Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  80. I am getting mixed messages. On the one hand you are saying obviously price is a factor. You are saying price is probably the predominant factor. Are there problems about capacity, for example?
  (Mr Siddall) Can I say price is a factor which can vary from market to market.

  81. Is there a problem about capacity?
  (Mr Pedder) Certainly as far as Corus is concerned, there is not a problem of capacity, no.
  (Mr Bagshawe) As far as my own business is concerned, I think we have to take as read that we can compete on the quality of the product and the quality of the delivery because if we cannot do that we would not be in business very long. In my instance, the orders I lose will generally be price dictated.
  (Mr Siddall) Can I just make the point, in my own business, a very small business, recent currency fluctuations have become a problem because when the currency fluctuates like that the customer will switch from one company to another and one cannot turn production on and off just like that, especially if one is working 24 hours a day seven days a week. That can result in all sorts of problems.

Mr Chope

  82. Can I come back to the subject of investment, I think Mr Rea touched on this earlier. Your paper paints a very bleak picture about future investment in your industry. You say at the moment returns on capital are negative. Is that just because you cannot charge a price that is going to be able to enable you to sell your goods at a price that is also going to produce a return on capital, or are there other factors?
  (Mr Siddall) I think, as I said before, I believe one of the main factors is our ability to be competitive. We have talked a lot about the weakness of the euro, we have talked a lot about having stability within the industry. Industry invests when it has stability and when it can see ahead and when it can see a return on that capital. Indeed, it worries me a terrific amount that we are not always investing as we should do in our industry because of the strength of the euro and our inability to be competitive. In the long term, if we do not invest we will become less competitive still. I think my colleagues will wish to answer that question as well.
  (Mr Pedder) Certainly as far as Corus is concerned, at the present time the issue is generating the cash to put to those schemes that we feel are the right schemes to develop the more competitive position for our various businesses. It really is the level of profitability at the moment which is a very major concern. We need to generate more cash and then that cash can sensibly be spent where it can generate a return. It is the first point that is the key determinant for us right now.

  83. It is a frightening statistic that you say investment has fallen over the last 18 months to levels less than half depreciation. That means the outlook is pretty grim if we carry on like that. Also, you say, on page 24 of your written evidence, that you think there is a City factor here, the City is not interested in investing in manufacturing industry, it still fancies the telecoms giants, despite the fact that you also say you provide gross added value per employee twice that which you can get in the telecom sector. Is that City bias or is it that nobody wishes to invest where you cannot get a proper return?
  (Mr Pedder) I believe it is about return. That is a personal view but I believe it is also a company view. I do not think if we can show that we are profitable, we are cash generative and that we have schemes for the future which will improve the return of the business, that is the issue. I think it is demonstrating that we can generate proper returns. I think there may be a short-term City focus on telecoms or e.commerce or whatever it is, but I do not think that is necessarily evidence of the City's short-termism approach because some of these dot com ventures have got infinite returns as I understand it.


  84. Almost as good as the French companies. After all, you used some of your resources, that is to say Corus, in buying a French company rather than investing in the United Kingdom. Is that a reasonable conclusion to draw?
  (Mr Pedder) We have got to look at where we can most sensibly invest to try to generate the best return for our business and follow our customers if that is where they are moving. As I have said to you before, exporting products out of the UK at this point in time is not a very good place to be. We have customers that we have developed over a period of time who are in other markets.

  85. You export jobs then?
  (Mr Pedder) As Mr Bagshawe said, we have customers who are looking to source products from different continents into their factories and we have to try and see whether we can make sense of that.

Mr Chope

  86. Is the issue of corporate tax a significant one? You refer to it in your paper and draw some quite interesting statistics out saying that, for example, in France as a percentage of tax revenue taxes on corporate income are 5.8 per cent and 2.6 per cent of GDP compared with 12.1 per cent of tax revenue in this country and 4.3 per cent of GDP. How much is the differential treatment of tax on corporate income relevant to the investment position?
  (Mr Rea) I think it is one of the important factors in the shopping list and from our point of view we would perhaps look at some other more immediate issues bearing more heavily on us, energy pricing, Climate Change Levies, items like that which go into the mixture when companies are looking at where to maintain or renew their investments or what product lines to follow. Obviously the Government take on GDP and whether they take it out of industry or take it out of the individual is a long-term factor that is as important to us as any other wealth creating business.

Mr Morgan

  87. You mentioned energy prices and I think you said in your submission that your prices for electricity were up to 40 per cent higher than your European competitors, yet the DTI have told us that over the last five years real terms electricity prices to industry have fallen by 20 per cent in the UK. Are these figures compatible with each other? Does it mean that the divergence in electricity prices between us and the continent has narrowed or have their prices fallen too?
  (Mr Rea) Energy pricing is an extremely complex topic. You would not expect me to be anything other than biased.


  88. This is an assumption that we tend to operate on when businesses come to us talking about energy, because we do it quite a lot and the complexity is not beyond us. If you can give us some examples to justify the case you are making.
  (Mr Rea) Forgive me, I meant no disrespect in that.

  89. No, it is okay.
  (Mr Rea) I am sure that we can have a half full and a half empty glass with our colleagues in the DTI and both be perfectly correct on energy pricing. The steel industry has suffered from excessive electricity prices in the UK compared to our competitors in mainland Europe, North America and the Far East for a very long period of time. We would be delighted to provide you with chapter and verse. We are talking here about electricity for intensive use, bulk electricity purchase. The normal hiding place for Government when challenging this is to talk about average prices to industry. Average prices to industry are of no interest at all to an electric arc operator who, when he strikes through his 100 tonnes of steel, takes more electricity than a local town takes while he is running it. Prices to industry are not directly relevant to bulk use of electricity in steel. We have chapter and verse until it comes out of our ears, we really have, on comparative prices of bulk electricity purchasing. Can I make a point about gas because that is an extremely important one at the moment which I think needs to be well ventilated. In the last couple of years we have had some advantage on gas pricing for industrial and for bulk use in industries like steel. We have had some advantage from privatisation and the restructuring of that gas market which has actually given us an improvement compared to the rather poor position we had for many years. That situation has been rubbed out in the last six to nine months with the opening of the connector into Europe. We have seen prices shooting up in the UK so that we are now right back into the average of European prices. European prices are set not by market forces but by arrangements tied to the price of oil, it has nothing to do with gas markets as such. We are right back into the bad situation and the benefits of privatisation and liberalisation of the market have been thrown away.

Mr Morgan

  90. When you said that prices were up to 40 per cent lower, presumably that is the worst case? What is your average?
  (Mr Rea) At this present time, we are talking electricity here, electricity for electric arc operators, Italian mills are fractionally worse off than we are, something like one or two per cent on the rate that is paid. Everybody else has cheaper rates than ours. I have brought a graph with me which I would be very happy to leave with you that has got the details as of 10 October, which is the nearest I can get you.

  91. I think Mr Pedder presumably has a direct comparison because you can just compare the bills, can you not?
  (Mr Pedder) We can. I do not have it with me. The general point that David Rea has made is correct. There is the issue of differentials and there is certainly the issue of speed of change again. If we can convey anything to you in terms of competitiveness, and energy prices are one dimension of this, all these are further drips on stone which is absolutely saturated right now because of this tremendous fight we have to retain competitiveness as the environment has moved against us more generally. On things like energy costs where, as David Rea says, we are looking at a massive increase as one hit electricity prices, where we were hoping for some relief with the opening up of the new trading arrangements, that has now been deferred. All these things are added pressure points at a time when we are least able to absorb these added pressure points. In terms of the direct comparison, I can come back to you on that.

  92. It is certainly not going to be anything like 40 per cent difference?
  (Mr Rea) Forgive me, Chairman, if I can put in the record and say that I will happily leave this chart I brought with us for this purpose. If you take an electric arc operator in the UK dated, I said 10 October, 1 October, pence per kilowatt hour for a medium sized arc furnace is 3.6 pence, for a large arc furnace it is 3.5 pence. That is 3.6 or 3.5 pence per kilowatt hour for electric arc operators. Comparable size contracts and furnaces in Germany are 2.3 pence per kilowatt hour for exactly the same type of kit. In France it is 2.4 for the 25 megawatt and 2.1 for the 80 megawatt.

  93. You also mentioned the Climate Change Levy. In regard to oxygen you have said that the producers of oxygen should be eligible for a rebate. How are your competitor countries affected in that respect because obviously they have equivalent energy taxes, or some of them do?
  (Mr Rea) Can I take a slight diversion on answering this as fully and helpfully as I can. If we secure full and final agreement with the DETR on the climate change agreements we should be in a position that is certainly not as bad as it would have been in the first place and which makes us marginally the worst in Europe. We have yet to settle the fine detail on those agreements, we still have outstanding problems on them: state aid and the clearance of those agreements with the European Community. If they are settled then the hot and heavy end of the steel industry will be only marginally the worst in Europe. If we do not get that, and for the rest of our member companies that are not covered by the IPPC agreements at the hot and heavy end of the industry, we shall be singularly disadvantaged.

  94. You mentioned a figure in your submission of 42 pence per tonne of steel produced, can you put this in context? How serious is that?
  (Mr Rea) If we get to that figure it will be on the basis of some very stringent requirements in terms of cutting energy consumption and subject to very draconian penalties if we even miss the target by one per cent. The rest of our members who are not subject to those sorts of agreements will carry a far higher burden.

  95. This is the oxygen costs?
  (Mr Rea) Yes.

  96. You are saying you are going to have to bear as an industry £6 million from the costs of oxygen because of the application of CCL to oxygen. You are saying that is equivalent to 42 pence per tonne. How significant is that in terms of what the cost of a tonne of steel would be?
  (Mr Rea) Unfortunately steels range in their selling prices from about £180 a tonne to £5,000 or £6,000 a tonne, so it will depend entirely on the product configuration at the time.
  (Mr Pedder) I think more significantly, the £6 million is significant at a time when you are making losses and struggling to find a way forward. Every pound is significant. This is a tax or a levy that is imposed irrespective of that profitability, it is there because we are there. It is not there because we have done well in our markets or anything of that sort, it just happens to be because we are there.

  97. Would it be true to say that in relation to the price of most steels it is not a particularly significant task, you will find it is fairly minute in percentage terms? Is that right?
  (Mr Siddall) Yes, but it is £6 million of uncompetitiveness for our industry.

  98. Yes, I understand that, but in percentage terms it is very small indeed.
  (Mr Siddall) It is still £6 million.

Mr Chope

  99. Have you got anywhere with the Government on your concerns that in this country we are producing 40 per cent of our steel as recycled steel and under the Climate Change Levy you are going to be charged more for recycling steel than for producing it through the primary route of virgin steel, despite the fact that recycling requires 69 per cent less fuel?
  (Mr Rea) I would wish that we were making more progress than we are. I fear that on this issue we are battering against the Treasury who are somewhat notorious in their reluctance to concede on the matter. We believe the case has been well made and well argued. The points you have just summarised are quite correct. We believe there is actually a perverse incentive there in economic terms because recycling steel, melting scrap, is being disadvantaged under this route. However, as yet we have not achieved it and I have some gloom about whether we shall actually carry the day.

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