House of Commons - Trade and Industry

Select Committee on Trade and Industry Fourth Report

II PRINCIPAL CONCERNS

5. We have not set out to conduct a thorough study of the UK steel industry and the context within which it operates. We have concentrated on areas of difficulty where there is some element of government responsibility. The memorandum from the UKSA provides a useful overall picture.[7] There are some general points to which we draw attention:

steel is a global business, but is not dominated by global companies: even the top 50 companies account for barely half of world output.[8] The proposed merger of Usinor of France, Aceralia of Spain and Arbed of Luxembourg, which would create the largest steel company in the world, may herald other consolidations.

steel, despite its bulk, is a widely traded commodity; 40% of world production is exported, with a pattern of ebb and flow in demand from each of the world's principal economic regions;

although there is reported to be global overcapacity, world demand is buoyant and forecast to rise, particularly in Asia;

steel production has success stories in smaller EU countries— such as Austria, Luxembourg and Sweden— and in states such as Ukraine, Argentina and Brazil;

UK steel output is falling, with provisional figures for 2000 suggesting the lowest output for over a decade. Elsewhere in the EU it is rising; the ISTC suggested that in 2000 the UK would produce less than Spain for the first time;[9]

UK productivity is generally agreed to be high, and to have improved rapidly over recent decades.[10] The ISTC quoted evidence that crude steel production per worker exceeded that of the other main European producers, in part because of longer hours worked.[11] Sir Brian Moffat of Corus told us that the company's productivity and operational efficiency had been excellent.[12] The DTI memorandum also noted the growth in productivity.[13]

Loss of home market

6. The history of the past decade can be simply described —

total UK steel consumption, including steel in imported end products such as cars and consumer durables, grew by 9 per cent;

steel consumption by UK manufacturing industry fell by 10 per cent, from 15.3 million tonnes to 13.7 million tonnes, while growing steadily in other major producing countries, leaving a shrinking home market for domestic producers, as manufacturing migrated out of the UK;[14]

UK producers lost much of their share of that shrinking domestic market, experiencing a 34 per cent decline in market share, from 10.9m tonnes in 1989 to 7.7m tonnes in 1999. In the past 30 years, UK use of domestically produced steel has fallen from 18 million tonnes to 7.7 million tonnes, while UK use of imported steel has risen from 1 million tonnes to 6 million tonnes.[15] Almost half of primary steel consumption is now of imported steel, primarily from other EU countries, and from central and eastern Europe.[16] UK producers have however retained a higher than average share of the domestic market; Sir Brian Moffat told us that Corus had a higher share of the UK domestic market that any other producer in their markets.[17]

UK steel producers have seen their share of a declining home market steadily eroded: a trend which began before the recent difficulties caused by the weakness of the euro.

7. Price was the principal reason adduced by witnesses from the industry for this loss of market share. Mr Tony Pedder of Corus accepted that there were some qualities of steel or specialised products not produced in the UK, but noted that most products were available.[18] He also attributed the growth in imports to the desire of customers to "keep us honest ... by having a percentage of their purchases with somebody else ...".[19] The Secretary-General of the UKSA stated that "price is undoubtedly the biggest factor by a street ...".[20] Sir Brian Moffat recorded the decline in the domestic appliance and "yellow goods" industries, and the declining demand for food cans, and told us that —

While decisions such as that of Nissan to build the new Micra in the UK imply a small increase in demand for UK steel, Corus told us that the underlying trend in demand from the automotive sector for UK steel was downwards.[22] Despite high productivity and a full product range, UK producers find themselves increasingly unable to compete with imported steel in simple price terms in the UK domestic market.

Exports from the UK

8. UK steel producers are successful exporters. They have to be if they are to survive, given the shrinkage in the UK domestic market. In the past few years, around half of a declining total of UK steel production has been exported, around 75 per cent of it to other EU countries.[23] Sir Brian Moffat told us that ten years ago only 30 per cent of output was exported.[24] The Secretary-General of the UKSA told us "Europe has increasingly become the home market for the UK steel industry ...".[25] Italy exports a broadly similar proportion and volume. Germany, Belgium/Luxembourg and France export around twice as much in volume terms, also overwhelmingly to other EU countries.[26] In that sense the UK is no more dependent on exports than are its European competitors; it is however distinctive in having to export across barriers of both sea and currency.

9. UK steel exports have fallen from the 1997 peak of 8.5m tonnes, to 7.4m tonnes in 1999. Witnesses told us of the difficulty in maintaining exports in the face of the weak euro, in particular to the eurozone, but also to other areas where eurozone competitors enjoy the advantages of cheaper costs. In February 2000 Mr Fletcher of Sheffield Forgemasters warned us that if the weakness of the euro continued "then clearly we will hang on as long as we can but we could lose the whole of our European business".[27] He had already had to make a number of his workforce redundant. In evidence submitted in November 2000, he warned of his fear that further redundancies might be imminent and of the disillusionment of the American owners of the business at "the continuing strength of sterling as they see it and by what they see as a lack of Government interest in manufacturing".[28] Mr Peter Siddall of Siddall & Hilton told us—

Mr Tony Pedder of Corus told us —

Sir Brian Moffat confirmed in February 2001 that exports in 2000 might have held up in terms of volume, but that Corus were exporting at a loss.[31] The latest figures of exports to the EU and to other trading areas suggest that the UK will manage to export around 6 million tonnes to the rest of the EU in 2000 as it did in 1998 and 1999.[32] This is in face of growing competition from steel imported into the EU from the former Soviet Union and eastern Europe and from Asia.[33] These figures however do not of course reveal the extent to which exporters are preserving their markets despite trading at a loss.

Sterling

10. The weakness of the euro has been one of the biggest obstacles confronting the UK steel industry in the short term. The ISTC described the "gross overvaluation of sterling" as the "most acute difficulty in the external environment";[34] in oral evidence its General Secretary called for entry into the euro as soon as practicable.[35] Mr Siddall told us that the exchange rate had "a terrific impact" on the industry and that the weakness of the euro was absolutely stifling the industry".[36] The uncertainty about future exchange rates creates an unstable climate and discourages investment. The euro has however strengthened in recent months. Were that to continue, the case could be made for retention of capacity with additional investment. There is no inherent reason why the UK steel industry under these circumstances would not be competitive.

World Prices

11. In evidence to us on 14 February 2001 Sir Brian Moffat of Corus told us that the recent strengthening of the euro, which it might be thought would be a major help to the company, was of little significance because it had been accompanied by falling world prices, which had wiped out the currency advantage. He told us that prices had deteriorated "very rapidly" in the autumn of 2000, such that weak pricing was accelerating at a greater rate than the euro was strengthening.[37] While Corus's Dutch and other operations might benefit from being in the eurozone, and may indeed displace UK product, UK operations were losing out.[38]

Investment

12. Low or negative returns on capital may well have long-term damaging consequences. The UKSA warned that "UK-based companies are holding off on investing in new or cutting edge plant and processes" and that "too great a proportion of investment is going into "maintenance projects".[39] It stated that —

The ISTC claimed that —

The Secretary-General of the UKSA warned that —

Mr Siddall, the President of the UKSA, told us —

Mr Pedder of Corus confirmed that there were difficulties in generating the cash required for the investments needed.[44] We refer below to one example of a past failure to invest, in a long rail facility at Workington.

13. In evidence on 14 February 2001, we put to Sir Brian Moffat the accusation levelled by the ISTC in supplementary evidence to us that Corus had "no proposals for investing in new plant or equipment in Britain when it made its restructuring announcement on 1 February".[45] Sir Brian told us that Corus had announced plans for investment on 13 February, and that they would be investing "over £300 million this year",[46] although in subsequent written evidence, Corus corrected this impression, stating that "Corus has not announced an investment programme", and gave details of three projects totalling only £18 million announced so far this year.[47] We await with interest further announcements from Corus regarding the remaining £282 million investment.

14. The memorandum from the DTI refers to efforts to help the steel industry become more competitive, following the model of the automotive industry forum, by committing £1.6 million to set up the Metals Industry Competitiveness Enterprise (MICE). It has also sponsored an e-commerce impact assessment, which we have seen.[48] Unexceptionable while these initiatives are, they seem to miss the main plot — the potential foundering of the UK steel industry through under-investment. DTI compile a scorecard of UK capital investment marked against that of our major competitors and trading partners: the Capex scorecard. In December 2000 the latest version of the scorecard was reported as having demonstrated the extent of UK under-investment. The competitiveness indicators published by DTI on 11 February 2001 record "signs of improvement" in business investment — including investment in public corporations— in 1999, recording the highest share of GDP in business investment since at least 1965. But the historical backlog of under-investment means that the UK still has the lowest business investment per worker over the last decade.[49]

15. Lack of capital investment is hardly a new song. We are wary of the commissioning by the Chancellor of another study by some eminent individual, whose conclusions can be reflected in the 2001 Pre-Budget Statement.[50] The Government identifies macroeconomic stability and lower long-term interest rates as the main contributions it can make to encourage investment, together with rather modest reforms to the tax system. That may be an unduly modest menu. We urge Ministers and officials to go beyond the role of dispassionate observers and compilers of scorecards and, within the constraints of the European Commission's increasingly rigid interpretation of state aid and competition rules, to bring forward and implement measures to encourage and facilitate capital investment in key manufacturing sectors, including steel.

Transport

16. In evidence to us in February Sir Brian Moffat raised an issue which had not been raised directly by the UKSA, but which Corus had raised with us in the autumn in connection with our inquiry into the impact on trade and industry of fuel taxation: the cost of transport. In October 2000 Corus submitted a memorandum which suggested that their annual transport costs would be around £10 million less each year if UK fuel duties were at the generally prevailing European level.[51] In February 2001, Sir Brian Moffat told us that not only did transport costs add on £35 a tonne to the costs of exporting to the continent of Europe, but also that "exporting from this country through every port costs on average 30 per cent more than it costs to export from the continent into this country".[52] Several of the vehicle manufacturers we spoke to had similar complaints, although not quantified to the same degree. The logistic costs to UK industry of exporting deserve further examination, in the context of their impact on the competitiveness of UK exporters.

Trade rules

ECSC and state aids to steel

17. The European Union as a free trade area has its origins in the European Coal and Steel Community Treaty signed in 1951. This was intended to "eradicate subsidised overproduction, market distortions and unfair competition ...".[53] The Treaty expires on 23 July 2002. The provisions restricting the receipt of state aids by primary steel producers, which are tougher than the general EU state aids regime, seem to be regarded by those concerned as successful. The Government and the industry seek a new Steel Aid Code which is robust as its predecessor.[54] We have heard no complaints on subsidies to other EU steel makers, despite the fact that a number of EU companies have a substantial element of state ownership.[55] Sir Brian Moffat told us that, while the "playing field is never dead level", he was convinced that state aids in steel were minimal, if they existed at all.[56] The UKSA told us that they were "ardent advocates of free trade with the proviso that it is fair."[57]

Anti-dumping procedures

18. EU anti-dumping procedures are labourious. Provisional duties are not applicable until nine months after filing of a complaint, by which time the damage to a market has been done.[58] Witnesses compared this unfavourably to the speed with which provisional duties can be applied by the US authorities prior to detailed investigation.[59] While doubting the validity of the US approach, producers seek a faster EU system, and WTO harmonisation of procedures under WTO auspices. We raised this matter with Mr Pascal Lamy during our meeting with him in Brussels in February 2001. He favoured action to bring US procedures more into line with prevailing international norms.

UK Government action against suspected dumping

19. The DTI is alleged to have a prejudice against anti-dumping measures, attributed by the UKSA to ideological free trade policies within the department.[60] The DTI memorandum noted that most recent complaints had resulted in trade measures, and that the only formal complaint registered in 2000 — on unfair trading of steel wire rope and cable from the Czech Republic, Korea, Turkey, Malaysia and Thailand — was still under investigation.[61] The UKSA complained that the UK's voting record in the EU's Anti-Dumping Committee had been consistently unhelpful to the industry, to the extent that —

The supplementary memorandum provided by the UKSA referred to the UK adopting higher standards of "injury" to the industry than those used by the European Commission and the WTO, and to it giving greater weight to the interests of consumers (in lower prices) than to those of local producers.[63]

20. We have some sympathy with what the UKSA described as "a presumption against the imposition of anti-dumping duties", and a preference for "countervailing duties" as an anti-subsidy measure. The explanatory memoranda provided to the House on draft anti-dumping Regulations regularly state that the UK " firmly believes that it [an anti-dumping Regulation] should not be used as a protectionist instrument. Thus the UK agrees Commission proposals for measures only if satisfied that they are economically justified".[64] There is however a well-understood and lengthy procedure for anti-dumping cases, which the UK operates together with its European partners. The Government may have been pursuing a pre-determined ideological line as a means of reinforcing its reputation within the EU as the leading apostle of free trade. Striking attitudes by resisting anti-dumping duties may seem a harmless way of reinforcing these credentials, since there is usually majority support from other Member States for anti-dumping duties where a good case has been made. It is not in our view a good practice. It conveys the wrong message to industry. It can be assumed to irritate our EU partners to no effect, without materially assisting the companies in those countries against whom measures are being taken. The evidence suggests that definitive decisions from the Commission on anti-dumping duties are decided on carefully, and slowly. We recommend a Ministerial review of DTI's voting on anti-dumping cases, to ensure that the department is not pursuing a fixed departmental line at odds with national interests.

USA

21. The ISTC told us that US anti-dumping provisions had been —

"disruptive and damaging to production in Britain and other Western European countries".[65]

The system encourages vexatious complaints to the WTO as a means of interrupting exports to the US. Even where those accused of dumping are acquitted, as in a recent case against import into the US of cold-rolled steel, the recent Byrd Amendment passed by Congress is said to give US steel producers an additional incentive to make allegations, since the revenue from duties imposed is distributed to the complainants.[66] In February 2001 Sir Brian Moffat told us that Corus had recently been the object of an American anti-dumping measure.[67]

22. The USA is a small but important niche market for UK steel producers, all the more so as the weakness of the euro undermines its competitiveness in the European market. Mr Pedder of Corus told us that the company had by and large been successful in getting rid of duties imposed because of its former status as a publicly owned industry.[68] We learned direct from Mr Lamy in Brussels his strong views on the US countervailing duties on UK steel products. The scale and nature of the US market is such that producers do not seem enthusiastic about complaining on market access restrictions, preferring a "softly softly" approach. They are no doubt inured to the difficulties of the US market and the political sensitivity of steel in the US. US steel companies own a number of UK steel companies or operate here through subsidiaries. None of this should discourage the Government from mounting at least as vigorous a defence of principles of free trade and transparency in dealing with the USA as is demonstrated within the relative privacy of the EU Anti-Dumping Committee, nor from lending its full weight within the EU to bringing US anti-dumping provisions in line with international norms.

Energy Costs

Electricity

23. The production of steel is energy intensive, accounting for around 20 per cent of industry costs, compared to around 15 per cent for labour costs.[69] The UKSA complained at the high prices of electricity and gas compared to those paid by their competitors. It told us that —

and that average prices to industry were no guide to the prices paid by an electric arc operator who takes more electricity than a town while operating.[71] Sir Brian Moffat told us that the relatively high price of electricity had been raised with the Secretary of State and with the regulator, but to no evident effect.[72] Industrial prices have fallen over the past five years, are falling now, and should fall further when the New Electricity Trading Arrangements (NETA) are introduced [73] — a date estimated in recent evidence to us from the Director-General of Electricity and Gas Supply as 27 March 2001, but one which may again be slipping.

24. The DTI memorandum stated that the price of electricity for large consumers in the UK "was lower than that of Spain and Italy".[74] The Secretary General of the UKSA told us that "Italian mills are fractionally worse off than we are ..... Everybody else has cheaper rates than ours".[75] The figures provided by the UKSA show a 20-25 per cent premium price paid by UK producers over the EU average.[76] Statistics are as ever imperfect: contract prices between suppliers and large industrial users are not always publicly available. The DTI does however accept that it has not been able to achieve its target of reducing electricity prices to below the EU average.[77] Ministers must redouble their efforts to bring the industrial price of electricity in the UK to below the EU average, and together with Ofgem identify any structural failures which account for the dramatically higher prices for electricity paid by UK steel makers compared to their French, German and Benelux competitors.