House of Commons - Trade and Industry

Select Committee on Trade and Industry Fourth Report

II PRINCIPAL CONCERNS

Gas

25. UK producers have had a significant competitive advantage in gas prices over recent years.[78] The UKSA told us in November 2000 that the doubling of new gas prices over the past 12 months, linked to the rising price of oil, was "ruining ten years' work in liberalising the gas market" and that —

The DTI stated in October 2000 that —

In evidence to us in November 2000, the Director-General of Ofgem told us of his concern at the recent rise in gas prices to industrial customers and his desire to be able to investigate some of the suggestions made as to the origins of this price rise. He told us that he was in particular interested in why the gas did not flow to the UK when British spot prices were higher than those in Europe.[81]

26. We heard oral evidence on the rising price of gas from the Minister for Energy on 14 February 2001.[82] The flow of gas from the UK's gas fields through the Interconnector, and the policies pursued by national monopoly gas producers in the EU and elsewhere, are seen as responsible for this recent punishing rise in industrial gas prices. We are mindful of the complexity of the market in gas, and the possibility of anti-competitive practices. We welcome the referral to the European Commission of the recent sharp rise in the price of gas to UK industrial consumers to establish if it is a genuine market-driven phenomenon and not the result of anti-competitive practices, while regretting that such action was not taken earlier.

Climate Change Levy

27. We have reported twice on the Climate Change Levy due to come into force in April 2001. In July 1999 we reported on the impact on industry of the proposed Levy, and helped secure some changes in the proposals made in March 1999.[83] In March 2000 we reported further, in the context of our examination of the November 1999 Pre-Budget Report, and heard evidence from, among others, the Aluminium Federation.[84]

28. The UKSA raised several points[85] whose familiarity makes them no less persuasive —

the rigidity of the proposed system of penalties:

the exclusion of industrial gases production from rebate, a matter on which we made a firm recommendation in March 2000,[86] and which we recently raised again in the context of chasing progress on our previous Reports[87]:

the wider arbitrary effects of reliance on IPPC coverage as a means of determining eligibility for rebate, so that comparable industrial processes are treated differently:

the perverse effect of the Levy in penalising recycling, in this case the melting of ferrous scrap in electric arc furnaces (EAF). EAF production is already declining in the UK as a proportion of steel produced, at a time it is increasing elsewhere, apparently as a result of high electricity prices.[88] We raised this matter in our March 2000 Report: the Government response went no further than an expression of general support for recycling.[89]

In its memorandum to us the Government noted that blast furnace coke used both as a fuel and a feedstock had been exempted following representations from the industry, and suggested that the treatment proposed for electric arc furnaces "does not represent a significant disincentive to recycling".[90]

29. The UKSA suggest that the Climate Change Levy will cost the industry £10 million directly, and a further £6 million in increased costs of oxygen: equivalent to over £1 per tonne of steel produced.[91] We have the sense that the levy may operate perversely. It reinforces the industry's sense that its difficulties are not well understood throughout Government. As the introduction of the Climate Change Levy approaches, we recommend that the DTI commit itself to assist the principal sectors affected by the Levy to produce objective reports on its impact after the first year, including progress made towards energy efficiency and emissions reductions targets made by those sectors eligible for a rebate; the distribution of the associated energy efficiency package; and the take-up by sector of enhanced capital allowances for energy saving investments. We would hope that the impact of the Climate Change Levy will be less damaging than the steel and other manufacturing sectors have suggested to us in evidence over the past 18 months; and that the concerns we have expressed in past reports on the effects on recycling and on the price of industrial gases will eventually find some positive response.

Employment

30. The number of those employed in the UK steel industry has fallen sharply in the past 25 years, from 194,000 in 1974 to 31,000 in 1999: a sharper fall than almost any other European country.[92] The ISTC attribute this to (i) the retention of significant degrees of public ownership of European companies, which may have led to maintenance of employment for social reasons at the expense of productivity gains or profitability and (ii) "legal and other institutional constraints" elsewhere in Europe.[93]

31. The allegation that jobs are lost in the UK which might have been saved if elsewhere in the EU because it is easier and cheaper to shed labour in the UK was very strongly put to us in evidence on the UK vehicle manufacturing industry.[94] The ISTC provided us with one example to demonstrate the way in which European-style procedures in Europe can produce a different outcome. In 1994, two plants owned by the Swedish Avesta company (now part of the Corus group) were given notice of closure in 1996: Degafors in Sweden and Panteg in Wales. Following an independent study of the Degafors plant, the plant was restored to profitability. The Panteg plant closed in line with the initial plan. The ISTC also compared the consultation process on closure of part of Corus' plant at Ijmuiden in the Netherlands with that at Shelton. They told us that employees at Ijmuiden had been given "a real say in resisting cuts of 590 jobs at the Ijmuiden long products facility". The ISTC told us :

UK employees had no prior information of the British Steel-Hoogovens merger, unlike their Dutch colleagues:[96] nor more than 48 hours notice of future redundancies. The General Secretary of the ISTC told us in November 2000 that his Dutch colleagues —

Sir Brian Moffat told us that discussions in the European Works Council had meant that employees were "fully aware of the difficulties we faced in the UK" and that the same consultative processes applied to plants in all countries.[98] The Ijmuiden plant was in fact closed.

32. The evident discontent felt by the workforce at the absence of consultation may arise from a particular style of management within one particular company. The absence of discussion leaves the workforce uncertain as to the reasons for cuts being made, and unable to put forward alternative propositions. A company such as Corus already has obligations under European law. It has a European Works Council,[99] although existing structures such as European Work Councils may not prove effective, as the Government suggested in response to our April 2000 Report on BMW and Rover.[100] In our recent Report on Vehicle Manufacturing in the UK, we welcomed the proposed terms of reference of the review of redundancy law and practice announced on 13 December 2000, subject to it going beyond "fine-tuning" of the law and practice of redundancy, and to it ruling nothing out, including primary legislation. We also called for the review to be conducted transparently and swiftly, and for the early publication of a date for the conclusion of the review.[101] The Government's review of redundancy law and practice announced following the Vauxhall decision to bring car manufacture at Luton to an end must also explicitly cover the lessons of the recent Corus announcements.

Enlargement

33. In the course of our 1998 inquiry into industrial and trade relations with Central Europe, we sought the views of the UKSA on the restructuring of the Polish steel industry in particular. When we visited Poland in 1998 and discussed the issue at some length with those responsible, the plans for restructuring were in the process of revision. In our subsequent Report we reflected the concerns expressed to us on the need for a comprehensive restructuring plan. In March 2000 the UKSA provided us at our request with a progress report, which revealed how little progress had been made in the accession countries.[102] Although all countries by now should be in compliance with the ECSC Steel Code, the evidence suggests that none are. The UKSA referred in that memorandum to political indecision in the countries concerned and an unwillingness to face up to the social problems that restructuring will bring.

34. In their memoranda to us in connection with this inquiry, and in oral evidence, the UKSA and ISTC emphasised the importance of restructuring and the beneficial effects of the steel industries in countries such as Poland and the Czech Republic being subject to the common EU rules on state aids and environmental standards. The UKSA underlined the importance of ensuring that the transition process was strictly controlled, with a minimum of derogations after accession. The President of the UKSA warned that "Any temporary derogations after accession would be extremely damaging to the EU industry ...".[103] The DTI told us that most of the candidate countries had steel industries which were dependent on state aids and did not meet environmental standards, and that it strongly supported the insistence by the European Commission in its discussions with these countries on the completion and enactment of restructuring plans.[104]

35. We were told in the course of our February 2001 visit to Brussels that the Commission would not tolerate non-compliance with the acquis for much longer. Commisioner Monti has recently issued a public warning that applicant countries will have to get their act together on state aids. We understand that Commissioner Verheugen is to meet steel industry representatives in early March.

36. There are concerns about the impact on the UK steel industry of EU enlargement. A number of the candidate countries have long established steel industries, the majority dependent on state aid and a protected home market. They do not at present have to meet EU environmental standards. Accession may increase overcapacity in an already saturated EU market. If the steel industries in accession states are granted excessively long or wide derogations from EU state aid and environmental rules, a further element of unfair competition would be introduced into an already imperfect market.

37. It is disappointing that so little progress seems to have been made over such a long period in obliging the accession states to go beyond mere expressions of intent to reform their steel industries. The Government must continue to exert its influence on the negotiations with the accession states to ensure that a genuine programme of restructuring of the protected steel industries of central and eastern Europe has begun prior to accession to the EU, and that any derogations granted are short and limited in scope. It is improbable that accession to the EU of any state would be ratified which had not put its act in order on its steel industry. The same applies to countries further east which may be contemplating application for membership of the EU.

78 Ev, p 38 & Q 89: Ev, p 71, para 12 Back

79 Q 89; also Q 181 Back

80 Ev, p 71, para 12 Back

81 HC 193-ii of session 1999-2000, Q 87 Back

82 HC 269-i of session 2000-01 Back

83 Ninth Report, The Impact on Industry of the Proposed Climate Change Levy, HC 678 of 1998-99 Back

84 Seventh Report, Business, Enterprise and the Budget, HC 51 of session 1999-2000, Part IV and Ev, pp 177-181 Back

85 Ev, p 39 Back

86 HC 51, para 57 Back

87 First Report of session 2000-2001, HC 109, Ev, pp 34-36 Back

88 Qq 99-100: Ev, p 39 & p 55: also p 7 (ISTC) Back

89 HC 514, page x Back