APPENDIX 1
Memorandum submitted by the Department
of Trade and Industry
1. This memorandum has been submitted in response
to a request by the Trade and Industry Committee to provide written
evidence in respect of an inquiry into the UK steel industry.
2. The memorandum outlines Government policy
in relation to key areas of interest and concern for the steel
industry—the current weakness of the euro; the climate change
levy; energy costs; unfair trading; the end of the European Coal
and Steel Community (ECSC) Treaty and accession of Eastern European
countries to the EU. It also summarises recent Government assistance
to the steel industry to help improve its competitiveness.
IMPORTANCE OF
THE STEEL
INDUSTRY
3. The Government is committed to doing
all it can to ensure that the manufacturing sector flourishes.
In this respect industries such as steel are vital and are in
themselves significant contributors to national prosperity. The
european steel industry has been going through a period of consolidation
during the 1999s and one of the key issues it continues to face
is overcapacity. The Government recognises that this is putting
pressure on individual steel companies to reduce costs to remain
competitive and to secure high value business. The UK steel industry
has itself undergone major rationalisation and restructuring.
Productivity per employee is now over four times greater than
it was 20 years ago and 70 per cent of steel qualities available
today have been developed in the last 10 years to meet increasing
demands for stronger, lighter materials.
4. The Government is aware that the UK steel
industry has to exist in an increasingly open and global market.
One of the consequences of pressure on costs has been a fall in
employment levels. The Government regrets job losses in the steel
industry but has taken concerted action, particularly when significant
numbers of redundancies have been announced, to help those people
who will lose their jobs. There has been specific help and guidance
from DTI, DfEE and other local agencies to help redundant workers
to retrain and improve their skills in order to find new jobs
such as job guidance; early access to a wide range of training
programmes; and help through Business Links and the Small Business
Service to support those who wish to become self-employed. The
Government Offices and Regional Development Agencies have also
worked closely with local partners to co-ordinate efforts to help
those affected.
WEAKNESS OF
THE EURO
5. The Government is aware that the weakness
of the Euro is a major concern for the steel industry in terms
of its direct impact on exports and on home sales especially for
products where customers are also export-orientated. The Government
considers the best contribution it can make is to secure long-term
economic stability based on low inflation and sound public finances.
This allows business to invest and plan ahead with confidence.
As a member of the G7, the UK Government shares other countries'
concern about the potential implications of recent movements in
the level of the Euro exchange rate for the world economy. The
Government was asked and agreed to participate in a public and
concerted intervention to support the Euro. The intervention was
a co-ordinated move by the G7 authorities.
CLIMATE CHANGE
LEVY
6. The climate change levy is an important
part of the Government's overall strategy for tackling climate
change—by encouraging energy efficiency across business
as a whole. Leading to lower greenhouse gas emissions, and helping
the UK to meet its 12.5 per cent target in emissions reductions
under the Kyoto Protocol. The climate change levy is an important
component of the UK Climate Change Programme which is to be published
at the end of October. Clauses implementing the climate change
levy are included in the Finance Act 2000 which received Royal
Assent on 28 July. The climate change levy will operate from April
2001.
7. The Government's aim in designing the
levy has been to safeguard business competitiveness, while maximising
environmental effectiveness. In recognition of the particular
problems faced by intensive energy users subject to international
competition (such as the steel industry), energy intensive sectors
entering into negotiated agreements with the Government to improve
their energy efficiency or to cut emissions, will receive an 80
per cent levy discount. Eligibility for entering such an agreement
is defined as those sites which are covered by the Integrated
Pollution Prevention and Control Directive. Generic agreement
documents are now nearing completion, and it is hoped that the
majority of sector agreements will be ready by the end of October.
8. During wide consultation on the proposed
levy, industry (including the steel industry) raised concerns
about the effect the climate change levy would have on competitiveness.
In response, significant revisions were made to the levy proposals,
including reducing the main levy rates and trebling—to £150
million—the associated energy efficiency package.
9. The steel industry will also be able
to benefit from other elements of the climate change levy package—the
National Insurance Contributions (NICs) reductions and the new
system of enhanced capital allowances for energy saving investments.
Also, the Government recently announced that it would be making
£30 million available to kick-start a domestic emissions
trading scheme, which offers significant potential benefits to
business. The levy must also be considered in a broader context.
Following the introduction of the New Electricity Trading Arrangements
(NETA), reductions of up to 10 per cent in electricity prices
are expected by some major producers.
10. In addition, where energy is used as
a feedstock rather than as an energy source, the Government decided
to exclude this from the scope of the levy. The steel industry
successfully argued for this exemption to be extended to blast
furnace coke used both as a fuel and a feedstock within the same
process. With this exemption of coke used in traditional blast
furnaces, the steel industry is concerned that steel produced
using electric arc furnaces will be at a competitive disadvantage,
with a resulting decline in UK ferrous recycling capacity. Because
of this concern, the steel industry has lobbied for the exemption
of energy used in recycling processes. However, the Government
believes that there should be some incentive for all users to
save energy at the margin, and that the treatment currently proposed
for electric arc furnaces (80 per cent levy discount) does not
represent a significant disincentive to recycling.
ENERGY COSTS
11. The UK steel industry has expressed
concern about energy costs in this country. However, the average
price of electricity for large industrial consumers has fallen
continuously in real terms over the past five years. Between 1995
and 2000 the average real price paid by industrial consumers has
decreased by 20 per cent. As at 1 January 2000, the price of electricity
for large consumers in the UK (including non-refundable taxes)
was lower than that of Spain and Italy. The forthcoming introduction
of the New Electricity Trading Arrangements (NETA) has led to
prices in the forward electricity markets for 2001 being around
25 per cent lower than in 1998 at the time of the White Paper.[1]
This is equivalent to a fall of around 30 per cent in real terms.
12. As for gas prices, between 1995 and
2000 the average price for gas for large industrial users decreased
in real terms by nearly 36 per cent. As at 1 January 2000, the
price of gas for large industrial users (including non-refundable
taxes) in the UK was the lowest in the EU. The recent high gas
prices on the wholesale market have not yet fed through to industrial
consumers generally, although the Government recognises that some
very large consumers who have contracts linked to spot prices
have suffered.
EXPIRY OF
THE EUROPEAN
COAL AND
STEEL (ECSC) TREATY
13. The ECSC Treaty 1951 expires on 23 July
2002. The Treaty was established to eradicate subsidised overproduction,
market distortions and unfair competition in EU steel and coal
markets. Most of its provisions will not be replaced, but there
are a number of matters which need to be resolved prior to its
expiry. The most important of these relate to regulations for
state aid for steel.
14. The ECSC Treaty prohibits producers
of certain primary steel products from receiving state aid. This
restriction has, however, been modified by a number of Commission
decisions—Steel Aid Codes— the latest of which expires
with the end of the Treaty. The Government believes that the Steel
Aid Code has been effective in controlling subsidised overproduction,
market distortions and unfair competition in EU steel markets
and therefore supports the adoption of a new Code very similar
to that currently in force. A robust Steel Aid Code has contributed
to a climate in which the problem of illegal state aids has declined
within the EU and the majority of Member States, including the
UK, want a new Steel Aid Code which is equally robust. This is
supported by the steel industry in the UK. We currently await
Commission proposals on this issue.
EU ENLARGEMENT
15. Most of the 13 candidate countries have
long-established steel industries most of which currently depend
for their survival on state aids, a protected market and the cost
advantage of not having to meet EU environmental standards. Over-staffing
and overcapacity are also common features. An important part of
the accession discussions taking place between these countries
and the Commission is the completion and enactment of restructuring
plans which will enable the steel industries of candidate countries
to compete fairly in the European Single Market. The Government
strongly supports this action.
UNFAIR TRADE
(DUMPING)
16. The European Commission is able to use
certain trade defence instruments—which have been agreed
under WTO rules—to deal with imports which are unfairly
traded and causing problems for EU domestic industries. It is
the responsibility of the affected EU industries to make complaints
to the Commission, who will then investigate the complaint and
decide whether trade defence measures are warranted. Member states
have to be consulted as part of this process. The Government's
policy on trade measures is to consider all Commission proposals
on their merits and agree to them only if satisfied that they
are legally and economically justified and in the overall Community
interest. Following the economic crisis in South East Asia, a
number of complaints were registered with the Commission, largely
as a result of the diversion of steel exports from third countries:
most resulted in trade measures. Only one new formal complaint
has been lodged with the Commission this year on unfairly traded
steel products (steel wire rope and cable from the Czech Republic,
Korea, Turkey Malaysia and Thailand) which is currently under
investigation. There are currently countervailing and anti-dumping
duties on 13 different steel products.
ENHANCING THE
COMPETITIVENESS OF
THE UK STEEL
INDUSTRY
17. The DTI continues to support the efforts
of the industry to become more competitive. For example, in February
2000 the Minister for Competitiveness launched the MICE project
(Metals Industry Competitiveness Enterprise) to help metals companies,
including steel companies, to improve their competitiveness by
the practical transfer of best manufacturing practice, introducing
Japanese shop-floor improvement techniques which have already
been exploited in the automotive industry. MICE, a five year project,
is an adaptation of the automotive Industry Forum (an industry-led
partnership supported by DTI which aims to raise the sector's
competitiveness by delivering shop-floor improvements programmes
to businesses in the automotive supply chain). The Government
announced in its 1998 Competitiveness White Paper that it would
fund up to 10 proposals from other sectors that wanted to adapt
this model to meet their particular needs. MICE is one of the
successful proposals and will receive £1.6 million funding
from DTI. MICE is lead by the metals sector's three major trade
associations; UK Steel Association, National Association of Steel
Stockholders (NASS) and the confederation of british metalforming
(CMB) in partnership with Steel Training Ltd, the metals sector
National Training Organisation. It is also supported by major
sector companies, the Engineering Employers Federation (EEF) and
other industry bodies.
18. In September 1999, the Prime Minister
launched the Performance and Innovation Unit Report of the E-Commerce@its.best.uk,
which forms the basis for the Government's e-commerce policy whose
overall objective is to make the UK the best place in the world
for e-commerce by 2002. One of the key recommendations in the
report was to "carry out and communicate shared industry/Government
sector-specific e-commerce impact assessments". E-commerce
is just as relevant to sectors like steel as to dot.com companies.
An e-commerce impact assessment on the steel industry was completed
in May this year with DTI support and was the first in the series
to be undertaken for a variety of sectors. The report, which looks
at current usage, opportunities for further development and barriers
to take-up, was carried out by Beddow Consulting in co-operation
with five major steel sector Trade Associations. One of the main
conclusions of the report was that while e-business was recognised
by the industry as a significant opportunity, as well as a challenge,
there was uncertainty about the future. Uncertainty was based
on a number of factors, for instance lack of understanding of
e-business opportunities and technology; uncertainty about the
savings that may be achieved and the real benefits. Follow up
action with the industry is currently under consideration.
October 2000
1 Conclusions of The Review of Energy Sources for Power
Generation and Government response to fourth and fifth Reports
of the Trade and Industry Committee October 1998. Back
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