Select Committee on Trade and Industry First Special Report




The Government welcomes the Committee's report and shares its concern about the future of the UK steel industry. The report is timely in the light of recent restructuring and consequent job losses within the UK steel industry and particularly within Corus.

On 3 May 2001 Corus confirmed its intention to proceed with further restructuring of the UK business and associated job cuts initially announced in February. The job losses are in addition to those announced in the previous year. On the same day the Government announced a package of support measures to help the individuals and communities affected. A similar announcement was made in the National Assembly for Wales. In total the two packages amount to around £135 million.

The Government has the following comments on the Committee's conclusions and recommendations:

State of the Steel Industry

(1) The symptoms of the state of the UK steel industry are all too apparent. Some companies are trading at a loss. Levels of capital investment are reported to be disturbingly low. The workforce is shrinking. There is nothing to be gained from papering over the problems facing the UK steel industry, nor their wider significance for the UK manufacturing base (paragraph 4).

The UK steel industry has undertaken significant re-structuring in the last year, particularly within Corus, and is the most productive steel industry, in terms of output per person against comparable European countries, overtaking Germany in 1999. It is unfortunate that the industry has not been able to capitalise on this achievement. It does however have to operate in a global market against fierce international competition.

We believe that a strong manufacturing sector is a vital part of the British economy and steel continues to play an important role. The manufacturing sector contributes a fifth of our national income (nearly £150 billion per year) and nearly two thirds of our exports, employs nearly 4 million people and is a major source of growth in productivity, exports and research and development.

Given the impact of increasing globalisation that there are bound to be implications for us in the United Kingdom owing to the slowdown in the world economy, especially in the United States. However, we should not overstate our difficulties. Most forecasters expect manufacturing output to grow this year. The medium-term prospects appear good with productivity having grown at nearly 5 per cent. Exports are also growing, with manufacturing exports up by nearly 10 per cent in the last year. We hope that the UK steel industry's prospects will also improve this year


No country can ever insulate itself from world economic events, but it is because of the decisive action that we have taken - introducing tough fiscal rules, reducing the national debt, making the Bank of England independent and delivering the lowest inflation for 30 years - that British economic policy is much better placed than it has ever been in the past.

Erosion Home Market and Euro

(2) 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. 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. The weakness of the euro has been one of the biggest obstacles confronting the UK steel industry in the short term. The euro has however strengthened in recent months (paragraphs 6, 7 and 10).

The Government fully understands the difficulties that the weakness of the euro has caused, particularly for the steel sector in terms of the impact on exports and imports. But the Government's objective for the exchange rate remains a stable and competitive pound in the medium term. The best contribution the Government can make to achieving this objective is to maintain sound public finances and low inflation. There is no short-term exchange rate target competing with the Government's inflation target. Any short-term attempt to manipulate the exchange rate, overtly or covertly, would put at risk both the inflation target and - as in the late 1980s - wider economic stability, which is what matters most for UK business.

Sterling's easing back from last year's peak against the euro is welcome news.

Capital Investment

(3) We await with interest further announcements from Corus regarding the remaining £282 million investment. 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 (paragraphs 13 and 15).

The economic stability and low inflation we have achieved provide an environment in which manufacturing industry can invest and plan ahead with confidence.

The Government also notes the Committee's concerns about the European Commission's interpretation of the state aid and competition rules. The ending of the ECSC Treaty will provide an opportunity to influence the European Commission's thinking in this area and we hope to see proposals on a new steel aid code in the near future. The Government would however not wish to see a significant liberalisation of the current Steel Aid Code which plays an important role in promoting a level playing field for the industry. The Government remains willing to work with the steel industry on proposals for investment in R&D and environmental protection, which are eligible, subject to meeting certain criteria, for public funding under the current steel aid code.

 Logistics Costs

(4) The logistic costs to UK industry of exporting deserve further examination, in the context of their impact on the competitiveness of UK exporters (paragraph 16).

Competition with European hauliers is an issue that has been widely discussed, particularly in relation to the road haulage industry and some commentators have noted that other EU countries have lower fuel duties than those in the UK. Individual countries' tax policies are, of course, entirely a matter for them (beyond certain minimum rates set at EU level). However, it should be remembered that hauliers in other countries will often have to pay other taxes and charges that UK hauliers do not, such as road tolls, and higher levels of income or corporation tax.

As the Committee concluded in your recent enquiry into the impact of trade and industry of motor fuel taxation, "[The TIC has] received no conclusive evidence to show that the current level of motor fuel taxation has rendered UK business as a whole less competitive... We [the TIC] remain to be convinced that any decline in UK competitiveness in recent times can be attributed to any significant degree to high fuel taxation levels".

The DTLR is not aware of differences in port costs of the scale and extent reported to the Committee. It is the Government's perception, based on the views of shipping companies and shippers who regularly use UK and European ports, that port costs in the UK are generally similar to those in continental Europe, and UK ports offer a competitive quality of service. The DTLR would be happy to consider evidence of excessive charges in UK ports. As stated in Modern Ports: UK Policy - it is government policy that users should pay the full costs of port and maritime infrastructure, and supports the EC's policy to make financing of ports more transparent.


(5) 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 (paragraph 20).

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.

(6)The Government treats proposals for anti-dumping measures on their merits. When considering proposals from the Commission for measures the Department will consult with representatives of all interested parties, including manufacturers, importers, users, consumers and other government departments. Decisions on voting will be taken on the basis of what is legally permissible and economically justifiable.

It is true that the UK has opposed the introduction of a number of anti-dumping and anti-subsidy (countervailing) measures on steel products, but there have also been a number of instances where the UK has abstained.

The UK position is decided by Government ministers where proposals are contentious or raise issues of conflicting national interests. There is therefore no need for a ministerial review of DTI's voting on anti-dumping cases.

Trade with USA

(7) 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.

The UK plays a full and active role both within the EU, and bilaterally with the US to ensure that instances of non-compliance with WTO rules which cause injury to the UK's interests are tackled swiftly and effectively. A good example of this was the successful action taken by the EU in the WTO against unjustified countervailing duties applied by the US on imports of lead bismuth steel products from the UK. The UK supports the EU's continued efforts to lift the remaining unjustified US countervailing duties on steel and other products. It is also essential, particularly in the case of anti-dumping investigations, that the industry is vigorous in promoting and defending their interests.

The Government would welcome the opportunity to discuss anti-dumping in a new Round of trade negotiations especially if that were to lead to changes in the Anti-Dumping Agreement which ensured a more consistent implementation of the anti-dumping instrument by WTO members. In the meantime, the UK, via the European Commission, will continue to participate fully in the WTO's ad hoc groups which provide a forum for discussing and debating the specifics of individual Members anti-dumping regimes.

Energy Costs: Electricity

(8) 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 (paragraph 24).

With the introduction of NETA on 27th March, the Government's reform programme for the electricity sector as set out in the 1998 energy White Paper is largely complete. Based on prices in forward markets wholesale prices in the coming year could be some 30% lower in real terms than in 1998 as a result of NETA and the other reforms including divestment of coal plant by the major generators.

The wholesale price comprises a large part of the total cost of electricity for larger industrial consumers. Other things being equal, pre-tax prices to these consumers during the year from April 2001 should therefore be significantly lower in real terms than in 1998.

Actual statistical data for prices after April 2001 is not yet available. However, there is other evidence that these reductions are taking place. For example, in March the Major Energy Users Council announced that wholesale prices in annual contracts just signed by some industrial consumers were down 10-15% on the previous year and the Chairman on the MEUC, Hugh Conway, said that "when John Battle announced his review of the Pool three years ago, he said he expected prices would be driven down by at least 10%. Some of our members have experienced 25% reductions over two years".

Energy Costs: Gas

(9) 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 (paragraph 26).

The Department notes the Committee's welcome of its referral to the European Commission of the operation of the interconnector.

The Government took this initiative because it had been concerned that the operation of the interconnector does not always appear to have reflected market fundamentals: for example, there is a history of spare capacity; there are occasionally perverse flows, and the interconnector's operation has not been transparent. The unexpected switch in interconnector flows on 15 January, from import to export, with harmful effects in the gas and electricity markets, was invoked by the Government in making the case to the Commission for an inquiry. The Commission announced the inquiry just over two weeks later, on 1 February.

The major reason for the sharp increase in wholesale gas prices has been arbitrage across the interconnector with high oil-related gas prices in Europe. The then Minister for Energy and Competitiveness in Europe has given evidence to the Committee (14 February 2001, see HC 269-i) on the Government's three-point strategy for addressing this: namely, to press for greater liberalisation and competition in the European market; to improve the functioning of the GB market; and to take action against anti-competitive behaviour. The Department continues to pursue this strategy. The new draft Gas Directive, published in March, is a very positive step forward, although the Government was disappointed that the Stockholm Summit in March did not set a date for liberalisation of the whole market. DTI and Ofgem have been looking at ways of improving information flows, as we believe that a well informed market is an efficient market; there has been progress (for example details of flows across the interconnector are now published just one day in arrears), with more to come. Meanwhile DTI, OFT and Ofgem continue to monitor the market closely. If there is any sign of anti-competitive behaviour, both Ofgem and OFT have significant powers to take action under the Competition Act 1998.

Energy Costs: Climate Change Levy

(10)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 (paragraph 29).

As with all taxes, the Government will keep the operation of the levy under review as part of the normal budget process. It shares the Committee's view of the importance of effective monitoring of specific elements of the levy, and is making arrangements to do this, as set out below.

There is provision in the climate change agreements to review the progress of the participating sectors, which are working towards delivery of energy saving targets in order to maintain their entitlement to the 80% discount on the levy. The Agreements provide that, in early 2002, DEFRA and the sectors will review operation of the agreements and to check progress towards the establishment of monitoring and reporting systems. The aim will be to prepare the way for the subsequent formal reporting of the sectors' performance against their targets. The initial intermediate 'milestone' target period in the agreements runs for two years, ending on 31 March 2003. As part of the formal assessment process, audited data for a twelve month period (ending within the period 1 October - 31 December 2002) must be reported to DEFRA. The data must be forwarded to DEFRA by the end of January 2003 at the latest. DEFRA will then assess performance against targets and re-certify sectors for discount entitlement, as appropriate. Sectors are expected to make their own arrangements for regular internal monitoring and this information may help to give an earlier indication, during 2002, of the progress being made towards the targets in the agreements.

Arrangements are also being established to monitor the take-up of the enhanced capital allowances scheme for energy-saving investments. It is expected that this will cover areas such as the category of product, through sampling, questionnaires and close liaison with the manufacturers.

In addition, the Carbon Trust has now been established and is developing its business plan. In the short term, the Carbon Trust will concentrate on helping business save energy and money. Looking to the longer term, it will develop the UK's capacity to meet the problems of climate change, considering not only commercial and technological factors but wider socio-economic factors which hinder our move towards a low carbon economy. The Carbon Trust will work with a wide range of low carbon stakeholders, including businesses, NGOs, Trade Unions, Government and the research community. The business plan will be subject to approval by the DEFRA who will work closely with the Trust and monitor their activities and achievements.

Review of Redundancy Law and Practice

(11)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. 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 (paragraph 32).

The Government announced on 18 January 2001 that it was to review UK arrangements affecting collective redundancies, to consider whether the current laws were working and whether more should be done to promote effective consultation with employees. Since the Review was begun, an agreement has been reached in the EU Council of Ministers on the proposed directive establishing a general framework for informing and consulting employees. This has a major bearing on the issues covered by the Review, and the Government now needs to take account of this. The Government will carry out a full consultation on the implementation in the UK of the Information and Consultation directive (which still has to be considered by the European Parliament before it can be adopted in Brussels). The Review will be taken forward through that consultation. The evidence gathered so far during the Review will inform the consultation and the subsequent implementation of the directive.

EU Enlargement and Steel

(12) 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. 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 (paragraphs 36 and 37).

The Government agrees with the Committee's comments on the potential for derogations or transitional periods to distort the single market. The avoidance of such distortions is a central issue in the ongoing enlargement negotiations on the environment acquis, and we are encouraged that many requests from candidates for transitional periods on key parts of the environment acquis have recently been withdrawn or scaled down. It remains, of course, a fundamental principle of the negotiations that transitional periods are exceptional, limited in time and scope and accompanied by a plan with clearly defined stages for the application of the acquis."

The State Aids acquis is part of the competition policy chapter and is due to be discussed under the forthcoming Belgian Presidency. It is too early to say what the outcome will be, but it is clear that the few requests which have been made for transitional periods are likely to receive a sceptical response and that the existing track records of enforcement of their current state aids commitments by the candidates are likely to be taken into account.

The Government fully supports the Commission's continuing efforts to ensure that real restructuring takes place in the steel industries of the candidates as soon as possible. This has included the submission to the Commission of detailed restructuring plans. We agree with the Committee's view that we should restrict as far as possible overcapacity and unfair competition in what is, as the Committee says, an imperfect market. On the practical side, DTI has been involved in a twinning project in Poland which seeks to assist with the consequences of steel (and coal) restructuring.

Corus: Consultation

(13 We regret that Corus felt unable to take Ministers more fully into their confidence in December while they were preparing the proposals announced on 1 February. We are not however convinced that there was much that Ministers could have done to help the process (paragraph 46).

The Government, in particular the Department of Trade and Industry, has regular contact with Corus and is therefore well aware of the company's concerns about such issues as the Climate Change Levy, energy prices etc. The interests of the company and the industry have been represented in inter-departmental discussions about such matters as the Climate Change Levy.

However, the company has been reluctant to have more strategic level discussions about their future plans. This has made it very difficult for Government to consider how it might help the company to capitalise on opportunities or avoid difficulties if it is unaware of its strategic direction.

Corus: Remediation of Contaminated Sites

(14) A clear statement by Government of the legal and financial framework for remediation of steel-making sites, including the powers to enforce clean-up of a vacated site, would be helpful. We would also welcome the prompt publication by Corus of plans for their evacuation of redundant sites, and a proposed timetable for their remediation, so that they can be put to other uses as soon as possible, in consultation with the regional and local authorities (paragraph 51).

The potential legal and financial obligations for site-remediation vary according to the nature of any contamination of the site, its location and when it becomes vacant. In part this variation reflects deliberate policy decisions, but in other respects it also reflects the transitional situation with respect to the implementation of new statutory requirements.

Part IIA of the Environmental Protection Act 1990 gives local authorities and the Environment Agency duties to identify and ensure the remediation of any land meeting a statutory definition of "contaminated land". This regime is intended to deal with risks arising from contamination, assessed on the basis of the current use and circumstances of the land. Potentially, it applies to sites that are in operational industrial use, that are derelict or that have been redeveloped for new uses; the basis for risk assessment on these different types of site may well be different, however, as the pattern of potential risks is to a large extent dictated by the particular use of the land.

Under Part IIA, liability for any necessary remediation falls, in the first instance, on any person who has "caused or knowingly permitted [a contaminant] to be in, on or under the land". If no such person can be found, liability passes to the current owner or occupier of the land, subject to limitations concerning water pollution cases.

The provisions of Part IIA came into force in England in April 2000 and in Scotland and Wales in July 2001.

In future, the closure of an industrial operation may trigger wider legal requirements for site remediation. The system of Integrated Pollution Prevention and Control (IPPC), which is being brought into effect on a phased basis over seven years, will require the operator of any permitted installation to carry out a site investigation and restore it to a "satisfactory state" when the installation is closed. This may involve remediation not only to ensure compliance with the standards in the Part IIA regime, but also to remove any contamination that has been caused during the period of operation of the installation.

Preparing a site for redevelopment may involve more extensive remediation of chemical contamination than can be enforced under either the Part IIA regime or IPPC. This is because a new site use may be more susceptible to contamination risks. In addition, there may be a need for other site-clearance and preparation work that is not related to chemical contamination. In some cases, former industrial sites are cleared and cleaned-up by the companies concerned before they are sold on for redevelopment. In other cases, this work may be carried out by a new owner as part of the redevelopment; the potential cost of this work will generally be offset against the purchase price paid for the land by the new owner.

Although it is the responsibility of any developer to ensure that the development is safe, local planning authorities may impose specific conditions or other obligations relating to site investigation and remediation as part of the planning approval process.

Corus: 1 February Cuts

(15) Nothing we heard from Sir Brian Moffat has led us to believe that the cuts announced on 1 February are part of a long-term strategy for the company's survival, nor that there have been Government economic policies which could have produced a different short-term outcome (paragraph 52).

We share the Committee's concerns about the apparent lack of a long-term strategy for the company. The Government's main aim must be to create an economic environment in which companies such as Corus can thrive but the company itself must have a long term plan to identify and take full advantage of opportunities and respond to emerging threats. Government ministers have made the point to Corus on more than one occasion that they believe Corus has taken a short-term and pessimistic view of prospects for manufacturing in the UK.

Corus: Workington and Long Rail

(16) Whether a good thing or not, the decision by Railtrack to seek longer rolled lengths of rail was scarcely a bolt from the blue. Bearing in mind the likely changes noted in the mid-1990s in the probable demand for long rail, we are surprised at the decision by British Steel not to invest in conversion of the Workington plant to long rolled rail in the 1990s, when it was making substantial profits. The purchase by Corus of the Hayange long rail plant in France in 1999, in response to Railtrack's express requirement for longer lengths of rolled rail, was the consequence of that earlier misjudgement, resulting in the company spending at least £83 million in acquiring a French plant rather than investing £50 million in the Workington facility (paragraphs 65 and 68).

Corus: Workington's Future

(17) We urge Corus to consider making Workington the company centre of excellence in short rail and sleeper production for the domestic and international market. We also urge Railtrack to give proper weight to the advantages of having a viable domestic rail producer close at hand when considering its future policy on ordering (paragraph 71).

We note the Committee's comments and hope that Corus and Railtrack will take appropriate action in this regard to ensure that the UK remains an important centre for rail manufacture. Where possible and appropriate the Government will support such action.

On the question of procurement, this is a commercial matter for Railtrack. But the Government's Ten Year Plan for Transport, by announcing £60 billion of funding for the improvement and expansion of the rail network, will ensure that there is no shortage of demand for steel rails. It must be in Railtrack's own interest to have a stable source of supply in the UK - and the post-Hatfield national recovery programme has underlined this.

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