6. Written evidence from Celsa
UK (Holdings) Limited
I am writing in response to your recent correspondence
with Mr Graham Mackenzie concerning the invitation by the Select
Committee to Grupo Celsa to give written evidence to its enquiry
in to Manufacturing and Trade in Wales.
Grupo Celsa, through its UK operating subsidiaries
is, of course, a very new investor in Wales, since it bought the
assets of the former ASW only 13 months ago and restarted steel
production in Cardiff only last July. However we are very pleased
to assist the Select Committee and I have pleasure in enclosing
a short note giving evidence outlining the company's experience
during its initial investment in Wales. The note also raises a
couple of policy concerns on matters which may adversely influence
Celsa's future development in the UK.
MANUFACTURING AND
TRADE IN
WALES
Celsa UK (Holdings) Limited, the holding company
for Grupo Celsa's operating companies in the UK is pleased to
give evidence to the Welsh Affairs Select Committee about its
experience as a recent inward investor to Wales.
THE COMDANV
Grupo Celsa is a privately owned group of Spanish
steelmaking companies which was established in 1967. (Celsa is
an acronym for Compania Espanola de Laminaciation SL). It has
three steel mini mills in Spain, located in Barcelona, Santander
and near Bilbao, as well as a number of downstream steel processing
subsidiaries.
In January 2003, Grupo Celsa purchased from
the Receivers of the former ASW the Cardiff steeling making assets
and certain other assets from the former ASW Sheerness site. More
recently it purchased a steel mini mill in Poland.
Grupo Celsa currently produces over 6 million
tonnes of steel per year—and employs about 5,500 people
including about 375 in the UK. Its global turnover to the end
of 2003 was approximately 1.5 billion Euros (1,000 million GBP).
The company specialises in the production and processing of light
long steel products including reinforcing bars, wire rod, merchant
bars and sections and structural steel. Its main markets are in
the construction and general manufacturing sectors.
The Company's business model, which it has pursued
successfully in Spain over the last 20 years or so, is to aim
to be the lowest cost producer in its chosen geographic market
through investment in the latest technology and lean operation
of its manufacturing plants. Service to customers is on a 24 hour
basis from stocks of finished products held at the manufacturing
plant. Even in the field of Reinforcing Bar, which is generally
considered a commodity product, Grupo Celsa has led innovation
through the development and introduction of higher strength grades
of material.
PURCHASE OF
ASW ASSETS
ASW Holdings plc went into Receivership on 10
July 2002 following several years of decline and under investment
caused by a series of strategic errors in the 1990s, excessive
borrowings, and, finally, the imposition of steel import sanctions
by the United States in December 2001. The Receivers closed the
Cardiff steelmaking operations within days, making the majority
of the workforce redundant at the end of July 2002. When no immediate
buyers were found, the Cardiff nail making business and the Sheerness
steelmaking operations were subsequently closed in the autumn
of that year.
When the Receivers marketed the Company, Celsa
expressed interest in acquisition of the steelmaking assets. After
a protracted period of due diligence and negotiation Celsa were
granted first a period of exclusivity and finally completed the
purchase of the assets on 9 January 2003. Celsa acquired the land
and steel making assets of the former ASW in Cardiff together
with the Bar Mill and C Caster from Sheerness. We understand that
the Receivers sold the nail making equipment at Cardiff and remaining
Sheerness steel making plant to other parties. The price and terms
on which Celsa purchased these assets remains commercially confidential.
Celsa purchased only assets and the former ASW employees remained
with the Receivers. Subsequent to the purchase of these assets,
Celsa immediately uplifted the Sheerness Bar Mill and Caster and
moved them to Cardiff where they remain in storage.
RESTART OF
PRODUCTION
Given the very short time frame over which Grupo
Celsa acquired the former ASW assets, which was dictated by the
nature of the receivership, Celsa had not at the time of completion
decided what to do with the equipment. The principal options were
to restart the Cardiff operations or to remove the equipment from
the UK to install it elsewhere in the Celsa group. Therefore,
Celsa then conducted an extensive and detailed review of the assets
and of the market opportunity in the UK and concluded in late
April that, since market conditions were improving, the plant
should be brought back to operational status. Subsequently, in
June, Celsa concluded that the plant should recommence production
and, after hot trials in July, production recommenced in August
2003.
Because of the limitations of the plant and
Celsa's view that the Cardiff plant would be viable if it primarily
serviced the UK markets for reinforcing steel, wire rod and merchant
bar with very limited exports, only one of the two furnaces at
Tremorfa was reactivated together with the Section Mill at Tremorfa
and the Rod and Bar Mill at Castle Works. This configuration was
anticipated to provide some 850,000 tonnes of finished steel capacity
and to employ some 400 people directly with a further 200 or so
employed by contractors.
At the present time (February 2004) the final
stage of the ramp up of production is being achieved with the
start of the third shift on the rolling mills and the recruitment
of the last people to facilitate 24/7 working in the Melt Shop.
Celsa Manufacturing (UK) Ltd now employs some 380 people and its
various subcontractors, in areas like Mill Services and Logistics,
directly employ about 240 people. Thus, some 620 jobs have been
created since May 2003. Of the employees recruited by Celsa, some
70% were formerly employed by ASW with some of the remainder ex
Corus and ex Outokumpu (formerly British Steel Stainless) at Panteg.
Many of the contractors' employees are also former ASW employees.
GOVERNMENT ASSISTANCE
From the very start of its involvement in Cardiff,
Grupo Celsa has found the climate in Wales most welcoming. All
the authorities in Wales, including the Welsh Assembly Government
(WAG), Cardiff City Council and the Welsh Development Agency,
have been most helpful in terms of such matters as provision of
leases, planning permission for building extensions etc and a
good rapport has been established and maintained between Celsa
and these bodies.
Grupo Celsa do, of course recognise that the
ability of the UK Government and regional bodies such as the WAG
to provide direct support to steel making activities and development
is severely constrained by the very tight restrictions which circumscribe
state aid to the steel sector.
That said, Celsa is in dialogue with the Welsh
Assembly Government over possible support on two issues.
1. Support for training
Whilst Celsa had the opportunity to selectively
recruit former ASW employees, the experience is that the people
lack many of the skills and attributes that characterize their
Spanish workforce. Therefore, Celsa have drawn up, with assistance
from Education and Learning Wales (ELWa), a comprehensive training
programme based upon NVQ Level 2 standards to help rectify this
situation. Discussions are now in train with ELWa regarding support
for implementation of these proposals.
2. Support for public road infrastructure
development
Unlike ASW, which operated a rail based distribution
strategy and gave poor customer service because of the manifest
problems on the UK's rail network, Celsa's business model is based
around the concept of holding large stocks of finished stocks
at the manufacturing site and offering 24 hour road delivery to
customers.
The move to this different distribution strategy
is likely to give rise to a significant increase in the volume
of road traffic from the Castle Works site in Cardiff Bay in particular.
A solution, with the co-operation of our neighbours, Associated
British Ports, has been proposed to and accepted by Cardiff Council,
but its implementation is dependent on WAG financial support.
This is now being discussed with the Welsh Assembly Government.
UK GOVERNMENT POLICIES
It can be seen from the foregoing that UK Government
policies, played little part in Celsa's decision to purchase the
assets of the former ASW and to restart production.
The attractions to Grupo Celsa were the availability
of the steelmaking assets which, whilst elderly, were in fairly
good condition, the opportunity of the UK reinforcing steel market
(c. 1 million tonnes per annum) which at that time was being supplied
solely by imported material and the ready availability of ferrous
scrap, the raw material for electric arc steelmaking.
Celsa has recognised that the cost base in the
UK is high in comparison to its plants in Spain and Poland, so
the focus of Celsa's operations in the UK will be primarily to
service the domestic market, with limited exports at times of
slack domestic demand. In general UK costs such as labour, transport
and construction costs are some 30% higher than Celsa incurs at
its plants in Spain, but the differential in electricity costs
and property taxes (rates) is much greater.
Two policy issues do concern Celsa for the longer
term.
1. Energy costs
Energy costs for large users in the UK have
historically been high in comparison with Continental Europe and
this position is getting worse with the imposition of the Climate
Change Levy. For example the electricity cost incurred by Celsa
in Cardiff is 600/a higher than the cost at its plant in Barcelona.
This is a serious problem for UK electric arc steelmakers because
most of the import competition comes from East European countries
such as Latvia and Belarus, some of which are not even signatories
to the Kyoto Agreement, and from Turkey. In all of these countries
both energy and labour costs are much lower than in the UK.
The imposition by the Government of the proposed
Greenhouse Gas Emissions Trading Scheme will make this adverse
competitive differential much worse. The government's intention
to require industry to reduce emissions by more than the 12.5%
agreed with the European Union under the Kyoto Agreement will
be very damaging to the UK steel sector. The proposed quota allocation
for Celsa is at a level which will require the company to buy
additional quota even to raise production levels back to those
previously achieved by the former ASW in Cardiff, thus creating
a substantial cost penalty for raising output and making the company
even less competitive against its European rivals.
The bureaucracy and additional "red tape"
associated with operation of the scheme will be a further on cost
to the business.
2. UK Transport Infrastructure
The very poor state of the transport infrastructure
and the consequent high cost of transport in the UK is a matter
of concern to Celsa.
At an output level of, say 850,000 tonnes, of
finished product in Cardiff, the company will be consuming around
1 million tonnes of scrap and other raw materials. All of this
tonnage will need to be moved in to and shipped from the Cardiff
sites.
Whilst some of the scrap (perhaps 30-40%) can
be moved by rail, the rest of the raw materials and virtually
all of the domestic sales will be moved by road. ASW's experience
of rail shipment was that it was expensive and very unreliable
leading to poor customer service. Thus, for the foreseeable future
there is little alternative to road transport if Celsa's business
objectives are to be achieved.
The poor state of the UK's road network is therefore
of great concern to Celsa. A particular problem is the bottleneck
at the Bryn Glas tunnels on the M4 east of Cardiff where there
appears no solution to the longstanding congestion problem in
sight. The Committee should be aware that the combined outputs
of Celsa, Corus and Alpha Steel in South Wales represent over
40% of UK steel production and much of this has to pass through
these tunnels to get to market.
There are similar bottlenecks around the country,
which increase transport costs and reduce the competitiveness
of UK manufacturers and the UK construction sector.
CONCLUSION
Grupo Celsa has welcomed the opportunity to
give this evidence to the Welsh Affairs Committee of the House
of Commons. Having successfully re-opened the plant in Cardiff,
and in so doing created over 600 new jobs, Celsa is looking forward
to a long and profitable future in the UK and in Cardiff in particular.
However the relatively high cost of doing business
in the UK, and the growing level of "red tape"—epitomized
by the bureaucracy around the operation of the Climate Change
Levy and the proposed Emissions Trading Scheme, do give the company
concern for the long term competitiveness of the business. As
noted above, the present high level of costs in the UK makes export
of steel commercially unattractive; further cost increases may
in the longer term restrict the growth of the company's domestic
business.
Francesca Mesegue
General Manger
23 February 2004
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