Written evidence from Corus
SECTION 1. CORUS
1.1 Corus in context
1.2 Strategic direction
SECTION 2. WHAT
DOES CORUS
MEAN TO
WALES
2.1 Employment and training
2.2 Corus operations in Wales
2.3 Turnover and spending in Wales
2.4 Recent investment in Wales
SECTION 3. ISSUES
FACING CORUS
IN WALES
3.1 UK/Welsh manufacturing
3.2 Effect of Government policy
3.3 R & D, job and wealth creation,
links with academia
3.4 Energy costs and taxes
3.5 Additional taxation issues
3.6 EU Enlargement
SECTION 4. CORUS
RESPONSE
ANNEX 1—BACKGROUND
1.1 Markets supplied by Corus
1.2 Turnover
1.3 Manufacturing operations
1.4 Corus Strip Products division
1.5 Corus and Health and Safety
1.6 Corus and the Environment
1.7 Corus People
1.8 Research and Development
1.9 Innovation
ANNEX 2—CHANGES
WITHIN THE
STEEL INDUSTRY
2.1 Industrial transformation
2.2 Steel industry
2.3 Marketplace
2.4 UK demand
2.5 Currency effect
2.6 UK economy
1. CORUS
Corus in Context
— Corus is an international metals
group providing steel and aluminium solutions to customers worldwide.
Combining international expertise with local service, the Corus
brand represents a mark of quality and strength.
— Corus comprises four divisions and
a speciality portfolio with operations worldwide.
— Corus was formed in October 1999
through the merger of British Steel and Koninklijke Hoogovens.
— Corus shares are listed on the London,
New York and Amsterdam stock exchanges.
Strategic direction
— Corus is focused on Restoring Success
to improve its competitive position amongst European peers.
— Corus' strategy is to focus on selected
carbon steel products and to achieve operational excellence by
rigorous benchmarking, sharing best practice and leveraging the
scale of the Company.
— Corus aims to be an innovative company
with a strong customer orientation, an international outlook and
a value creation mindset.
2. WHAT DOES
CORUS MEAN
TO WALES?
Employment & Training
— Corus is the largest manufacturing
employer in Wales, employing c. 8,000 people across 10 sites in
North and South Wales.
— It is estimated that Corus direct
employment supports a multiplier effect of two. Therefore, Corus
in Wales directly and indirectly supports c. 25,000 people.
— Corus direct disposable wage income
in Wales is c. £200 million per annum. It is estimated that
for every £1 million of direct wage income, a further £0.7
million wage income is supported in other sectors in Wales. (Average
salary per employee of c. £25,000 per annum)
— The company substantially invests
in training existing and future employees. In Wales, the company
sponsors c. 60 Engineering Doctorate students at Swansea University
at any one time.
— UK Steel Enterprise, Corus regeneration
arm, has been helping to create jobs and regenerate the UK's steel
area since 1975.
— To date UKSE has
supported over 3,700 companies who have committed to the creation
of over 60,000 jobs. (Of which over 20,000 are in Wales).
— Following Corus
Group restructuring of UK operations in 2001, an additional £10
million was provided towards supporting job creation in steel
areas—for example, construction has started on the £3
million Innovation Centre in Victoria, Ebbw Vale to attract high-tech
value jobs to the area. Project funded by UKSE/matched through
Objective one.
Corus operations in Wales
— Corus Strip Products UK—Llanwern,
Port Talbot, Aluminised Products;
— Corus Colors—Shotton—(North
Wales) & Tafarnaubach (South Wales);
— Corus Packaging Plus—Trostre,
Llanelli;
— Corus Narrow Strip—Llanwern
(transferred from Whiteheads site);
— Cogent Power (75% owned by Corus)—Newport;
— Corus Distribution and Building Systems—Cardiff,
Ammanford, Newport; and
— UK Steel Enterprises—Cardiff.
Turnover and spending in Wales
— Corus does not report individual
Business Unit turnover, however, the "Welsh" element
makes up a substantial part of Group turnover.
— Corus "Wales" day-to-day"
expenditure is in the order of c. £1.5 billion per annum—of
which direct spending in Wales is c. £350 million. There
are around 2000 suppliers to Corus "Wales", of which
c. 700 are Welsh-based, and of which est 10% receive more than
£1 million worth of business per annum.
— It is estimated that for every £1
million of direct Corus output in Wales, a further £320,000
of output is supported—ie as a result of output supported
in the supply chain and output supported as employees and suppliers
spend incomes in Wales. This totals to an estimated £640
milion of indirect output in Wales.
Recent Investment in Wales
— Corus has invested over £1.2
billion in Wales during the last 12 years.
— Corus Strip Products UK alone invested
£250 million in Port Talbot/Llanwern during last five years
and over £110 million in 2002, including the world-class
project to rebuild the No 5 Blast Furnace at Port Talbot.
— Further significant investment (net
cost £71 million) has been announced for 2004-05 to increase
capacity at Port Talbot by 25% (one million tonnes).
— Additional investment plans for Llanwern
and Port Talbot 2004-05 total £50 million.
— Other recent investment by Corus
in Wales includes the installation of upgraded "tin coating
line" at Corus Packaging Plus (Trostre) at a cost of £10
million, and a £4 million investment in Corus Living Solutions
at Shotton.
— Example of direct benefit to Wales;
— Of the £75
million invested in the new blast furnace at Port Talbot—over
£35 million was spent with Welsh companies.
— Further—it
is anticipated that 50% of the £71 million cost of increasing
capacity at Port Talbot, and associated £50 million improvement
investments at Llanwern and Port Talbot will benefit Welsh "local"
companies.
— Companies involved
in projects such as the BF5 rebuilding, have been able to secure
further contracts due to the visible and successful completion
of such challenging projects.
3. ISSUES FACING
CORUS IN
WALES
— Corus has interests that impinge
on almost every aspect of Government policy, either as an employer,
a manufacturer, an exporter, a user of Government services, a
tax payer, an energy user, a transporter of goods, a supplier
of services, inter alia.
— Corus is committed towards adopting
an open approach to engagement with government and other external
stakeholders, and frequently updates, and discusses issues with,
national and devolved government, agencies and regulators.
UK/Welsh Manufacturing
— Corus makes a significant contribution
to the Welsh economy, but must sell its products throughout the
UK and in selected overseas markets.
— Manufacturing sector in Wales is
in a poor state. Official figures show manufacturing output falling
month on month in Wales, indicative of the continuing erosion
of our UK customer base.
— Latest Welsh Assembly
Government Statistics (January) show that the drop in manufacturing
output in Wales (2002 cf 2003) was SIX TIMES the drop in the rest
of the UK. (4.2 cf 0.7—up to Q3 2003 annual).
— UK has suffered from a long-term
decline in steel demand, with a 35% fall over the past 30 years.
More significantly, demand in 2002 was 12% below the 1998 level,
reflecting the drop in UK manufacturing activity. (2003 figures
not yet available)
— Sustained effect of adverse sterling/Euro
XR reduced competitiveness of UK steel exports and undermined
our UK customers—the UK Manufacturing sector during the
late 1990s and early part of this decade. We must be wary that
the under valuation of the US $ against the euro could also be
damaging to the UK's interests.
— Welsh GDP some 20% below UK average.
Without steel it would be disadvantaged further.
Effect of Government Policy
— Generally, there is now a positive
approach from government towards supporting industrial change.
Whilst the Steel industry cannot directly benefit from regional/state
aid, there are areas where government could have a significant
impact on manufacturing—for example, through public procurement
policy, improvements in education and training, improvements to
infrastructure to assist with raw materials deliveries and access
to markets for finished goods.
— However—in Wales, whilst level
of engagement with national and devolved political representatives
is high—and where a mechanism has been implemented to discuss
various support measures, the outcome is often disappointing.
The political "will" to support manufacturing is strong—however,
bureaucratic process yields very little, if any, "real"
support.
— Too many regulations are being imposed
and "gold-plated"—particularly within the environmental
area. Over-regulation and over-enthusiastic interpretation of
regulations draw a huge amount of management time and resource
away from the task of running the business—we give some
examples of this below.
— Our principal concerns are the effect
this has on our customers, and on our costs, often for little
or no environmental benefit. Having experienced a number of years
with an overvalued currency, many of our former UK customers have
already moved their manufacturing operations away from the UK.
— Inevitably, if national and devolved
Government regulations continue to restrict our remaining industries,
many more will simply move somewhere not constrained by such things.
— As an example,
the EU Emissions Trading Scheme consultation process—Corus
takes full responsibility for our impact on the environment, and
are working towards improving these impacts. Corus has reduced
energy use per tonne significantly, and in the Climate Change
Agreement reference year of 2002 Corus contributed almost all
of the 9.5MT CO2 reduction attributed to the steel
industry out of the UK total of 13.5MT. Whilst this reduction
was distorted by special circumstances like the Blast Furnace
outage at Port Talbot, on a like for like basis, our "real"
reduction was around 1.7MT (equivalent to ~0.4% of total UK CO2
emissions)
— The Government's
target of a 16.3% reduction in CO2 emissions by 2007
is a much more onerous target than either the Kyoto agreement
or the UK's existing Climate Change Agreement. Corus is ready
to take a fair share of the burden. We are particularly concerned
that the UK should not be placed at a competitive disadvantage,
whether that is with other European steel producers, with Kyoto
non-signatories, or, with Kyoto signatories who are not constrained
as to the amount of CO2 they can produce.
— The proposals will
inevitably lead to a substantial increase in wholesale electricity
prices, with a consequential effect on the competitiveness of
UK manufacturing industry and, therefore, our customers. We are
also disappointed that solutions have not been found to spread
the burden more fairly among other CO2 producing sectors.
— Corus' allocation
under the UK National Plan is being studied in detail. The Plan
is extremely complex and is not transparent. For example, we need
to understand better the effect it will have on plant extensions
and new steelmaking capacity. We will be discussing the proposals,
in the context of our UK restructuring programme, with DEFRA and
DTI in the coming weeks before commenting in detail and responding
to the proposals, with the aim of maintaining Corus' competitiveness
in the marketplace.
— The EU has introduced the Landfill
Directive, which aims to reduce the amount of material landfilled.
However, at the same time, the definition of waste is being interpreted
by the Environment Agency in such a way as to unnecessarily label
otherwise useful products and by-products as waste. The stigma
of the waste label has the immediate effect of reducing both the
demand for, and value of, that material and increases regulatory
and administration costs. The net result is increased landfilling,
contrary to policy objectives and environmental aims. It is difficult
to reconcile blast furnace slag, (part of the output from ironmaking
process) as a waste, when it has been used for decades as a valuable
alternative to quarried stone in road building and as a cement
substitute. This also confounds the purpose of the aggregates
levy which is designed to reduce the amount of new stone quarried.
— Over 92% of our co-products and by-products
are recycled or used as secondary raw materials. Whilst the remainder
currently goes to landfill, we are researching a wide range of
options to find new uses for what could be valuable materials.
Only a fraction of our landfilled material is classified as hazardous,
but alongside the obvious point of classifying non-wastes as wastes,
there is a similar move to reclassify some materials from non-hazardous
into hazardous. This changes the way these materials are handled
and transported as well as adding significantly to the cost.
— Corus would welcome a review of public
procurement policy, for example, with respect to publicly funded
construction projects. There is concern that current policy does
not reflect the "whole-life" benefit of these projects
with respect to impact on suppliers, and to sustainable development
considerations. To highlight this, the recently constructed Welsh
National Velodrome track, which is adjacent to the Corus Llanwern
site in Newport, was funded by public and lottery finance. Whilst
Corus "Colorcoat" material, which carries a 25 year
guarantee, was originally specified for this project, the contract
was awarded to a Swedish competitor, which does not offer the
same guarantee of product longevity.
R&D, job & wealth creation, links with
academia
— In general, the UK is better at Research
than Development.
— Whilst R&D has an important role
to play in creating new products and business opportunities, UK
manufacturers often lack the support and resources to take those
ideas and turn them into products. Again, the political will exists,
but bureaucracy often prohibits these projects from moving forward.
— Corus spends some £50 million
per annum on R&D. In the recent government consultation on
the R&D tax credit, Corus supported the idea of extending
the definition of R&D to help drive the process of product
development.
— Corus also argued that "big"
companies should benefit equally from the opportunity to receive
a cash refund, rather than a deferred tax credit if they are loss
making. This is presently available to SMEs and delivers help
when it's needed.
— Corus has worked alongside universities
for many years, and has an excellent track record in sponsoring
university Chairs, Engineering Doctorates and undergraduates.
A high proportion of employees are funded to undertake post-graduate
qualifications in a variety of disciplines. Corus also sponsors
and collaborates with universities on research projects, some
of which receive public funding at UK or European level. We are
aware that the Lambert review into industry/academic collaboration
has recently been published and will be considering its findings
as we review our links with local universities.
— However, Corus has similar concerns
to many others about the direction of secondary and tertiary education
in the UK, particularly in respect of the teaching of maths and
physical sciences. These subjects require strong cumulative knowledge
building over many years, but appear to have suffered from the
many changes that have been made in the curriculum, the examination
system and their general perception as "difficult" subjects.
Energy costs and Taxes
— Steel and aluminium processes are
energy intensive. Corus operations consume large amounts of electricity
and gas. Natural gas prices increased from an average of 19 pence
per British Thermal Unit (BTU) in 2000 to an average of 24p for
H1 2003. A 1p change in gas prices results in c. £5 million
change in our annual pre-tax operating costs.
— Corus expenditure on electricity
is significant. The average price paid for electricity has increased
from 2.2p per MWh in 2000 to 2.3p for H1 2003. Every 0.1p rise
increases Corus operating costs by £10 million.
— The UK, Dutch and German governments
have imposed general energy taxes on industry. Corus has endeavoured
to minimise the cost impact of these taxes through a series of
negotiated agreements. From April 2001, the UK Govrnment has imposed
a tax on the business use of energy (Climate Change Levy). A negotiated
agreement was signed with UK Govt to allow Corus to take an 80%
reduction in the amount of CCL up to end 2002. As we met our energy
efficiency targets in 2002, we will receive the same reduction
for 2003 and 2004. In order to qualify for 2005 and 2006 we have
to meet the efficiency targets for 2004. This reduction is worth
£28 million per annum. Introduction of the EU Emissions Trading
Scheme will require a re-evaluation of targets to cover those
areas of activity that fall outside EUETS but remain within CCL.
If we fail to meet agreed targets costs in the form of increased
taxation will be significant.
Additional Taxation Issues
The following provides an overview of the impact
of just some of the tax changes introduced:
— Renewable Obligations—the
decision by the govt to introduce RO has obliged electricity providers
to source energy from renewable sources, adding a further c £4
million to UK electricity costs from 2003 and up to £17 million
in 10 years.
— Corus pays £3.5 million in Landfill
Tax—rate will increase from £12 to £15 in
£1 steps and then by £3 per annum to an eventual rate
of £35/tonne. Coupled with the issue of redefinition mentioned
earlier, this has the potential to become both quite complicated
and quite costly unless handled intelligently.
— Double Tax Relief proposals
cost Corus some £5 million in 2002 (dividends from controlled
foreign companies will be taxed in UK).
— Increased NICs payments of
over £5 million per annum.
— Energy; Gas & Electricity;
Gas prices have significantly increased since the annual contract
negotiations in January 2000. Although NETA has reduced prices,
in Wales, we pay more for electricity cf England due to higher
transmission charges.
— Lighthouse dues(!)
As a result of the charging methodology employed, bulk carriers
of low value raw materials pay a disproportionately large share
of the light dues costs. As a comparison, each shipment to our
UK facilities attracts Light Dues of £16,000, whilst a similar
shipment to our Ijmuiden plant in the Netherlands is not
charged for this service. Our annual bill, whilst reduced as a
result of the new cap, still means we will still pay some £2.5
million per annum in Light Dues for UK imports of our essential
raw materials. We are disappointed that the Dept for Transport
has still not properly addressed this issue, despite the clear
anomalies that have been revealed.
EU Enlargement
— Countries seeking EU membership have
large steel industries. UK Government needs to ensure these countries
fully comply with EU laws vis environment, etc—otherwise
resulting in damaging and unfair competition.
— Many of these countries have previously
been accused of steel dumping in the UK at subsidised prices.
Corus is concerned that some of these new entrants will not be
required to sufficiently restructure, and, that they will continue
to receive state aid until 2006 and up to 2009 in one case. It
is important that the further candidates of Romania and Bulgaria
and Turkey, are required to deal fully with this point before
they join the EU and not afterwards. They have been aware of their
responsibilities in this matter since 1990!
4. CORUS RESPONSE
— Corus has responded to the issues
it faces by restructuring and introducing challenging performance
improvement objectives. For example, the High Performance programme,
which was implemented in Corus Strip Products UK, in 2002, has
led to a major and sustained improvement in the efficiency and
performance of the Llanwern and Port Talbot plants.
— However, it is clear that the plethora
of additional taxation measures, burden of government and EU legislation
and government policy towards manufacturing industry, have combined
to have a severely damaging impact on the competitive position
of the company.
— Corus welcomes this inquiry and the
opportunity to highlight some of the areas of concern faced by
the company and by its customers.
22 January 2004
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