Examination of Witnesses (Questions 131
- 139)
WEDNESDAY 4 FEBRUARY 2004
CORUS
Q131 Chairman: Welcome, Dr Carr and
Mr Pettifor. Corus has appeared before us on a number of occasions
in slightly less happy times. I think we will have a better day
today, so welcome to the Committee. Perhaps you could introduce
yourselves for the purposes of the note taker.
Mr Pettifor: I am Stuart Pettifor
and I am chief operating officer for the Corus Group, so I am
responsible for total operations worldwide for IT and also R&D.
Dr Carr: I am Mark Carr. I am
the managing director for Corus Strip Products UK, which is essentially
the two Corus businesses operating out of Port Talbot and Llanwern.
Q132 Chairman: Thank you very much.
Could both of you, if possible, briefly describe the state of
the steel sector in Wales and perhaps you could fit that into
the global and national steel experience at the moment.
Mr Pettifor: Shall I start and
say maybe where we think the industry is globally and then with
reference to the UK and Wales. Steel demand in terms of manufactured
steel in the UK for use in UK manufacturing has declined steadily
over the past few years, in terms of flat rolled steel for Wales
was probably at its lowest point that we have ever seen last year.
It declined some 35% over the last 30 years, 12% over the last
four or five years. If we look at what is happening in Europe
then really there is no growth. Steel demand and outputs have
been relatively flat. If you look at world statistics then they
will tell you that steel is growing at some 4% a year but most
of that is in China, in fact 90-odd% of it is in China, where
some 30-odd million tonnes of capacity was added last year and
it is likely that some 40 million tonnes of capacity will be added
this current year and probably a similar amount will be added
the year after. So growth in China is really quite phenomenal
at the moment. The interesting thing is nearly all of that steel
demand is being consumed within China, much of it in infrastructure,
but a lot of demand—and I guess you have heard today—increasing
demand for white goods manufacture and auto manufacture where
I think in three to four years' time they will be probably one
of the top three manufacturing nations in terms of white goods
and cars. So a tremendous explosion. So the main thing is very
little export out of China at this time. A lot of growth in South
America, where that is really fuelling export growth and plants
being built in South America purely to export semi-finished products
around the world. The former Soviet Union, which had a major collapse
in steel after the collapse of Communism is now re-growing its
industry quite quickly. Whilst that has generally resulted in
an export of semi-finished products into the rest of the world,
increasingly the domestic market is growing and we are seeing
Russian companies now come outside Russia and buy four steel companies.
We have just in fact seen a Russian company Severstal buy a rolling
operation called Rouge Steel in the US. I think one of the issues
we have to remember is that consumption of steel in total in the
UK is probably at record levels but most of it is imported in
goods and cars, in white goods and all the things we like to buy.
So our problem is not one of making things here, it is more the
fact that our customers and our customer base have continued to
decline and we are still seeing that up to now. So I think that
is really where we are. The current situation I think we are in
is that demand is actually beginning to grow. There is now some
real demand in the US where the economy is beginning to rebound.
There are beginning to be real shortages of certain products in
the UK market. China, whilst its industry is growing quickly,
cannot satisfy its own demands and so is importing tremendous
quantities of steel, which has a big impact on the world market
and that itself means that there is very little pressure in Europe
at the moment on steel that could be imported here, it is all
being sent by those countries elsewhere. That is leading probably
this year to some shortages in certain products in Europe. That
will not be in the long products area but there will probably
be some shortages in hot rolled coil in the first six months and
that of course has an impact on the industry in Wales because
that is where all our hot rolled coil manufacturing facilities
are.
Q133 Chairman: So it might be good
news?
Mr Pettifor: Yes. Well, it is
good news. The bad news, because there is always something else,
is that because China is consuming so much material it has until
really last year in major terms used its own iron ores and its
own coals. Their iron ores are very similar to the majority of
the UK iron ores, they have got some iron and carbonate, about
30% if you are lucky, and they are moving very much more to importing
iron ore and now increasingly are beginning to move to imported
coals. This is placing great strains on the world supply of these
materials and we have seen prices absolutely rocket. Not only
have the prices for those materials rocketed but the price of
freight and bulk freight has also rocketed. Two years ago you
could get a big bulk freighter for around 12 to $15,000 a day.
You will not get one for under $85,000 a day today and there is
no sign that that will go away in the short term. There are very
few of these boats being built. All the world shipyards are full
that can make this type of carrier but they are not full of bulk
carriers, they are full of L&G tankers and they are full of
double holed oil tankers, which the world is also short of. So
we face at this time tremendous cost pressures. So the price increases
that we have announced for January this year and in fact yesterday
increased and announced another round of £35 a tonne increases
in the UK really only go part way to recouping these enormous
increases.
Chairman: Thank you very much for that.
Q134 Mr Caton: In your submission
to us you have mentioned that steel cannot benefit from regional
or state aid. Is there any other assistance available from either
Central Government or the European Union?
Dr Carr: I think in terms of aid
that is available there are, I think, two key areas for us. One
is potentially in terms of research programmes and support for
those support programmes, the other area is for training opportunities.
There is a number of new businesses that we have looked at and
we have actually just set up a new business entity, which we call
Living Solutions in North Wales, Shotton, which is looking at
essentially packaged accommodation and as a new business we are
looking for different skills within that unit and we are looking
for training support for that. We can get that. It is proving
to be quite a difficult process to open the door to get access
to it, in all honesty.
Mr Caton: Thank you very much.
Q135 Mr Williams: Leaving aside reinvestment
in existing plants, does the accession of the new countries into
the European Union mean that Britain and the developed Western
European countries are ruled out so far as any new investment
in productive capacity is concerned?
Mr Pettifor: No, I do not think
so. I think the problem we have got is that we would find it very
difficult to invest in a new steel plant if you started from one
end to the other in the UK and that is because the market is not
here. It is as simple as that. What we are doing in our investment
programmes now, especially in Wales, in rounding out Port Talbot
to 4.8 and I am sure the answer will be more than 5, but it really
is based on supplying that steel into the UK market. We are so
exposed to exchange rate fluctuations, which have been well aired
over the past, that it would be impossible to have an industry
which has massive over-capacity in the UK.
Dr Carr: Perhaps I could just
add to that. The restructuring which we went through in 2001 was
essentially about sizing of the whole of our Welsh operation to
the available UK market, as Stuart rightly says. The challenge
for us now is to make that re-sized operation competitive. So
the investment that we are undertaking is competitiveness-based
very much and not actually growth-based.
Q136 Mr Williams: In your memorandum
you argue that there is now a positive approach from Government
towards supporting industrial change. Can you give us examples
on how this new approach has been put into practice. You say in
your memorandum "a positive approach from Government towards
supporting industrial change". There is a change in Government's
attitude then?
Dr Carr: Yes, I think that is
right. One of the things that we have tried to do, particularly
in the last few years, is to develop a much more open dialogue,
an engaged dialogue with many, many more stakeholders than we
might have historically done and I think what we are seeing as
a consequence of that is much more support in relation to at least
understanding the issues that manufacturing is facing and then
a preparedness as a consequence of that to take on some of the
issues that we face. The majority of those fall into the category
we have just described, which is essentially how can we be competitive,
how can we maintain a level playing field across those that we
meet on a regular basis in our core markets. That is not just
Europe, as Stuart said earlier it is increasingly penetration
from other areas and I think there is a much more receptive environment
to that, yes.
Q137 Mr Williams: I think you also
highlight that bureaucratic processes do not yield much help to
you. Perhaps you could say what are the main obstacles in your
dealings with Government?
Dr Carr: I think one of the key
issues for us is that when we go through particularly our development
processes or our environmental improvement processes or work simply
to improve performance at a local level what we actually do come
across is a very slow process by which to make change happen and
often it feels that that can impede the rate at which we can restore
the business's competitiveness. We have made substantial progress.
This is not a bad news story as far as I am concerned and the
competitiveness of our operations in Wales has improved very substantially
over the last two years, but there is plenty more we can do and
what we do not need as we are going through that process is to
actually have to jump an even higher hurdle because there is some
bureaucracy associated with licensing, associated with new permitting,
which in itself we fully support but in terms of the timescales
it takes to sometimes secure that, it can delay us.
Q138 Mr Caton: Has the recent weakening
in sterling re the euro had any effect upon the profitability
of Welsh operations due to costs of imports or even the ability
to export again sometimes?
Mr Pettifor: Yes, it has because
our market is basically a euro market and our pricing is a euro
pricing, even in the UK it is euro pricing. You might actually
get the bills paid in pound coins but it is actually a euro market.
So the exchange rate is quite critical to us. The general rule
of thumb that our finance people always talk about is that a euro
cent is worth something like 13 million on the bottom line, but
that takes a while to work through. In some cases it maybe takes
up to two years to work through because we have traditionally
been able to maintain a premium in terms of price in the UK against
continental Europe because of the logistics costs of getting steel
here and when exchange rates move you generally lose that, and
indeed we lost it last year and we are in the process in part
of rebuilding that this year and that is why we have announced
a
40 price rise in mainland Europe and £35 in
the UK. There is a similar differential for the January price
rise as well. So it is a very positive effect for us in the way
things have moved. The other problem we have, of course, is the
dollar and its weakness has impacted more negatively on UK operations
than it has on continental European operations and that is especially
true in raw materials because all raw materials and in effect
energy as well is really a dollar market worldwide. So that is
another issue, which makes it much more difficult to understand
the dynamics of how these things actually work. Of course, certainty
would be quite nice to have. I think it is fair to say that when
the pound was last at these levels to the euro, in fact the deutschmark,
was around 1980 and nobody at that stage regarded it as unremitting
good news, in fact it was unremitting bad news and led to the
pound soaring to these levels and if you remember there was quite
a decline in the industry at that time. Then there was a decline
in the currency, it went down to around 1.20 if you are talking
in terms of euros, 2.25 deutschmarks in about 1995. During that
period of decline we saw the manufacturing industry and steel
consumption actually grow. From 1995 until today we have seen
the exact opposite and since the currency has turned over and
ha weakened we have yet to see any growth in manufacturing as
a result of that. We recognise there is up to a two year lag before
you see that but I think the bigger issue for us now is where
manufacturing is actually going to. But when the pound strengthened
it started sourcing some components in mainland Europe and now
there is a new relationship. They find that they cannot get supplied
by UK component manufacturers because they no longer exist of
course, so rather than try and restart that they just relocate
east and they just go. That is a phenomenon that we see happening
more and more.
Q139 Mr Edwards: Can I ask you about
your relationship with the Government. How do you find relationships
with the DTI and Westminster and how do they compare say in Wales
with the Assembly and the Welsh Development Agency and has devolution
helped or hindered your relationships?
Mr Pettifor: Well, Mark spends
a lot more time talking to Wales than I do so he could maybe answer
that, but I think from my perspective they are very good. I think
our relationships with the DTI are very, very much improved from
what I remember from when I was last here, not in this place but
when I last worked for what was British Steel at the time before
I vacated the place for Sweden, where it was, shall we say, a
fairly adversarial type of relationship as I remember. But I think
it is very good now. We get good cooperation from them. We can
go and talk to them about anything at any time. We find that they
listen to what we say and the steel workshop that was held a couple
of weeks ago we found was a positive development. I think we will
find that some more good will come out of that as we move forward.
So I think those relationships are very much better than they
have been for some time.
Dr Carr: Just to add on that,
there is a lot more dialogue undertaken there between ourselves
and obviously the Welsh Assembly, the First Minister and the Economic
Minister on a regular basis and I think they then separately and
locally around the sites there is continuous dialogue between
local MPs and AMs, which means that the issues the industry is
facing, be it the raw material issue that Stuart described on
the back of China or the market issues related to the manufacturing
sector in the UK are clearly understood and with that level of
understanding undoubtedly we get a greater level of support commensurate
with it.
Mr Pettifor: Could I maybe add
that in my comments there is no implied criticism of the DTI either.
I think that we have actually changed our style quite considerably.
We have a much more open style. You will maybe hear from the DTI
officials what they think, but I think we are much more open in
what we will say and what we will discuss with people these days
than has been the case in the past.
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