Select Committee on Welsh Affairs Minutes of Evidence


Examination of Witnesses (Questions 259 - 279)

WEDNESDAY 17 MARCH 2004

AYKROYD & SONS AND ANGLESEY ALUMINIUM METAL LIMITED

  Q259  Chairman: Welcome this afternoon to our inquiry into Manufacturing and Trade in Wales. We are very grateful to you for coming before the Committee. Could you begin by introducing yourselves?

  Mr Barbagallo: Thank you very much. My name is John Barbagallo, I am the Managing Director of Anglesey Aluminium and I have been there for over three years. I am trained as a chemical engineer, and I have an MBA from the University of Queensland in Australia. I have spent nine years in the coal industry in Australia; I have now spent nine years in the aluminium industry. I have worked in Australia, New Zealand and now in Wales.

  Mr Aykroyd: I am David Aykroyd from Aykroyd & Sons. I am the fourth generation of Aykroyd & Sons. My great-grandfather started a clothing business in Manchester back in 1912. We have principally been involved in the manufacture of all types of clothing, from men's shirts to what we do now which is character children's nightwear—so all the Harry Potter, Spiderman pyjamas and Barbie and Disney products. We supply to the nightwear market, both out of our production unit, which is Bala in North Wales, and, also, due to, I am afraid, retailer pressure, we have started to import from several other countries of the world.

  Q260  Chairman: If I can ask both of you, in general terms, how would you describe the state of the sector in which each of your companies work, and how do you see the health of that sector in Wales?

  Mr Aykroyd: The clothing industry in Wales has been absolutely decimated, as probably all of you are aware, certainly over the last ten years and more so over the last five years. A huge amount of the sewing industry, I am afraid, has gone overseas. There are, obviously, various reasons for that, which I presume some of the questions a bit later on might address. It is extremely difficult surviving with manufacturing in the UK—not only in Wales but in the UK as well. Aykroyd & Sons are one of the few people who do seem to be managing to buck that trend. I think that is because we do have a niche product in character, on which the retailers do want some amount of flexibility. Nobody really knows how well the product will sell; the market is very fickle with children and one day they want Spiderman, the next day they want Shrek and the retailer wants that on the shelf with a very fast turnout—hence the reason why we are still managing to keep the UK side of the business going. In general, the manufacturing trade in Wales, as far as sewing is concerned, is decimated and there is very little of it left, I am afraid.

  Mr Barbagallo: If I take a broader perspective first, in the UK, the Aluminium Federation consists of primary smelters, secondary smelters, extruders, rolling mills, powder plants, fabricators and stockholders. In terms of Anglesey Aluminium, we provide 14% of our product into Wales, 58% stays in the UK and 28% goes to Europe. It is generally thought that in all sectors of the aluminium industry the margins are very tight; we do see increased competition from EU and also abroad, and with the exchange rate there are limited export opportunities and we are seeing a lot more competition from China. Generally, for the aluminium sector, trading is probably classed as.

  Q261  Albert Owen: This is directed to Mr Barbagallo: as a manufacturer of aluminium, what proportion of your total costs is in power and energy?

  Mr Barbagallo: I probably need to give you a bit more background behind that question. As an aluminium smelter we consume a large amount of electricity—at the moment 255 megawatts of power. On our current cost base that represents 35% of our input costs as a business. If I am actually allowed to digress for a moment, electricity supplied in the UK is very expensive given the amount of electricity we use. I actually think that the situation in the UK is getting serious and in future will get more serious, given that we are closing Magnox nuclear stations and we do see a trend of coal-fired power stations declining and we are relying more on imported gas in the future. In the current situation, nuclear and coal represent over 50% of the power in the UK, and much of this is actually going to close in the next 10 to 20 years' time. I think the Energy White Paper was a good starting point but it probably does not adequately address the replacement options for electricity in the future. I think renewables will help and I think there is a good opportunity for renewables developing in Wales, but given my current understanding, that looks like it will be capped at 10, possibly a bit more than that, up to 15%, of the electricity generation in the future. My concern is how do we address the remaining 40% gap if nuclear and coal actually do eventually fade out of the industry? I guess the TV programme "If the lights go out" will probably be a gentle reminder of today's session.

  Q262  Albert Owen: Can you give us some idea? When you talk about the volume you consume in a day, I remember when I visited the plant your predecessor telling me that the energy used in your plant in one day equates to what the city of Chester uses in a week. Is that a good comparison?

  Mr Barbagallo: I think it is a good comparison. I am using the numbers that were provided by the Welsh Assembly in their Energy Summit probably 12 months ago. To look at the power generated in Wales, we consume 12% of it.

  Q263  Albert Owen: You mention that in your written submission, and I am fully aware of it. What kind of problems do you envisage if a gas power station does not come on line locally? At the moment, much of your supply comes from the Wylfa nuclear power station, although you have had periods when you have got it from the Grid. How do you envisage the next 10 to 15 years if you do not get a replacement in close proximity?

  Mr Barbagallo: If you do not mind, I will take a step back. The smelter has been operating for 34 years now and the original contract was signed with the owners of Wylfa for 30 years. In 2000 we signed a second contract for another ten years, so we now have a contract that expires in September 2009. We have had concerns about the transmission systems, and through the National Grid we have actually put a lot of work into the transmission systems so that we do not have to rely on the local power supply. If you look at Wylfa, Wylfa has publicly stated it will close in 2010. We have had a relationship with Wylfa that will be nearly 40 years of supply, so it is a strong relationship there. However, we are not totally reliant upon Wylfa for our future generation. We are after a long-term, continuous supply of competitive priced power rate our continued operation. If I could make one comment: I actually took my management team to Wylfa last week and was highly impressed with the Wylfa operation. I do think it will be a great shame to Anglesey, Wales and the UK when Wylfa does close because that power station currently contributes about 2% of the power in the UK[1].

  Q264  Albert Owen: If 2010 is the switch-off for Wylfa and there is no replacement in the locality, would there be increased costs for you to increase your infrastructure to get capacity from the Grid?

  Mr Barbagallo: We are looking at this as an issue now. There are three options for us. The first one is to look at replacing the ordinary gas-fired power station, and there is a study under way to look at that as we speak. The second one is to source power from the Grid directly, and there would be significantly higher costs associated with that option. The third one, is to actually close the smelter.

  Q265  Albert Owen: Just to finish, you mentioned renewable sources of energy, and in particular offshore wind farms are coming on line in North Wales and in the locality and, indeed, will contribute, as you said, up to 10% of the nation's supply by 2010. Do you envisage yourself tapping into that renewable source over the next few years?

  Mr Barbagallo: If we look at Anglesey we are really after two things: we are after a secure, continuous supply of electricity, firstly, and the second one we are after is a competitive price for electricity. If you look at wind, it actually supplies neither for an operation like ours. For a home user or from a domestic point of view wind is a great option, it actually does contribute to renewables in general and that is something we need to encourage and foster for the future. However, if we actually look at offshore wind, there is not enough offshore wind in the UK to get anywhere near powering our electricity requirements. Secondly, offshore wind, at best, is double the cost of nuclear, gas or coal for electricity generation.

  Q266  Mr Caton: I am moving on to regulations, particularly regulation from the European Union. Mr Aykroyd, if I can ask you a question first, what is your experience of the impact of EU regulation on your business?

  Mr Aykroyd: If "Draconian" is too strong a word, then very difficult indeed. We are constantly having to put in and work systems which are obviously costly. We are trying to compete with other countries in the world, obviously; not EU countries, but countries that certainly have nothing like the regulation that we have to work under; not only regulation as far as our employment is concerned (which obviously we have to accept) but red tape, regulations, health and safety issues, and whatever. As a fairly small manufacturing company, trying to keep our costs and efficiencies down to a bare minimum, because of the wage structures that we are having to put in against places like China, we have to employ a full-time person to handle our health and safety, and obviously that is an on-cost that is difficult for us to handle. So, in general, it is very difficult, although I appreciate that all the EU regulations are made with the best welfare of our employees in mind and of the environment as well. It is very, very difficult for us to put all of the things into practice and maintain efficiencies regarding our cost prices to our customers.

  Q267  Mr Caton: Are you able to engage with Government to air your concerns and explore ways of helping you?

  Mr Aykroyd: We as a company have not done so, no. Whether there are ways and means of doing that, I am sorry, I have not exploited them. We have just had to put up with the situation and do our very best.

  Q268  Mr Caton: Thank you. Moving on to Anglesey Aluminium, you mentioned in your written submission several EU regulations—REACH, IPPC etc. Can you tell us which of these, in your view, is the most onerous or perhaps badly specified, and provides the least environmental benefit?

  Mr Barbagallo: I have been in Anglesey for three years and there have been a number of regulations or legislations that will apply to our business. Just to give you an idea of the scale, we have seen the new electricity trading arrangements come in, we have seen the Climate Change Levy go live in 2002, we have seen the introduction of the Renewables Obligation, the introduction of the Integrated Pollution Prevention and Control (IPPC), the EU Landfill Directive is new on the list and we now have to meet the COMAH regulations (Control of Major Accidents and Hazards). The EU REACH proposal has started to rear its head a lot more and we have seen the start of the European Union Emissions Trading Scheme. They are the main ones but we can look at the Temporary Workers' Directive and other directives that are coming through the EU at this stage. If you look at Anglesey Aluminium, all of these are big issues for the business. Some of them are environmentally based and some of them are other based. If we look at them, all of them have the potential to close the business in the long-term and do add an element of cost to our business. If I can digress, for a moment, as a business we have reduced total CO2 emissions by 42% since 1990 while increasing production by 16%. Most of this was achieved before the Renewables Obligation, the Climate Change or the EU ETS legislation came into being. We did these things because it actually makes  sense in terms of health and safety and environmental benefits and, also, energy efficiency. So, from my point of view, we have been penalised for early action because we continue to be right at the edge of some of this EU legislation. We may talk about that a bit later. If you look at the EU IPPC regulations, our business gets a PPC permit—a licence to operate, so to speak—and this was granted to us in May 2003. The requirement under this legislation is to meet best available techniques and is enforced or regulated by the Environment Agency. The Environment Agency have actually asked us to install scrubbing equipment, which actually comes at a cost of £6 million—double our profit that we made last year. It actually adds a lot of extra uncertainty to the business. For a lot of EU countries that legislation does not come into being until 2007 but the Environment Agency in the UK said to us we must have that in place by 1 January 2006, which is obviously making us uncompetitive compared to our EU competitors. One piece of EU legislation for an energy-intensive business like us, in terms of CO2 emissions or Landfill Directives, does cause us a lot of issues. We continue to work through the Government or the various agencies to try and influence the right outcome for the businesses.

  Q269  Mr Caton: Reading your submission, the regulations that stood out for me were the REACH regulations because most of the others you accept as probably having an environmental benefit. It sounds, from your submission, as if there is not much environmental benefit there. Is that true?

  Mr Barbagallo: The REACH submissions have gone through a number of reviews. There are a lot of questions that can be raised about REACH. I actually think that REACH is probably a number of years away before Member States will be happy with the way the regulations are written at this stage. It started off with the best interests, to look at organic chemicals that were hazardous in nature and, unfortunately, it has expanded and expanded and expanded till it included things like aluminium, which we need to make a safety case for. It is just another nail, I suppose. If you look at all the other things that are going on in the manufacturing industry it makes it difficult to continue to operate in this operating environment.

  Q270  Mr Caton: You have said that you try to influence government. Can you tell us a little bit more about how you go about doing that?

  Mr Barbagallo: We have a direct contact or representative from the DTI, who I deal with directly regarding any legislation or regulations that are coming through. So we actually can input information into the DTI directly. Anglesey Aluminium is also a member of the Aluminium Federation in the UK, as a sector group, and liaises with the DTI and other departments of government to talk about some of the regulations that come into being. We are also a member of the CBI and, also, the European Aluminium Association. So we are a member of a number of organisations to try and influence in that way. I think that does help. The trouble is it tends to be we need to use them on the big issues rather than some of the minor issues that prevail in different industries in different sectors. I would like to give a good example. When the Climate Change Levy was introduced that had the potential of adding £12 million a year to our energy bill, or associated with our energy bill. The UK Aluminium Federation did work with the Government, the Government listened to industry and then came about the negotiated agreements—the Climate Change Agreements—which I thought was a tremendous outcome. In terms of the cost, operationally, of the Climate Change Levy, I am actually quite pleased with that. I think that was a good collaboration between industry and the Government on that front. Taking what has not been done so well, it may well be the EU ETS. That was supposed to start on 1 January 2005. There is a feeling of a bulldozer approach that is happening on this one here. The National Allocation Plans need to be completed. I think the UK is well ahead of a lot of other Member States in the EU to get this in place but it is creating a lot of uncertainty in industry—certainly the electricity generation sector. So sometimes the immediacy of getting regulations in does cause a lot of concern and uncertainty for businesses.

  Q271  Mr Caton: Do you always use the avenue provided by UK Government or do you do any negotiations with the European Commission when policies are being developed?

  Mr Barbagallo: Obviously, I do talk to our local MP and our local AM as well when these issues do come up, so that was a bit of an oversight, but we do use other trade associations. In terms of the European sector, I feel quite out of my depth associated with that; I am not sure how the process works, but we do rely on industry groups, like the Aluminium Federation or the CBI, to help us out there. From where I sit, that seems like a very difficult process.

  Q272  Albert Owen: You mentioned the Climate Change Levy and the fact that a concession was given whereby you had great savings on the proposed £12 million per annum. In cash terms, what does the Renewables Obligation mean to you per annum and has there been any progress in trying to get agreement on that?

  Mr Barbagallo: Thank you very much for that question, Albert. The Renewable Obligation caught us by surprise because we had a contract through to September 2009 with our electricity supplier Magnox. What happened was the Renewables Obligation was going to be subject to all electricity suppliers and our electricity supplier said "Hang on, if we are going to wear these costs we are going to pass them through." If the costs were amounted from 1 April 2002 they were going to amount to about £49 million over 10 years. That grows because it started off at a 3% requirement for renewables and that grows at pretty much 1% per year to 15% in 2015. I am only estimating, Albert, but at 2015, if Anglesey are still in business and is exposed to the Renewables Obligation, that will probably add £10 million per annum to our electricity bill.

  Q273  Albert Owen: Just one last remark: you will be pleased to know the Chancellor froze the Climate Change Levy today. That is good news.

  Mr Barbagallo: I am looking forward to that. Can I make one more comment on the Renewables Obligation? We did contact the Welsh Assembly and the DTI about that levy and there has been a statutory instrument raised in the new Energy Bill which does help Anglesey Aluminium over the next five years, and we are grateful to the Welsh Assembly for its help on that front.

  Q274  Julie Morgan: I was going to move on to competition, but before I went on to that I wanted to congratulate Mr Aykroyd on the cre"che that you have and to ask you how it is going.

  Mr Aykroyd: Absolutely brilliantly. It is terribly difficult to ever quantify exactly how beneficial it is to the business, but it has certainly helped. We have a huge percentage of our workforce which is female and it has helped us to get experienced staff back on to the shop floor on a much quicker basis. It is also very good for our relations with our staff because we charge very, very nominal fees—I think it is in the region of £28 a week—for the service to employees. They obviously would not be working without that. So it has been very, very good indeed. We had a huge amount of help to set that up from various grant-aided bodies or whatever—a tremendous amount of help. I think, initially, we are talking about through the WDA but I am not too sure whom exactly we got the grants from at the end of the day, but we had some very significant grants and it has been of tremendous benefit for us. Very good indeed.

  Q275  Julie Morgan: I expect that will come up later on under workforce, but I wanted to congratulate you on that. This is a question to both of you. What are the key business factors which give your company competitive advantage in its marketplace? How, if at all, do you expect this to change over the next five years?

  Mr Aykroyd: I do not really know that there is anything, unfortunately, in manufacturing that really gives us any benefit at all, I am afraid, except for briefly what I touched on earlier. Because of the product area we are in, the flexibility of our workforce enables us to turn the product round very quickly. It is a terrible thing to say, having always been a clothing manufacturer, and Aykroyd & Sons, as I said, having always been purely a UK clothing manufacturer, but we have had to bite the bullet, I suppose, in the last five or six years to take up a bit of importation. A very difficult decision, personally, but one that had to be made to enable us to continue. So, if we were being really realistic about this, Aykroyd & Sons should stop manufacturing. It is as simple as that. The margins that we are working to are extremely tight and difficult, and the regulations that we have touched on do not help. Additional taxation, such as the 1% added on to National Insurance last year does not help us when we are trying to employ a lot of people in a product area that needs a lot of people thrown at it. Saying that, please do not get me wrong; we have no intention of stopping. We will fight the retailers with their ever-increasing demand for margin, and whatever. Really, it does need the Government and, obviously, this Committee to be aware that it is extremely difficult to continue manufacturing in the UK, with the wages we have got and with the restrictions that we are under. I cannot say there is any benefit for us to continue manufacturing, unfortunately, the way things are.

  Q276  Julie Morgan: When you say you should stop trading, do you mean it is not profitable for you to continue trading?

  Mr Aykroyd: Please do not get me wrong, we are still finding a level of profitability from UK manufacturing but it is very difficult to quantify how much of that UK side of it helps with the retailers because they want their margin. We cannot give them their margin purely by supplying out of the UK, so we balance that margin. In other words, we buy in a Thomas the Tank Engine pyjama from China that gives them a 70% margin and we make a Postman Pat pyjama from the UK that gives them a 45% margin and they balance the two up and they are quite happy with that scenario. That is the reason. The other reason is that for a small community where we are manufacturing, in Bala, we need to keep that going for the benefit of the community as much as anything, but it is very difficult.

  Q277  Julie Morgan: How do you expect this to change over the next five years?

  Mr Aykroyd: As I said, five or six years ago we were 100% UK manufacturing; we are now 55% UK, 45% importation. That has stayed static certainly last year and we are hoping it will stay static this year as well, so we are not seeing what started to be quite a rush towards importation as far as Aykroyd is concerned; we seem to have stemmed that and are managing to keep the UK quantities fairly well.

  Q278  Julie Morgan: Who are your main competitors?

  Mr Aykroyd: Purely importers. We do not have any competitors in our trade actually now manufacturing in the UK at all.

  Q279  Julie Morgan: Outside?

  Mr Aykroyd: Yes, they are basically importers who will bring in the product; they are not manufacturers, they are purely importers who will bring the product in from whichever country they feel fit to source from.


1   A major contributor to the North Wales economy. Back


 
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