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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