It’s been a rough month for the UK steel industry. At the end of September, Thai firm SSI closed its Redcar plant. Yesterday, Swraj Paul’s Caparo Industries filed for administration. And today it’s the turn of Tata Steel to announce major production and job cuts at three sites. As a result, up to 5,000 UK steel workers (or one in six) have either lost or likely face losing their jobs.
The word ‘crisis’ gets bandied about a lot, but it seems apt. The same could be said for the phrase ‘perfect storm’ – over the last, turbulent year, Britain’s industry has faced tumbling global steel prices, the strong pound hitting exports and the oil and gas industry (a major consumer of steel) turning off the taps on investment.
The crucial factor is clearly the drop in the steel price – a tonne of steel billet was worth $480 in January, falling to $100 for most of the summer, before rising to $170 today – as a result of the hard landing in China’s heavy industrial sector (the jury’s still out on exactly how bad the slowdown in the wider economy is).
The price of steel billet in $ per tonne has fallen dramatically in 2015. Source: Quandl
The consequence? Plunging global demand and a dreaded case of Chinese steel dumping. According to industry body UK Steel, China has excess capacity of 340 million tonnes, which is about 20% of global production and about thirty times the UK’s total output. When life’s already hard, so much cheap excess supply can be a killer.
PM David Cameron may or may not raise the issue of unfair trade with Chinese premier Xi Jinping during his visit to the UK this week (‘dumping’ is not normally considered acceptable dinner conversation during a royal banquet, but you never know). However, the real issue is surely not the storm, but the industry’s ability to resist it.
Commodity prices and production are naturally cyclical, as investment in capacity lags behind changes in demand. Businesses operating in such industries know this more than anyone, and try to protect themselves from the hard times by various forms of hedging. Why, then, has this down cycle caused such damage?
In part it’s because the fall this year has been so steep and arguably unexpected, and came hot on the heels of another sharp price downturn last year. But it also reflects an underlying lack of resilience to such shocks: Britain is a very expensive place to produce a generic product, which means margins are lower.
Caparo Industries, for instance, made only £3.1m operating profit in 2013, when times were better, off £372.8m of revenues. Turnover fell just 1.3% last year, but with margins so tight that plunged the firm into the red with a £800,000 loss.
Steelmakers would also rightly point out that such fine margins mean the burden of carbon and other taxes could make all the difference to their survival. Indeed, following a summit with industry leaders last week, business secretary Sajid Javid said the government would ‘look at’ business rates, high energy costs and environmental taxes.
Whether looking will translate to doing remains to be seen, but, if the government’s recent withdrawal of renewables subsidies is anything to go by, there is some hope for the beleaguered steel industry (if not the planet).
Long term, though, its slow and sad decline will surely continue – at least when it comes to mass market steel. Though commodities are by their nature hard to differentiate as products (there can be no iPhone of steel, as it were), there are higher quality grades that the UK could position itself as a leading manufacturer of.
Hopes that the industry will still be employing 30,000 people in twenty years’ time, however, remain somewhat forlorn.
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