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Is there a future for the British steel industry?

The sinking of the British steel industry has resulted in confusing, and sometimes contradictory debates. The politicization of these challenges tends to obscure questions having primarily to do with industrial strategies. Strategies of the concerned companies of course, but also those of States and Europe.

May 2016
lire en français
lire en français
Executive Summary

Populists – leftist and rightist – in the US as in the UK are now putting free trade on trial. If the United States are debating the benefits of NAFTA, as well as the entry of China into the WTO and on the trans-Pacific (TTP) and trans-Atlantic (Tafta) agreements, the UK’s debate is more focused on the British steel industry’s sinking, as revealed in the decision by Tata Steel to divest or close its steel business in the UK.

The British debate over free trade

The British debate is enshrined in heated discussions about the Brexit, one of these discussions’ themes being the defense of the industry.

For Brexit’s supporters, Tata Steel’s decision raises a problem of industrial sovereignty. But the problem is not that Tata is Indian. The case is given as an illustration of the loss of control by the United Kingdom of its industrial destiny in favor of Brussels, when a sovereign UK could extend its trade with China! … as well as with the rest of the world (emerging countries and United States). The argument remains unclear, as one cannot easily picture how a British steel industry, facing both global overcapacity and the aggressive strategy of Chinese exports (112 million tons), would get better after Brexit. For the “Remain” supporters, this very same case illustrates the advantage of keeping the UK an integral part of a powerful trading bloc able to negotiate better multilateral compromises. However, this argument is as unclear, since it does not explain why the present cabinet has slowed down the European anti-dumping action and done everything to avoid upsetting China.

Both supporters and opponents of Brexit tend to exploit this debate, while it is in fact the condition of the British steel industry that is to blame.

Recent industrial history has to be added to the picture.

Tata’s losing industrial strategy

When Tata Steel bought out Corus Group, created from the merger of British Steel and Dutch company Hoogovens, the weak link was English. Despite significant investments (5 billion pounds) in European plants and decommissioning of equipment that cost Tata 2 billion pounds over five years, the bought out British part did never reach its balance. Worse, Port Talbot – its main unit, located in Wales – loses 300 million pounds per year.

How to explain such a collapse?

By buying out Corus, Tata Steel took up three simultaneous challenges. Firstly, the Dutch steel industry, which was competitive and profitable, would provide the foundation for a balanced European operation. Secondly, by mastering the entire value chain, from iron ores to special steel, Tata intended to duplicate the Arcelor Mittal’s model then viewed as successful. Thirdly, by streamlining the British tool and by modernizing it (the investment gap dates back to the pre-Thatcher era) Tata made the choice of maintaining a production activity close to its customers.

This bet proved a losing one. First, because the limited growth among emerging countries, as well as the great Western recession, contracted the market. And iron ore which quoted $136 per ton in 2013 dropped to $41 per ton in 2015… resulting in an increase in production by mining groups that did not want to lose their market share! Also due to Chinese stratospheric investments (more than half the global capacity, that is nearly 1 billion tons) that increased global overcapacity, with a spill of Chinese steel on the whole Europe. And finally, because in such a context, prices just collapsed.

Aging plants, steel commodity production, collapsing prices, rising imports, the economic equation of the old British steel industry was becoming unmanageable.

A government with no industrial vision

Her Majesty’s government’s reaction proved hesitant, embarrassed, and eventually timid. Firstly, while the US government, facing the very same problem, activated anti-dumping proceedings, the British government was causing the European administration – already surprisingly slow – to slow down even more. As France’s Minister of Economy Emmanuel Macron publicly mentioned it, European anti-dumping tariffs are notoriously inadequate: 20% for cold rolled steel, while the US rate is 300%. The British government background and position are all about free trade: what counts is not the fate of the mills but the ability to create new wealth especially in business services; the UK economy needs more trained, qualified, equipped workers for a new growth, than new protected employees on shrinking markets; and finally, imports benefit consumers and producers that lower their costs thanks to imported components.

After Tata Steel’s announcement and local political authorities’ reactions to the risk of thousands of jobs losses, particularly in Wales, the government announced that “all options remain open” and that it will be vigilant on the sale process as well as on the economic and social strategy of the buyers.

Finally, a nationalization, although firmly rejected at first, was timidly mentioned in the form of a carry strategy by the UK Treasury, until satisfactory acquirers are found or an internal recovery solution is implemented.

Three problems

To sum up, the sinking of Port Talbot poses three types of problems. The first one faces most developed countries. Left to itself, British steel industry may disappear. Can we imagine that developed countries may end up leaving behind the production of steel commodities on their soil?

The second problem is about the very conditions of international trade today. The EU anti-dumping policy, even if mobilized against the predatory practices of Chinese exporters, proved slow and insufficient. Chinese promises to remove 100 to 150 million tons of excess capacity are not kept, as Chinese steel today reaches Europe at prices below the cost of scrap metal.

The third problem is about industrial policy and correct right scale to implement it. The European steel industry now represents 320,000 employees, while the upmarket does not even protect players like Thyssen-Krupp. Should we start rethinking the value chain extension, stop thinking globally and give ourselves the means to act at a European level?

The first version of this article was originally published in French by our syndication partner

Elie Cohen
Economist, Senior Researcher, Sciences Po