Britain’s steel industry is on the brink of collapse and a lot of people are blaming China for its glut of production which has pushed down prices and made it impossible for UK companies to do business.
But it’s not just China you have to blame for the demise of Britain’s steel industry — it is also Europe.
Both are simultaneously helping kill it off.
The reason why the UK steel industry is failing right now, while Britain is part of the EU, is two-pronged:
1. Steel prices in Europe — the place Britain is exposed to the most for prices — are ridiculously low, making it difficult for the UK to compete.
2. EU state aid rules mean that Britain’s government can do very little to help out the nation’s steel companies — EU law means there are strict safeguards in place preventing parliament from bailing out the companies.
So firstly, let’s take a look at steel prices in Europe.
Steel prices have fallen to their lowest levels in 12 years and a range of British companies are struggling to survive. This is because prices in Europe and Asia are so low, Britain can’t compete. It’s just cheaper to import steel because it’s too costly to produce it in the UK.
Look at how low prices are compared to March 2012:
On the flipside, falling global demand and a strong pound makes steel exports more expensive. Simply put, Britain is in the worst spot right now.
The 98-year-old Redcar steelworks in the North East closed down at the expense of 2,200 jobs in October and Tata Steel is putting up its entire UK business up for sale. Meanwhile, parts of Caparo Industries’ steel operations is in administration and 1,800 people are set to lose their jobs. It’s a bloodbath.
Now everyone wants to blame China, but it is too simple to solely blame the nation for steel’s woes. However this is what analysts and politicians are saying.
Rakesh Arora, an analyst at Macquarie, told the Financial Times on Thursday that producing steel in the UK “makes no sense actually.”
The FT reported:
Steel’s labour costs there [the UK] at about $200 per tonne of production, compared with as little as $10 for its Chinese peers. “That gap was too difficult to bridge with the best of operating efficiencies,” Arora said.
Considering prices are around £285 per tonne for steel, according to pricing agency Platts, you can see how Chinese steel companies can remain so profitable and British companies struggle to make ends meet. In fact, Britain’s biggest steelworks Port Talbot is said to be losing around £1 million per day.
It’s pretty horrific out there.
China produces half the world’s steel and has ramped up production massively over the last 30 years. Take a look at the chart.
China used to only mainly export its steel to other Asian countries but as its economy began slowing down, it started to place — or dump — lots of its cheap steel on the overseas market which pushes down prices.
“We have had a succession of ministers, and now the prime minister, saying that they will ‘raise’ the issue of Chinese steel dumping, which we know is impacting on the UK steel industry and the global steel price,” said Roy Rickhuss, General Secretary of the steelworkers’ trade union Community, in October 2015.
“The prime minister needs to do more than ‘raise’ the issue. He needs to tell the Chinese premier what action he’s going to take to stop Chinese steel damaging the future of a vital foundation industry in the UK.”
China’s crude steel production over the last decade has exploded, bringing hundreds of millions of tonnes more per year to the market.
“It is clear that the steel industry has, for the time being, reached the end of a major growth cycle which was based on the rapid economic development of China,” Hans Jürgen Kerkhoff, Chairman of the Worldsteel Economics Committee, said back in October.
“Combined with China’s slowdown we also face low investment, financial market turbulence, and geopolitical conflicts in many developing regions. The steel industry is now experiencing low-growth which will last for the time it takes for other developing regions of sufficient size and strength to produce another major growth cycle.”
But this is where it gets a bit sticky.
The Worldsteel Economics Committee forecasts extremely modest growth in steel demand in 2016.
Low demand means exporting is difficult. This is on top of lower Asian and European steel prices remaining low.
Take a look at how the UK steel industry is made up:
In tandem, Britain’s dependence on Europe, not China, for imports means the UK is more exposed to lower European prices:
Everyone is keen to blame China, after all it looks pretty clear cut on the surface that a glut of Chinese steel production is pulling down prices.
But look a little deeper you see it isn’t all China’s fault — being part of the EU is. After all, how come Britain is suffering more than its other European counterparts?
Britain’s Foreign Secretary Philip Hammond summed it up in October, when lots of steel companies starting axing jobs and falling into administration, by saying “it’s wrong” to blame only the Chinese for the glut in steel production.
“That’s a problem, but it’s not only the Chinese,” he said on the Today programme in October. It’s true, Germany has had a healthy and steady growth in steel production over the last few years.
Just take a look at the discrepancy over the latest crude steel production figures from the World Steel Association:
That same day as Hammond, Peter Brennan from Steel Business Briefing highlighted to the BBC how “the real competition” comes from European suppliers, “who are helped by the euro’s relative weakness against the pound.”
He added that higher business costs are forcing Britain into an un-competitive position. For example, the British government’s business rates are around 10 times higher than competitors’ in France and Germany, according to UK Steel.
But this is where the problem with the EU really comes into it.
The leader of Britain’s opposition Labour, Jeremy Corbyn, called on the Conservative-led government to intervene to save Britain’s steel industry. After all, thousands of jobs would be lost and the impact on communities would be significant.
However, Prime Minister David Cameron is stuck.
In January 2016, Margrethe Vestager, the EU Commissioner in charge of competition policy, illustrated how bound EU states are in intervening (emphasis ours):
Steelmakers across the EU are struggling with worldwide overcapacity and strong imports — the response to this challenge must be to improve the sector’s long-term global competitiveness.
Therefore, EU state aid rules enable Member States to, for example, support research activities or relieve energy costs of steel companies, and the Commission tackles international trade distortions using anti-dumping or anti-subsidy measures. It is also why EU countries and the Commission have put in place strict safeguards against state aid to rescue and restructure steel companies in difficulty.
This avoids harmful subsidy races between EU countries and that uncontrolled state aid in one EU country can unfairly put at risk thousands of jobs across the EU.
In other words, it would be illegal for Britain to bail out steel companies like it did with the banks. In fact, this statement was taken from the results of an investigation into how “€211 million funding granted by the Walloon authorities in Belgium to several steel companies within the Duferco group between 2006 and 2011 distorted competition in breach of EU state aid rules.“
“Despite the illegal state aid to Duferco the company has now withdrawn almost all business activities from Belgium. The case shows that state aid to artificially keep steel manufacturers afloat that are not viable seriously distorts competition and only delays their exit from the market at the cost of taxpayers,” added Vestager.
So the British government’s hands are tied.
If Britain left the EU, the government could nationalise the steel industry or pump cash into the ailing industry.
But you’ve got to ask yourself whether that is the right thing to do. After all, it’s not really viable considering Port Talbot alone haemorrhages over £1 million per day. It’s loss making .
Basically, Britain is in the worst spot of them all and right now companies are finding it exceptionally difficult to produce or export steel in order to make any money. British steel companies also don’t really have the support of the government like German or French companies do to keep rates low.
So really, the UK is better off just closing everything down — and the EU has to take some responsibility in this, not just China.