Blast furnaces across the UK are under threat as the steel industry bounces from one crisis meeting to another. And, as the last flames in the furnaces flicker in the headwinds, commentators are scrambling to find out what has gone wrong.
China is the easiest fall guy with its huge increase in low-priced exports flooding the international markets. But the scaling back of the British steel industry is as much down to historical bad decision-making as it is the current threat of foreign competition.
Indian-based Tata Steel is the largest producer in the UK, having taken on many of the British steel assets when it bought the European operation, formerly known as Corus, for a whopping £6.2 billion in early 2007. The UK division of that business is now a forlorn shadow of its former self with headcount diminished and many of the assets mothballed.
The company announced a further 1,050 job cuts Monday with the majority of jobs to be cut located at its blast furnace-based Port Talbot plant in south Wales. Talks are ongoing regarding the sale of its long products division, centered around two active blast furnaces in Scunthorpe, the assets of which have had their value written down to zero.
Sources close to the negotiations with Greybull Capital suggest that if Tata cannot sell the division by the end of March, then operations will be halted as the Indian parent company finally loses patience.
With the liquidation of the Teesside slabmaking business, SSI UK, in October last year, one of Europe’s largest furnaces was rendered another relic of a former industrial powerhouse. Undoubtedly it will face the same fate as Ravenscraig, a giant symbol of Scottish steelmaking that was closed in 1992 and demolished in 1996.
Sources suggest Port Talbot may itself run out of funding without a radical restructuring to restore profitability, hence this announcement of further job cuts.
The current chapter in the story of the British steel industry is one of accelerating rationalization as businesses find it increasingly difficult to compete in one of the world’s most globalized industries. But why is the UK, once the giant of the industry, such an uncompetitive place to produce steel?
The commentariat points the finger at imports, energy costs, business rates and government procurement policies. While these factors are accelerating deindustrialization, there are more crucial deep-rooted reasons why once proud production sites appear impotent in what are now critical times for the sector.
Throughout the escalation of this crisis, politicians and trade unions have called on the state to intervene. State intervention, much like protectionist trade measures, is booming in the global steel industry as governments look to save jobs.
The shadow chancellor John McDonnell used Italian steelmaker Ilva, Europe’s largest steel production hub, as a case study for positive state action. “The government intervened, they took over, they invested and turned the situation around,” he said.
In reality, the financial backing of the heavily-indebted steelmaker meant the company could lower sales prices without risk of bankruptcy. Tata Steel is among a host of companies competing with Ilva in Europe and it suddenly faced the prospect of competing on price with a huge local mill selling at Chinese prices. This drove the market down and hammered the margins of much of the European industry.
Even European steel producers’ association Eurofer has complained to the Commission about Italian aid for Ilva, saying it is against state-aid rules.
Tata Steel’s UK division suffers from legacy issues relating to its own former days as a state-owned, bureaucratic behemoth whose commercial decisions were influenced by political pressures.
The reason Port Talbot is such a production hub dates back to British Steel’s desire to shift investment and jobs to south Wales. This was as a result of a need to bring jobs to a particularly poor region suffering from high unemployment rather than any apparent commercial benefits.
The Teesside production site has a large dock and a huge blast furnace allowing it to benefit from economies of scale in both its production process and deliveries of raw materials. However, investment shifted away and the site was mothballed before its resurrection under Thai ownership.
This strategic misstep of spreading production facilities is critical in understanding Tata’s current difficulties in such a thin margin environment.
The company’s recently mothballed Scottish plate mills are supplied with slab cast miles away in Scunthorpe. The plate is then freighted back to the West Midlands where its main distribution hub is located.
Liberty Steel, the company behind the revival of another south Wales rolling mill, plans to buy the Scottish mills and supply them with competitively priced slab on the merchant market. It is likely the scale of the production would also be reduced to tailor the needs of the market, rather than the needs of government to provide jobs.
The subsequent privatization of British Steel presented new problems, with independent ports adding extra margin pressure with their cargo discharging costs significantly higher than those seen on the continent.
The direct comparison is Tata’s other major European production hub based in Ijmuiden, Netherlands. This unit of the business produces more steel, has its downstream operations on site and state-of-the-art technology after investment was centred on a single location.
It seems increasingly likely Tata will base its future operations at this division.
The UK industry is fragmented but the demand for steel means there is a future for steel processing companies. However, it appears the iconic blast furnaces, and the huge number of jobs that come with them, will soon be nothing more than ashes and dust.
A future for EAFs?
Perhaps electric arc furnace-based production has a future in the UK. The country has a reservoir of scrap; currently most of this is shipped to Turkey and Asia, which could be melted in domestic furnaces — as happens at Celsa.
Liberty, which is becoming the darling of the UK industry, continues to invest heavily in the steel industry. After restarting its hot strip mill in Newport, where it also says it will begin remelting, it has acquired a slew of assets from the stricken Caparo Group and is also in talks with Tata and Greybull over the Scottish plate mills.
Unlike Tata, Liberty has acquired all of its assets in a very tough market, and subsequently paid cheaper prices. Therefore it will not have to keep up high debt payments — Tata’s misery was compounded recently by a credit rating cut by Standard & Poor’s. (Standard & Poor’s, like Platts, is owned by McGraw Hill Financial.)
Liberty has also invested in a power station in Newport, which could theoretically reduce costs by supplying the steelworks, and is buying downstream assets such as Caparo’s tube business, guaranteeing it a market for its coil.
Others have taken this tack in the UK, notably Thamesteel and Celsa, to varying degrees of success; Thamesteel went out of business after one of its wholly owned fabricators ran into financial difficulty, and amid a lack of support from its parent company.
Celsa is still running, but the company’s financials are always a source of keen debate in the close-knit UK market.