Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

MONDAY 6 NOVEMBER 2000

MR PETER SIDDALL, MR TONY PEDDER, MR TONY BAGSHAWE AND MR DAVID REA

Mr Hoyle

  60. I believe a feasibility study was done at Workington about using it for the production of long rail. I believe that report has not been made available. Would it be possible to make that report available?
  (Mr Pedder) I am not aware of that report but I am sure I can come back to you on that one.

  61. If you would we would be very grateful. My understanding is you have refused to let the local authority up there have sight of that report. If you would take that on board. It seems strange that you are not aware of it. Obviously under the new transport policy, which the Government is committed to, we should see more new investment into Railtrack and the extra money that has gone in but also we will see investment in the coach industry. What help and assistance will that give to the steel manufacturers if we see an expansion of the bus and coach industry? I do not know how you will all benefit from that. What share of the market do you expect to pick up?
  (Mr Siddall) I cannot say I have a lot of knowledge about the bus and coach industry but obviously steel and other metals are extensively used in the coach industry. One would hope that would secure extra work for our industry. I am sorry, I cannot comment about that industry.
  (Mr Bagshawe) If I may just come in there. Historically there has been a strong presence in the West Midlands in particular in the coach and Railtrack industry. I think that has changed into a lot of foreign ownership over the last few years. There is business there that obviously everybody in this industry will be going for with a passion to secure those orders and make sure wherever possible they do not go overseas.

Mr Cunningham

  62. Moving on to exports, in your written submission on page 18 you note that 75 per cent of UK steel exports go to the European market. Is it because we are so exposed to the European market that the weakness of the euro matters so much?
  (Mr Siddall) Sorry, I did not catch that last part?

  63. In your written submission on page 18 you have noted that 75 per cent of UK steel exports go to the European market. Is this because we are so exposed to the European market that the weakness of the euro matters so much? How important is the euro to this?
  (Mr Rea) I think you are quite right there. Europe has increasingly become the home market for the UK steel industry. We have a very strong presence in most of the major European markets and consuming sectors. In most of the companies anyway there is a strong policy of hanging on very tightly to customers, staying very close with the people we have a partnership with. It has been an exceedingly painful experience over the last couple of years. Companies are losing a lot of money hanging on to customers and supply contracts and trying to stay there.
  (Mr Siddall) Can I just say, the euro has depreciated by 20 per cent since January 1999. In my case, where my company supplied a lot of components into industries in Europe, those orders are very hard won but they are very, very easy to lose. One tends to keep in there even if one is supplying at cost or below cost. It is very easy to lose a customer and very hard to win one. Obviously one tries to keep in there and supply these customers.

  64. Is the exchange rate creating these uncertainties? What sort of impact is the exchange rate having?
  (Mr Siddall) The exchange rate has had a terrific impact on our industry, particularly if one is trying to plan ahead. If planning ahead secures certain markets and requires investment in capital, one bases that investment in capital on the exchange rate at the time. If, as what happens to the euro happens, it just throws us out of the window. The manufacturing industry does need stability. Purchasing capital plant can often take six or nine months for that capital plant to come through. In the meantime if currency has depreciated by 10 or 15 per cent that can make a nonsense of those figures but one has still gone ahead with the investment.
  (Mr Bagshawe) If I could just come in there. I think not only on the medium term that Peter Siddall has talked about but even on the short term we are experiencing some quite significant variations in the value of the currencies. When we have been fighting to keep in a European market for 18 months now, even small fluctuations can make the difference between an order being acceptable and making some contribution and having to walk away from an order. When we have fairly rapid variations, as we have had recently, it can be an embarrassment of actually when you have quoted an order it being profitable and when you come to get it you are making no money for your business and that makes life very difficult.

  65. Would you say the Corus merger was a leap in the dark by the Dutch given the volatility of the markets at the moment?
  (Mr Pedder) I think the Corus merger has proved with hindsight, which is always a good way to look at things, perhaps not to have been as helpful to them as it might have been. I am sure they had different expectations of currency relativities when they were considering the merger but I am sure they did the merger for a variety of reasons, of which that was one. I think the size of Corus, the critical mass, the breadth of products, were all very strong features which were in their mind. If I can refer to my Dutch colleagues as "they", they, like us, the former British Steel employees, are of course extremely disappointed at how the results of the merged companies have turned out. It is something that obviously neither side would have hoped for and we are working very hard to try and rectify it. If I can just pick up a comment you made earlier about the importance of the European market. Certainly as far as the Corus product range is concerned, in the main we are producing bulk quantities. We are large steel makers as opposed to specialist producers, in the main. We do have a number of specialist products. For the bulk products margins tend to be thin in world steel because of competitiveness and margins tend to be small relative to the transport costs of moving to distant markets. Therefore, Europe, by its very geography, is a natural next market beyond UK for the UK end of our production. The Northern European region is a natural market for our Dutch operations in the bulk steel sector. Therefore, the impact of changes in the euro's relativity really do hit us very quickly and very hard and that has been seen in the financial results that we produce and which are on public record.

  66. Exports last year were up by 1.4 million tonnes yet on page 26 you indicate that since 1996 the average value of each tonne of steel exported by the UK steel industry fell from £410 per tonne to £300 last year. Are most of your companies exporting at a loss?
  (Mr Pedder) I can assure you so far as Corus is concerned, our exports are not profitable. We are running really hard, as Peter Siddall said, to retain customers, to retain orders, to avoid major configuration changes. Our export business is exceptionally poor. Indeed, if you look at steel generally for our products, the impact of German prices is very strong in the bulk steel product area. The relativities have meant that our UK prices are not the most remunerative either at this point in time. We are working extremely hard to try and keep our configuration as close to where it is but take costs down to give us some prospect of generating some returns so we can continue to invest. I can assure you on the exports, specifically the question you raised, these are very unremunerative for us at this point in time.

  67. Are you running at a loss or a minimal profit, which one?
  (Mr Pedder) On exports?

  68. Yes.
  (Mr Pedder) On exports we are running at a loss.
  (Mr Siddall) I can assure you as well in my own company in contrast to Corus, which is absolutely tiny, it often takes you a couple of years to get in with a customer to develop a component with him, to give him the quality of service that he wants, to give him the price that he wants, you are very, very loath to walk away from that customer. You do everything you can to keep that customer. It can mean often paring your operation down to the bone because you want to keep that customer, you want to keep jobs, you want to keep the company going. Many, many of those things we do at the moment are running at a loss. The weakness of the euro has absolutely stifled us in a sense in my own company.
  (Mr Rea) May I add a further point on that. I think there is an important question underlying this and that is the ability of companies to invest. I said at the beginning of the answer to this question how companies now in the UK steel industry work far harder than they did 20 years ago at holding export business and staying with those customers just as much as they wish to stay with home market customers. If you are doing it at a loss the one thing which goes, and goes early, is investment. That obviously means the business is being run away in the sand whilst you are hanging on to that export business. That is something which is going to come home to roost in years to come, you cannot catch up with that once you have missed investment. The next point on from that is that we have seen exactly the same thing going on in UK manufacturing as well. This is not something that is unique to steel. Investment in manufacturing in the UK is drying away.

  69. Are there any good export prospects anywhere that you feel you would need some assistance with or is it all just doom and gloom?
  (Mr Bagshawe) I think, speaking from my own company's basis, the one significant saviour over the past 18 months has been the strength of the American economy and the fact that there have been opportunities there for us to redirect our exports from mainland Europe into North America. As we all know, the North American market has been very strong and it has given us that opportunity over the last 18 months. The American market is arguably a little bit off the boil at the moment, whether that is a structural change or whether that is an adjustment to stocks, I think it is too early to say.
  (Mr Pedder) Certainly as far as Corus is concerned, we have had the same experience. We have worked very hard in the North American market and would be one of the major importers into that market. Of course that runs the risk—going back to dumping—that you can get caught in that crossfire as it starts. Therefore, we have to watch our position very carefully. Additionally, right now, as Mr Bagshawe said, the market has gone off the boil to some extent. Corus also in the past has been very active in the Asian market and we have been one of the biggest suppliers of structural steel products for the various construction activities that were in the Asian market, going back four or five years, but of course that is nothing like as buoyant as it was.

  70. Are there any export barriers you can sell to the USA? You probably heard earlier submissions regarding the countervailing duties that it imposed on exports of British Steel products after an EU ruling that British steel ceased to benefit from Government subsidies. What are your views about that?
  (Mr Pedder) I think, generally speaking, that the trade actions that have been taken against us are working through their course and sunset reviews are taking place and we are proving to have some success in getting rid of any historic duties which might have been applied to us for reasons that we may have disagreed with at the time. I think that is all, with one exception, working through very sensibly at this point in time. I do not think it will change the fundamentals of our ability to sell more in the short-term because that is very much market related, and our need to make sure that we do not get excessively active in that market and take more than is reasonable.

  71. Is this an issue that you have raised with the British Government?
  (Mr Pedder) Yes. We have talked to the British Government about the US market and the various restrictions that apply and they have supported us in getting rid of some historic duties that have applied to us, certainly as far as Corus is concerned.

Chairman

  72. A couple of points. Mr Bagshawe, your bosses are American, they denominate profit in dollars but do they denominate losses in dollars as well?
  (Mr Bagshawe) All financial numbers at the end of the day are translated into dollars, I am afraid, that is the measure. My American owners bought our businesses some 18 months ago and they bought them for the long term. They bought them to develop an operation this side of the Atlantic. It is my job to deliver on their vision. It is not the easiest job in the world at the moment, but as one of my bosses a long time ago said "I never promised you an easy job", which is fair comment. It is hard work to develop a European subsidiary at the moment. The size of the American market is so much bigger than the UK and, indeed, significantly in terms of the European size and there are some different ways of doing things in the States perhaps.

  73. I only hope John Maynard Keynes' remark about "in the long run we are all dead" does not come into play too prematurely. One last point: we have had British Trade International before us in the past and UK Trade Partners. Do you get much assistance from them when you are trying to sell abroad? Do you find that the DTI/Foreign Office arm is getting behind you in your endeavour to export? Is there much evidence of that or do they think that they should not throw good money after bad?
  (Mr Rea) BTI as such is a new and young organisation. We are hoping, shall we say, for better and more consistent performance from that in the future. It has certainly been our companies' experience that on occasions, and in some markets, DTI and HMG have been extremely helpful and there are very good success stories in that category. Across the piece though there have been problems and there have been some disappointments at the overall standard of understanding from the people who are out there in the external markets. Maybe that is partly our fault in the degree to which we have input into that system in order to help them help us. We hope BTI will do better. They complimented us in certain respects in their recent study on sectoral organisations and they made some positive proposals for how they might aid and abet sectors focusing on certain export markets and I hope we shall do well.

Mr Morgan

  74. Just a supplementary on this. You said your new owners had wanted to establish a presence on this side of the Atlantic.
  (Mr Bagshawe) Yes.

  75. Is there an implication there that they wanted to establish a presence in the eurozone?
  (Mr Bagshawe) That was indeed the attraction. There are an increasing number of companies either owned this side of the Atlantic or the other side of the Atlantic that have manufacturing operations both sides of the Atlantic. Our desire as we move more and more towards global purchasing is that we have an operation that is capable of supplying customers with an identical, or almost identical, product both sides of the Atlantic. At the moment I am discussing with a number of customers in a wide range of industries global sourcing, which will not only include Europe but North American supply as well.
  (Mr Siddall) At the end of the day it really is all about our ability to be competitive, that is really the crucial issue. I am sure we would welcome a chance to broaden that debate as well.

Mr Laxton

  76. You yourselves have provided us with some quite interesting statistics in your written submission. You have said, or indicated, that there has been something like a nine per cent growth in demand for steel from the UK from 1998—99 and yet at the same time in terms of imports we have seen steel deliveries from outside the UK increase from 29 per cent to 44 per cent. This has led to a pretty huge decline in the UK domestic product in terms of market share. What is the reason for this? Is it about quality? Is it about productivity? It is probably partly about price but surely it is not going to be wholly and completely about price. What is the reason for this?
  (Mr Pedder) Certainly, speaking as far as Corus is concerned, it will be a range of factors. First of all, let me assure you that we try to win every order we can in the UK market from our UK facilities because, as I said before, that is the best place for us to be in the spectrum of sales. Our customers want to exercise choice. They like to keep us honest, I am sure, by having a percentage of their purchases with somebody else and that means having a second, if not a third source. There are not all qualities of steel that are bought in the UK market that we produce, not all products or qualities, for the reason that you cannot cover the entire range, although we cover it fairly comprehensively. I do not believe that the issue in terms of any orders we lose is to do with quality or our delivery performance, and it is certainly not our competitiveness because we are very anxious to compete. Customers will exercise choice and, as I say, there are some products that we just do not make.

  77. I will respond to that by saying that perhaps in terms of looking at statistics that you have provided, they have exercised choice one can say maybe for the first time or they have changed their position with regard to choice pretty rapidly if we have seen, as your figures indicate, steel deliveries from outside of the UK increasing from 29 to 44 per cent. That is a huge leap if it is just exercising choice.
  (Mr Pedder) And I think price will come into that on some occasions. As currency relativities move, it becomes more attractive for outside suppliers to supply into the UK market and we have choices to make as to whether we respond to every price that comes into the UK market. That is the balance that we are trying to keep in terms of our sales. We are, I can assure you, trying to win every order we can.

  78. Looking across the piece, the whole of your industry within the UK, you have said yourself, Mr Pedder, that there are certain steels you do not manufacture, you do not produce. Fine, but is that something that is accelerating as a process? Have you got out of certain elements of steel production which hitherto you were in? I am just interested in why we have seen such a huge step change in terms of imports over a relatively short period of time from your figures. I am just going from your written submission that you have given to us: a nine per cent increase in steel consumption within the UK and yet this huge figure of a 15 per cent or more increase in imports.
  (Mr Pedder) I think what we need to do is look behind the figures. I will come back on that, if I may, with some specifics. There are no major areas where we would say we have come out of the manufacture of products, generally we are covering most of the products that we were several years ago.
  (Mr Rea) If I could broaden that out, Chairman, from beyond Corus. There are very, very few steel product lines or grades that are not made in the UK. There may be a question about the amount of capacity there is to make and the volume there is to make but there is virtually no grade that you cannot buy from a UK source. Price is undoubtedly the biggest factor by a street in the mixture of factors at the moment which are affecting the figures you have just pulled out.

  79. They are your figures, not my figures.
  (Mr Rea) You have pulled out that particular aspect and, as Tony said, there is a range of factors that go into a purchasing decision, but price has been the predominant one in recent times for the very obvious reason. It was also a point made perhaps earlier on in the session before you joined us where the President pointed out that steel in imported goods is now the biggest single source of steel into the UK market. That is exactly the same factor, price is affecting manufactured goods coming into the UK. That is where an awful lot of steel is now entering at a very low price through the manufactured goods.
  (Mr Siddall) Can I just say, Mr Laxton, as well, in my own case, where my company makes components, those types of components are things used all over the world, particularly obviously our European competition has looked at the UK and found it an extremely attractive market. I must point out that when UK buyers of components are buying them, they owe no allegiance to the UK at all, they will go where they can buy those products most cheaply at what they see as the best quality and the best price. They will see no allegiance, their allegiance is to their own company. With the strength of the pound that makes life very difficult indeed in my business.


 
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