Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 1

Memorandum submitted by the Department of Trade and Industry

1.  This memorandum has been submitted in response to a request by the Trade and Industry Committee to provide written evidence in respect of an inquiry into the UK steel industry.

  2.  The memorandum outlines Government policy in relation to key areas of interest and concern for the steel industry—the current weakness of the euro; the climate change levy; energy costs; unfair trading; the end of the European Coal and Steel Community (ECSC) Treaty and accession of Eastern European countries to the EU. It also summarises recent Government assistance to the steel industry to help improve its competitiveness.

IMPORTANCE OF THE STEEL INDUSTRY

  3.  The Government is committed to doing all it can to ensure that the manufacturing sector flourishes. In this respect industries such as steel are vital and are in themselves significant contributors to national prosperity. The european steel industry has been going through a period of consolidation during the 1999s and one of the key issues it continues to face is overcapacity. The Government recognises that this is putting pressure on individual steel companies to reduce costs to remain competitive and to secure high value business. The UK steel industry has itself undergone major rationalisation and restructuring. Productivity per employee is now over four times greater than it was 20 years ago and 70 per cent of steel qualities available today have been developed in the last 10 years to meet increasing demands for stronger, lighter materials.

  4.  The Government is aware that the UK steel industry has to exist in an increasingly open and global market. One of the consequences of pressure on costs has been a fall in employment levels. The Government regrets job losses in the steel industry but has taken concerted action, particularly when significant numbers of redundancies have been announced, to help those people who will lose their jobs. There has been specific help and guidance from DTI, DfEE and other local agencies to help redundant workers to retrain and improve their skills in order to find new jobs such as job guidance; early access to a wide range of training programmes; and help through Business Links and the Small Business Service to support those who wish to become self-employed. The Government Offices and Regional Development Agencies have also worked closely with local partners to co-ordinate efforts to help those affected.

WEAKNESS OF THE EURO

  5.  The Government is aware that the weakness of the Euro is a major concern for the steel industry in terms of its direct impact on exports and on home sales especially for products where customers are also export-orientated. The Government considers the best contribution it can make is to secure long-term economic stability based on low inflation and sound public finances. This allows business to invest and plan ahead with confidence. As a member of the G7, the UK Government shares other countries' concern about the potential implications of recent movements in the level of the Euro exchange rate for the world economy. The Government was asked and agreed to participate in a public and concerted intervention to support the Euro. The intervention was a co-ordinated move by the G7 authorities.

CLIMATE CHANGE LEVY

  6.  The climate change levy is an important part of the Government's overall strategy for tackling climate change—by encouraging energy efficiency across business as a whole. Leading to lower greenhouse gas emissions, and helping the UK to meet its 12.5 per cent target in emissions reductions under the Kyoto Protocol. The climate change levy is an important component of the UK Climate Change Programme which is to be published at the end of October. Clauses implementing the climate change levy are included in the Finance Act 2000 which received Royal Assent on 28 July. The climate change levy will operate from April 2001.

  7.  The Government's aim in designing the levy has been to safeguard business competitiveness, while maximising environmental effectiveness. In recognition of the particular problems faced by intensive energy users subject to international competition (such as the steel industry), energy intensive sectors entering into negotiated agreements with the Government to improve their energy efficiency or to cut emissions, will receive an 80 per cent levy discount. Eligibility for entering such an agreement is defined as those sites which are covered by the Integrated Pollution Prevention and Control Directive. Generic agreement documents are now nearing completion, and it is hoped that the majority of sector agreements will be ready by the end of October.

  8.  During wide consultation on the proposed levy, industry (including the steel industry) raised concerns about the effect the climate change levy would have on competitiveness. In response, significant revisions were made to the levy proposals, including reducing the main levy rates and trebling—to £150 million—the associated energy efficiency package.

  9.  The steel industry will also be able to benefit from other elements of the climate change levy package—the National Insurance Contributions (NICs) reductions and the new system of enhanced capital allowances for energy saving investments. Also, the Government recently announced that it would be making £30 million available to kick-start a domestic emissions trading scheme, which offers significant potential benefits to business. The levy must also be considered in a broader context. Following the introduction of the New Electricity Trading Arrangements (NETA), reductions of up to 10 per cent in electricity prices are expected by some major producers.

  10.  In addition, where energy is used as a feedstock rather than as an energy source, the Government decided to exclude this from the scope of the levy. The steel industry successfully argued for this exemption to be extended to blast furnace coke used both as a fuel and a feedstock within the same process. With this exemption of coke used in traditional blast furnaces, the steel industry is concerned that steel produced using electric arc furnaces will be at a competitive disadvantage, with a resulting decline in UK ferrous recycling capacity. Because of this concern, the steel industry has lobbied for the exemption of energy used in recycling processes. However, the Government believes that there should be some incentive for all users to save energy at the margin, and that the treatment currently proposed for electric arc furnaces (80 per cent levy discount) does not represent a significant disincentive to recycling.

ENERGY COSTS

  11.  The UK steel industry has expressed concern about energy costs in this country. However, the average price of electricity for large industrial consumers has fallen continuously in real terms over the past five years. Between 1995 and 2000 the average real price paid by industrial consumers has decreased by 20 per cent. As at 1 January 2000, the price of electricity for large consumers in the UK (including non-refundable taxes) was lower than that of Spain and Italy. The forthcoming introduction of the New Electricity Trading Arrangements (NETA) has led to prices in the forward electricity markets for 2001 being around 25 per cent lower than in 1998 at the time of the White Paper.[1] This is equivalent to a fall of around 30 per cent in real terms.

  12.  As for gas prices, between 1995 and 2000 the average price for gas for large industrial users decreased in real terms by nearly 36 per cent. As at 1 January 2000, the price of gas for large industrial users (including non-refundable taxes) in the UK was the lowest in the EU. The recent high gas prices on the wholesale market have not yet fed through to industrial consumers generally, although the Government recognises that some very large consumers who have contracts linked to spot prices have suffered.

EXPIRY OF THE EUROPEAN COAL AND STEEL (ECSC) TREATY

  13.  The ECSC Treaty 1951 expires on 23 July 2002. The Treaty was established to eradicate subsidised overproduction, market distortions and unfair competition in EU steel and coal markets. Most of its provisions will not be replaced, but there are a number of matters which need to be resolved prior to its expiry. The most important of these relate to regulations for state aid for steel.

  14.  The ECSC Treaty prohibits producers of certain primary steel products from receiving state aid. This restriction has, however, been modified by a number of Commission decisions—Steel Aid Codes— the latest of which expires with the end of the Treaty. The Government believes that the Steel Aid Code has been effective in controlling subsidised overproduction, market distortions and unfair competition in EU steel markets and therefore supports the adoption of a new Code very similar to that currently in force. A robust Steel Aid Code has contributed to a climate in which the problem of illegal state aids has declined within the EU and the majority of Member States, including the UK, want a new Steel Aid Code which is equally robust. This is supported by the steel industry in the UK. We currently await Commission proposals on this issue.

EU ENLARGEMENT

  15.  Most of the 13 candidate countries have long-established steel industries most of which currently depend for their survival on state aids, a protected market and the cost advantage of not having to meet EU environmental standards. Over-staffing and overcapacity are also common features. An important part of the accession discussions taking place between these countries and the Commission is the completion and enactment of restructuring plans which will enable the steel industries of candidate countries to compete fairly in the European Single Market. The Government strongly supports this action.

UNFAIR TRADE (DUMPING)

  16.  The European Commission is able to use certain trade defence instruments—which have been agreed under WTO rules—to deal with imports which are unfairly traded and causing problems for EU domestic industries. It is the responsibility of the affected EU industries to make complaints to the Commission, who will then investigate the complaint and decide whether trade defence measures are warranted. Member states have to be consulted as part of this process. The Government's policy on trade measures is to consider all Commission proposals on their merits and agree to them only if satisfied that they are legally and economically justified and in the overall Community interest. Following the economic crisis in South East Asia, a number of complaints were registered with the Commission, largely as a result of the diversion of steel exports from third countries: most resulted in trade measures. Only one new formal complaint has been lodged with the Commission this year on unfairly traded steel products (steel wire rope and cable from the Czech Republic, Korea, Turkey Malaysia and Thailand) which is currently under investigation. There are currently countervailing and anti-dumping duties on 13 different steel products.

ENHANCING THE COMPETITIVENESS OF THE UK STEEL INDUSTRY

  17.  The DTI continues to support the efforts of the industry to become more competitive. For example, in February 2000 the Minister for Competitiveness launched the MICE project (Metals Industry Competitiveness Enterprise) to help metals companies, including steel companies, to improve their competitiveness by the practical transfer of best manufacturing practice, introducing Japanese shop-floor improvement techniques which have already been exploited in the automotive industry. MICE, a five year project, is an adaptation of the automotive Industry Forum (an industry-led partnership supported by DTI which aims to raise the sector's competitiveness by delivering shop-floor improvements programmes to businesses in the automotive supply chain). The Government announced in its 1998 Competitiveness White Paper that it would fund up to 10 proposals from other sectors that wanted to adapt this model to meet their particular needs. MICE is one of the successful proposals and will receive £1.6 million funding from DTI. MICE is lead by the metals sector's three major trade associations; UK Steel Association, National Association of Steel Stockholders (NASS) and the confederation of british metalforming (CMB) in partnership with Steel Training Ltd, the metals sector National Training Organisation. It is also supported by major sector companies, the Engineering Employers Federation (EEF) and other industry bodies.

  18.  In September 1999, the Prime Minister launched the Performance and Innovation Unit Report of the [email protected], which forms the basis for the Government's e-commerce policy whose overall objective is to make the UK the best place in the world for e-commerce by 2002. One of the key recommendations in the report was to "carry out and communicate shared industry/Government sector-specific e-commerce impact assessments". E-commerce is just as relevant to sectors like steel as to dot.com companies. An e-commerce impact assessment on the steel industry was completed in May this year with DTI support and was the first in the series to be undertaken for a variety of sectors. The report, which looks at current usage, opportunities for further development and barriers to take-up, was carried out by Beddow Consulting in co-operation with five major steel sector Trade Associations. One of the main conclusions of the report was that while e-business was recognised by the industry as a significant opportunity, as well as a challenge, there was uncertainty about the future. Uncertainty was based on a number of factors, for instance lack of understanding of e-business opportunities and technology; uncertainty about the savings that may be achieved and the real benefits. Follow up action with the industry is currently under consideration.

October 2000


1   Conclusions of The Review of Energy Sources for Power Generation and Government response to fourth and fifth Reports of the Trade and Industry Committee October 1998. Back


 
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