Memorandum submitted by Corus Rail
RAIL MANUFACTURING AT CORUS RAIL, WORKINGTON
1. This memorandum has been prepared by
Corus for submission to the Trade and Industry Committee, in response
to the Committee's request for further information on Corus' rail
activities, its market assessment for rail, and its future strategy
for rail manufacturing in the UK.
2. Corus Rail is a business unit of the
Corus Group plc. It is one of the world's leading suppliers of
rail and associated railway products. Corus has two rail mills
located in Workington, Cumbria and at Hayange in North Eastern
France. The Workington rail mill currently employs 327 (see 21
below), and manufactures heavy rail, steel sleepers, light rail
and track accessories; the Hayange mill employs 504 and manufactures
heavy rail and grooved rail for use in urban transport systems.
In addition to rail manufacturing the business is involved in
other railway related activities, principally railway engineering
and design consultancy, rail welding for installation into track,
the manufacture of switch and crossing systems and, through its
joint venture interests, track maintenance and renewals. Total
direct employment at the end of October 2000 was 1163, 659 UK
based and 504 in France. There are a further 500 employed in the
UK based joint venture. The non-rail manufacturing section of
the UK business has experienced very strong growth in employment,
with an increase of c 17 per cent in the last three years.
3. The Workington rail mill has been involved
in the manufacture of steel rails since 1877. The main products
are 113lb and UIC 60 specification rails. The mill receives its
steel bloom feedstock for rail from the Corus integrated iron
and steel works in Teesside. The bloom is then heated in the walking
beam furnace, and processed into steel rail sequentially through
the Primary descaler, 42 inch Breakdown mill, Secondary descaler,
34 inch Roughing Mill and 31 inch Finishing mill. The rail is
then sawn and stamped and further processed through advanced rail
treatment and inspection systems in order to meet customer technical
and quality specifications.
4. Rails at Workington can be manufactured
in lengths of up to 40 metres. These are then dispatched for delivery
to the customer or alternatively to be welded into continuous
strings at one of Corus' two purpose built rail service centres
located in Workington, and Castleton, Lancashire.
5. In response to market demands recent
investment at Workington has focused upon quality improvement
and cost reduction.
Additionally, Corus has also invested in steel quality
at its integrated works to keep pace with customer demands for
enhanced and cleaner rail steels.
6. In the early 1990's a welding centre
was commissioned at Workington to meet Railtrack's (then British
Rail's) demand for 182 metre continuously welded rail strings
of 36 metre rail. The Company also acquired the only other UK
fixed welding centre, located at Castleton, Lancashire, in 1993.
7. In October 1999 Corus (then British Steel)
acquired Usinor's French rail manufacturing company, Sogerail,
and its associated sales company, Materiel de Voie, for £83
million. The advantages of the acquisition were that it:
Extended the company's market presence
and manufacturing base in Europe.
Balanced the business' exposure to
Doubled the size of the rail business.
Provided immediate opportunities
for global growth giving new markets for products and services
through the excellent synergy between the two companies.
Provided customers with a total service
and product offering from design consultancy through manufacturing
to track renewal.
Made the business more competitive.
In general terms the products produced and markets
served by Workington and Sogerail were seen as complementary:
In addition to heavy rail of up to
40 metres, Workington produced ultra long welded rail, steel sleepers,
light rail and track accessories. Sogerail had the capability
to produce rail up to 80 metres and produced an extensive range
of grooved rails for urban transport systems.
Workington had a market presence
in the UK, Europe including Eastern Europe, North Africa, Asia
and the Middle East. Sogerail had market presence in France, Western
Europe, North and South America.
It was made clear by the Company at the time
of the acquisition that to maximise its share of the Railtrack
contract it intended to supply Railtrack's demand for 72-metre
rail from the Hayange mill.
The company believed that there were substantial
benefits for employees, shareholders and custmers in completing
8. Historically world demand is estimated
at c 6 million tonnes per annum (mtpa). Exlcuding Russia and China
the figure is currently 3.8 mt pa. There is substantial overcapacity
worldwide and in Europe the main area of sales activity capacity
at 2.3 mtpa exceeds demand by over 1 million mtpa. In 2000 export
demand fell generally, with the two signficant markets of Germany
and the USA particularly affected. As a consequence rail prices
have fallen substantially.
9. Competitive pressures within the UK market
have been intense which have created a severe cost price squeeze
and significantly reducing profit margins. Between 1995 and May
2000 (when the new Railtrack supply contract was awarded fixing
prices for a five year period), rail prices have fallen substantially.
In the same period the Deutschmark against the £ exchange
rate appreciated from 2.24 to 3.35, enabling European producers
to target the UK and force down Sterling prices to establish a
10. For a UK based exporter the impact of
a strong Pound/weak Euro has meant that exporting from Workington
into the Eurozone is not profitable. With a high dependency upon
exports, the combined effects of declining worldwide demand and
the strong pound/weak Euro, Corus' only available response has
been to cut costs and improve productivity. The Company announced
in May 2000 a reduction in manned capacity at the Workington rail
mill during 2000 (see below), with the revised configuration focused
upon the UK market.
11. In 2000 Railtrack awarded a new five-year
rail contract to three CompaniesCorus, Voest Alpine and
Lucchini. Lucchini, an Italian rail producer, has been introduced
as a third supplier as part of the new contract. It also awarded
rail welding contracts to Corus and another service provider.
The main features of the contracts are:
Railtrack have decided to:
Purchase a minimum tonnage of rail
from Corus (no breakdown of length, section or grade specified).
Purchase a minimum tonnage of welding
services from Corus.
Award the operation of a new Southern
welding centre to another service provider.
Corus are committed to:
Providing the full range of products
in line with Railtrack call-off including 72 metre rail from Hayange.
Investing in the Castleton welding
plant to accept 36 metre and 72 metre input lengths to produce
216 metre long welded rail strings.
In an attempt to maximise market share, Corus
reduced prices substantially, reflecting the competitive pressures
imposed by a weak Euro. With the introduction of an additional
rail supplier market share will, however, be reduced substantially
from an estimated 90 per cent to an estimated 60 to 70 per cent.
12. The market for long rail (that is rail
supplied in rolled lengths greater than 40 metres) is European,
with little or no demand in non-European markets. Demand in Europe
for rail at 72 metre or above is estimated at 0.6 mtpa. Again
there is excess supply as current installed long rail capacity
is estimated at 1 mtpa.
13. Some 85 per cent of world demand for
rail is in short lengths, and there remains a stable European
market for short lengths (36 metre as-rolled lengths or less)
as a proportion of total rail demand. Mature long rail markets
such as Germany and France still source 43 per cent and 40 per
cent respectively of their total rail requirements in short lengths.
The European figure as a whole is about 50 per cent, with the
prospect of reducing to the French and German levels over time.
Secondary track and switch and crossings are the major markets.
14. Unlike mainland Europe, the UK network
has no tradition of using long rail. It was not until 1998 that
Railtrack declared, all other things being equal, they would prefer
to use long rail. The rationale for this change was to reduce
track maintenance costs, as maintenance of track in the proximity
of welds is considerably more costly than the average. The increased
cost was due to a phenomenon known as "weld dip", which
is a change in the geometry of the rolling surface with time.
The "weld dip" imposes high dynamic forces, which are
transmitted through to the substructure and cause ballast degradation.
Once degraded, the ballast does not provide the support for the
rails, which then deflect more, increasing the frequency and extent
of maintenance work.
15. Corus' (then British Steel's) strategy
for the UK rail network in the 1990's was to supply ultra-long
factory flash-butt welded strings of 182 metres, using 36 metre
rail feedstock. The strategy involved the acquisition and installation
of modern welding facilities in Workington and Castleton. The
timely acquisition of the welding plants met the UK market requirements
effectively and ensured a stable and profitable market for the
Workington product throughout the 1990's.
16. Factory flash-butt welding is recognised
as the highest integrity method of welding rails compared with
site based welding. Ultra-long welded strings of factory flash-butt
welded rails are therefore preferred as they keep to a minimum
the number of site based welds in track.
17. In response to known investments being
made by European competitors, in the mid-1990's Corus carried
out an investment appraisal of the cost benefits of installing
a 72 metre capability at Workington (installing a rolling capability
beyond 72 metres is not feasible given layout constraints). The
appraisal identified a cost of £45m (£50m at current
prices), and would have resulted in the closure of the Light Products
mill, which employed at the time, 45 people. The Company did not
proceed as it could not be justified financially as:
There was little from the home customer
in the development as they were content with the provision of
ultra-long factory flash-butt welded strings from Corus.
Levels of investment in the UK rail
infrastructure throughout the 1980's and 1990's were insufficient
to justify substantial investment.
The cost of investing in a longer
rolled rail was too high given site layout constraints and capital
There was no demand for long rolled
rail from the rest of world customer base.
18. In 2000 the Company commissioned Corus
Consultants (the Company's specialist in-house engineering consultants,
experienced in commissioning steel manufacturing units around
the world). Their remit was "In the light of the questions
from the County Council's Task Force, Corus Consulting are asked
to undertake an arms length appraisal of how to produce 72 metre
finished rail at Workington, and to establish the costs of doing
so". Their revised estimate for the scheme was placed at
£47.7m, which is marginally below the £50m (current
prices) estimate that was made in the mid 1990's. The existing
plant configuration could not accommodate a 72 metre scheme within
the current process flow route, and it would be necessary to devise
a completely new/dedicated process route involving the demolition
of the Light Products mill and the purchase of significant items
of new capital equipment.
19. Justification for investing in a 72-metre
capability at Workington in 2000 can only be made on the basis
of supplying the UK market. Since 1998 Railtrack's policy has
been to multi source and in 2000 they entered into a five year
contract with Corus, Voest Alpine and Lucchini. Both Voest Alpine
and Lucchini can supply rail up to 108m long. Installing a 72
metre scheme at Workington would not increase its market share.
Known price and projected volume levels prevailing in the UK under
the 5 year rail supply contract do not provide the returns sufficient
to justify investing the £47.7m investment in the 72 metre
scheme, particularly as Corus have a 72 metre facility located
20. On 19 May 2000, following a prolonged
period of short-time working, Corus Rail announced a reduction
in manned operating shifts, from 10 to 5, resulting in a reduction
of 168 jobs from the then 400 strong workforce (see para 10).
The reduction was a result of a severe downturn in the export
order load due to poor international demand, which had also resulted
in prices falling worldwide. The continued strengthening of the
pound since 1995 had weakened the business' competitive position
considerably, and had allowed competitors to target the UK market.
A further contributory factor was the inability of the mill to
roll rail beyond 40 metres. In reducing manned shift operations
the Company have ensured that sufficient skills are retained amongst
the workforce to enable capacity to be increased should market
circumstances warrant it.
21. Available capacity at Workington on
a five-shift configuration amounts to c 140kt of rail per year.
The Company estimates that UK demand for up to 36 metre length
rails would comprise c 3.5 shifts per week of Workington's available
22. There has been a recent increase in
demand for rail as a consequence of Railtrack's emergency track
re-laying programme following the Hatfield rail crash. Initial
estimates are that the additional rail requirements in the next
six months can be accommodated within the five shifts of available
rail rolling capacity, but there is a requirement for additional
welding capacity and associated processing. Since the Hatfield
crash an order for 19kt has already been placed on the Workington
mill for manufacture up to the end of December 2001.
23. The following is a summary of the points
that Corus would like the Committee to take note of:
The World and European market for
steel rail is highly competitive with structural over capacity.
The UK market has become highly competitive
since the privatisation of British Rail, and Railtrack have introduced
a policy of multi-sourcing in order to obtain world best prices
from all of its suppliers, including rail suppliers.
Exchange rate movements have enabled
overseas suppliers to target aggressively the UK market on price.
The acquisition of Sogerail enabled
Corus to extend its European base, realise synergies and to maximise
its share of the Railtrack contract by supplying 72 metre rail
into the UK.
Investment in long rail at Workington
is not an option as the financial returns do not justify the costs
Corus believe that there is a stable
market for 36 metre rail in the UK and overseas markets.
A severe downturn in the export order
load combined with adverse exchange rate movements since 1995
made the Workington rail mill, manned as it was on 10 shifts to
export 70 per cent of its output, uneconomic.
Whilst there can be no guarantees
the best opportunity for the Workington rail mill to achieve a
viable future is to operate on five shifts, supplying predominantly
the UK market, to reduce its costs and to improve operating performance.
24 November 2000