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


Memorandum submitted by Corus Rail



  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 currency fluctations.

    —  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 the acquisition.


  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 market presence.

  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 Companies—Corus, 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 costs.

    —  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 in France.


  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 capacity.

  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 of capital.

    —  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

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