Select Committee on Trade and Industry Ninth Report


2. The Main Problems

Context

4. As in the previous inquiry, we have not set out to conduct an exhaustive assessment of the UK steel sector and all the factors which might affect its performance. Instead, we have concentrated on the challenges immediately facing the sector and sought to establish whether there is scope for Government action to assist the industry meet those challenges.

Global steelmaking

5. Steel production across the world has increased steadily over time. According to the Iron and Steel Statistics Bureau (ISSB), world steel production amounted to 902 million tonnes (mt) in 2002, a rise of more than 43% since 1972.[4] We found general agreement that global production capacity now exceeds demand. Whereas demand and supply roughly balanced in 1972, global consumption of steel products totalled 868 mt in 2002. Demand continues to grow, particularly in developing economies such as China,[5] and the International Iron and Steel Institute has predicted that consumption will rise by 4.6% in 2003 and 4.4% in 2004.

6. Production and demand in the EU are broadly in balance, at between 150-160 mt per year.[6] Eurofer[7] predicts that EU demand will remain sluggish at least over the next year. Corus told us that while EU production capacity has been cut in recent years through a process of consolidation, much of that capacity had previously been under-utilised, with the result that actual production had not been reduced.[8]

UK Steelmaking

7. Productivity and output per worker in the UK steel industry have increased over time in line with those of its major European competitors (France and Germany)[9] and is generally regarded as among the best in the world.[10] Labour costs are generally in line with EU competitors, although they are significantly higher than those in eastern Europe.[11] The Government expects that the disparity with countries such as Slovakia and Poland will diminish over time as these countries are assimilated into the EU.[12]

8. Steel production in the UK declined by nearly 70% from 1970 levels to 6.3 mt in 2002. This decline has been more marked in the last few years. UK output fell by 40% over the period 1997-2002. Over the same period, UK steel exports fell by 36% to 5.6 mt, which was 10% lower than in 2001.

9. UK demand for steel mill products has fallen by 30% over the past 30 years and the reduction in demand has been more marked in recent years. Demand in 2002, at 12.9 mt, was 12% lower than in 1998.[13] Imports of steel mill products have risen steadily since 1970, when only 5% of UK demand was met by imports. By 2002, 53% of the steel used in the UK came from abroad. In his evidence to us, however, Sir Brian Moffat reported a slight recovery in that position in the past year, and it appears that UK production now accounts for 52% of UK demand — a performance comparable to that of the industry in France.[14] Indeed, despite losing market share to imports over the past thirty years, UK producers have retained a greater share of their domestic market than their competitors in the major EU steelmaking countries.

10. Despite the fact that the UK steel industry is one of the most productive in the world, it has continued to struggle to compete in its domestic market on price alone.

Steel exports

11. Steel is a commodity traded across the world and UK producers have been major exporters for some time. In the 1970s exports averaged about 3.4 mt per year. These rose steadily through the 1980s and 1990s to a peak of 8.5 mt per year. In the past five years, however, UK exports have fallen back to the levels achieved in 1985, and stood at 5.6 mt in 2002.[15] More than 70% of UK exports go to EU customers with Germany accounting for 750,000 tonnes per year. Other major markets for UK steel products include the USA, China, Canada and Taiwan.

UK steel consumption

12. Steel is a vital material in all industrial economies. In the UK, the construction sector accounts for 22% of steel consumption, automotive industries a further 17%, and metal goods another 13%. Engineering and other manufacturing industries collectively account for 45% of the steel consumed in the UK.[16] Construction demand in the UK has been relatively strong in recent years, and the recent decline in UK demand is closely linked to the poor performance of the manufacturing sector, which we discussed in some detail in our Report on the competitiveness of British manufacturing last year.[17]

13. Several witnesses were optimistic that demand for steel would increase in the construction sector. The DTI memorandum noted that this sector has been the most buoyant of the UK markets for steel, and that the public and private sectors are making considerable investment. Steel is a major component of most construction projects and the department expects that increased Government expenditure on hospitals, schools, and transport infrastructure will provide significant opportunities for the steel industry.[18] While the ISTC and Amicus agreed, Corus were more circumspect about the prospects of recovery. Sir Brian Moffat made the point that the manufacturing sector was the biggest customer for steel, and that demand and investment was falling in that sector. UK manufacturers had been investing and moving production outside the UK, and the company could not expect to recover all of its customer base.[19]

14. We note the fact that the current demand from the construction industry for steel products has been strong and that this is partly, at least, driven by public expenditure projects. We would hope that the Government, when considering such infrastructure for the future, will take account of the need to maximise the tendering opportunities for UK steel producers.

Exchange rates

15. The EEF identified the fundamental cause of the decline in UK steel output as the strength of sterling.[20] This has had a direct impact on the steel sector by making imports more competitive, thereby depressing prices in an over-supplied market, and by making steel exports less competitive. It has also had an impact on demand for steel in the UK. The EEF told us that "the fall in demand is therefore directly attributable to the state of UK manufacturing in general which has struggled since sterling began its long rise against the euro in 1996."[21] Corus and other witnesses identified the diminishing customer base in the manufacturing sector as a major contributory factor in the decline of Corus's fortunes, at least part of which is attributable to the impact of adverse exchange rates. However, not all steel producers have had as difficult a time as Corus. Mr Temple of the EEF pointed out that specialist producers have achieved some good market positions in global markets because of continuing high demand for their products.[22]

16. More recently, the euro has strengthened considerably against sterling, and we noted varying degrees of optimism among our witnesses about the significance of this development. The trade unions considered that recent exchange rate movements provide a good opportunity for the UK to recover market share.[23] The view from Corus was more cautious about the longer term stability of the currency and prospects of recovery of lost business.[24] And although the EEF felt that the improvement in exchange rates provided a very good opportunity for the sector to move back into profitability, Ian Rodgers pointed out that the erosion of the UK manufacturing base would preclude a substantial increase in UK demand for steel.[25]

17. We note that the decline in UK steel production and falling demand for the product have been long term trends that predate the adverse sterling/euro exchange rates. There can be little doubt, however, that the strength of sterling has contributed significantly to the decline in the competitive position of the sectors. We hope that recent favourable exchange rate movements can be maintained, providing a period of stability which would allow the sector the opportunity to recover profitability in the longer term.

Trade rules

EU Anti-dumping procedures

18. The EU's legal procedures against dumping are generally acknowledged to be cumbersome and suffer from the disadvantage of being retrospective. By the time that action has been taken against an action to dump product on the EU market, the damage has been done to EU industry. Despite these drawbacks, however, it is essential that the European Commission is given proper support from the British Government when it attempts to halt such practices. The previous inquiry considered complaints about what was perceived to be DTI inaction on anti-dumping cases,[26] and this time several witnesses expressed their disappointment at the lack of support from the UK Government for EC proposals for anti-dumping measures on hot-rolled coil from Egypt, Turkey and Slovakia, which failed for lack of support from Member States.[27] Although the direct effect of these imports was acknowledged to be negligible, the EEF was concerned that this would encourage a return to the market of steel from those three countries, and possibly the diversion of steel originally intended for China as a response to the downturn in demand from that country and to the strengthening of the euro.[28] For the DTI, the Minister of State for Employment Relations, Industry and the Regions attributed the failure of the European Commission's proposals to inflexibility on the part of the Commission itself. He told us that there had been near-unanimity in the Council over what was proposed for Slovakia and Turkey, but not for Egypt. If the Commission had been willing to exclude measures against Egypt from its proposal, the UK would have supported it.[29]

19. The EEF suggested to us that better protection would be afforded to UK industry if country-specific import tariff quotas were introduced for hot-rolled coil products.[30] The DTI explained that the Commission was considering the introduction of such a system to compensate for the removal of existing anti-dumping measures from imports of hot rolled coil, which it had already proposed and to which the Government was strongly opposed. Unless the Commission succeeded with its proposal to remove anti-dumping measures, the introduction of tariff quotas was hypothetical.[31]

US steel import tariffs

20. We found general support for the concerted action taken by the Government in the wake of the decision by the US Government to impose extra tariffs of up to 30% on imports of steel products into the USA. It was acknowledged that pressure by Government Ministers had helped the exclusion of a number of specialist products from these tariffs.[32] Such niche products form a significant part of the UK industry's trade with the USA.[33]

State subsidies

21. Several witnesses drew our attention to what they regarded as unfair competitive practices, particularly among the UK's non-EU competitors, such as the USA and some of the EU candidate countries.[34] These practices included direct government subsidies to protect production capacity, and the imposition of less stringent environmental standards than those applying in the EU. The Minister of State acknowledged the concerns that the terms and conditions of EU enlargement allowed the accession countries several years to bring state support for their steel industries and environmental and other legislation into line with EU regulations.[35] In the DTI's view, however, enlargement would assist the UK industry in the long term by bringing environmental and labour standards in the accession states up to EU standards, thereby reducing the present disparity between costs to industry inside and outside the EU.[36]

22. We found support for the Government's position in the negotiations in the OECD to develop an international agreement on steel subsidies.[37] The ISTC noted, however, that these negotiations would not be concluded for some time and would not address the immediate problems facing the industry.[38]

23. We support the Government's policy that unfair export and production subsidies should be removed wherever possible, but that anti-dumping measures should not be used as a cover for protectionism. We commend the Government's efforts to promote this policy in the continuing OECD negotiations, but recognise that conclusion of these negotiations lies some time in the future.

Energy costs

24. In 2001 the high cost of energy paid by UK steel manufacturers relative to that paid by their international competitors was identified as an inhibition to competitiveness in what is a very energy-intensive industry.[39] Since then, liberalisation of the UK gas and electricity markets has reduced wholesale prices to the point where they are broadly competitive with the rest of the EU. We were told that, welcome though these changes had been, their beneficial effects had been reduced by the introduction of the Climate Change Levy in April 2001 and, more recently, the Renewables Obligation.[40] For the EEF, Ian Rodgers made the point that, unlike some other energy-intensive industries, the steel sector is subject to a Climate Change Levy of 20% on its energy usage.[41] The recently-imposed Renewables Obligation on electricity suppliers had already resulted in an increase of 4% in electricity costs to the industry, which would rise to 10.4% by 2010.[42] The point was made to us that steel producers in other countries were not affected by such extra charges.[43] In a supplementary memorandum the DTI estimated that the cost of the Obligation to consumers would be an increase of 5% on average electricity prices in 2010 compared to 1999 prices.[44] The department acknowledged that energy intensive industries would have to meet greater than average price rises. It said that the Government will consider the impact of the proposed EU Emissions Trading Scheme on the Climate Change Levy, but pointed out that the emissions trading scheme had yet to be agreed.

25. The EEF also told us that the potential effect of the environmental measures set out in the Government's Energy White Paper would be to increase industrial electricity prices by 25% and gas prices by up to 30%.[45] Such costs would not be incurred by steel companies in developing countries or in those countries which are not signatories to the Kyoto Protocol. Even within the EU there were differences in the way such environmental targets were being set. It was suggested that the Government should consider adopting the approach of the German Cabinet, which had agreed a proposal for special treatment for energy-intensive industries whose competitiveness was threatened by higher electricity prices as a result of the Government's green energy policy. The DTI has explained to us that the German approach to increasing the use of Renewables is more prescriptive, less market-oriented and more expensive than the market-driven approach adopted in the UK. In the DTI's view, this "high level of Government intervention, which is incompatible with our liberalised and competitive market, is unnecessary in the UK."[46]

26. We have commented in other Reports on the potential impact of the higher energy costs incurred by UK industry as a result of the Climate Change Levy and the Renewables Obligation, and do not think it necessary to rehearse old arguments. Nevertheless the Government should reconsider the scope and future merit of the Climate Change Levy well in advance of the full operation of the EU emissions trading scheme in 2008. While it is important that internationally-agreed objectives for environmental protection are achieved, the UK contribution towards those objectives should not have an adverse effect on UK competitiveness.


4   App 6 Back

5   App 1 Back

6   App 6 Back

7   The European Association of Steel Producers Back

8   App 1 Back

9   App 2 Back

10   Q 177, Apps 2, 4, 10 Back

11   App 1 Back

12   Q 179 Back

13   App 6 Back

14   Q 99 Back

15   App 6 Back

16   App 6 Back

17   Trade and Industry Committee, Third Report of Session 2001-02, The Competitiveness and Productivity of UK Manufacturing Industry, HC 597  Back

18   App 4, para 19 Back

19   Qq 120 -122 Back

20   App 6 , Qq 4,5 Back

21   App 6 Back

22   Q 3 Back

23   Q 58 Back

24   App 1, Q 3 Back

25   Q 5 Back

26   HC 270 (2000-01) Back

27   Apps 1, 2 and 10 Back

28   Q 39 Back

29   Q 181 Back

30   App 2 Back

31   App 5 Back

32   App 1, 2 and 10 Back

33   App 6 Back

34   Apps 2, 8 and 10 Back

35   Q 177 Back

36   App 4 Back

37   Apps 2 and 10 Back

38   App 10 Back

39   HC 270 (2000-01) Back

40   App 2 Back

41   Q 43 Back

42   Q 44 Back

43   App 2, Q 43 Back

44   App 5 Back

45   App 2 Back

46   App 5 Back


 
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Prepared 27 June 2003