Examination of Witnesses (Questions 80
MONDAY 6 NOVEMBER 2000
80. I am getting mixed messages. On the one
hand you are saying obviously price is a factor. You are saying
price is probably the predominant factor. Are there problems about
capacity, for example?
(Mr Siddall) Can I say price is a factor which can
vary from market to market.
81. Is there a problem about capacity?
(Mr Pedder) Certainly as far as Corus is concerned,
there is not a problem of capacity, no.
(Mr Bagshawe) As far as my own business is concerned,
I think we have to take as read that we can compete on the quality
of the product and the quality of the delivery because if we cannot
do that we would not be in business very long. In my instance,
the orders I lose will generally be price dictated.
(Mr Siddall) Can I just make the point, in my own
business, a very small business, recent currency fluctuations
have become a problem because when the currency fluctuates like
that the customer will switch from one company to another and
one cannot turn production on and off just like that, especially
if one is working 24 hours a day seven days a week. That can result
in all sorts of problems.
82. Can I come back to the subject of investment,
I think Mr Rea touched on this earlier. Your paper paints a very
bleak picture about future investment in your industry. You say
at the moment returns on capital are negative. Is that just because
you cannot charge a price that is going to be able to enable you
to sell your goods at a price that is also going to produce a
return on capital, or are there other factors?
(Mr Siddall) I think, as I said before, I believe
one of the main factors is our ability to be competitive. We have
talked a lot about the weakness of the euro, we have talked a
lot about having stability within the industry. Industry invests
when it has stability and when it can see ahead and when it can
see a return on that capital. Indeed, it worries me a terrific
amount that we are not always investing as we should do in our
industry because of the strength of the euro and our inability
to be competitive. In the long term, if we do not invest we will
become less competitive still. I think my colleagues will wish
to answer that question as well.
(Mr Pedder) Certainly as far as Corus is concerned,
at the present time the issue is generating the cash to put to
those schemes that we feel are the right schemes to develop the
more competitive position for our various businesses. It really
is the level of profitability at the moment which is a very major
concern. We need to generate more cash and then that cash can
sensibly be spent where it can generate a return. It is the first
point that is the key determinant for us right now.
83. It is a frightening statistic that you say
investment has fallen over the last 18 months to levels less than
half depreciation. That means the outlook is pretty grim if we
carry on like that. Also, you say, on page 24 of your written
evidence, that you think there is a City factor here, the City
is not interested in investing in manufacturing industry, it still
fancies the telecoms giants, despite the fact that you also say
you provide gross added value per employee twice that which you
can get in the telecom sector. Is that City bias or is it that
nobody wishes to invest where you cannot get a proper return?
(Mr Pedder) I believe it is about return. That is
a personal view but I believe it is also a company view. I do
not think if we can show that we are profitable, we are cash generative
and that we have schemes for the future which will improve the
return of the business, that is the issue. I think it is demonstrating
that we can generate proper returns. I think there may be a short-term
City focus on telecoms or e.commerce or whatever it is, but I
do not think that is necessarily evidence of the City's short-termism
approach because some of these dot com ventures have got infinite
returns as I understand it.
84. Almost as good as the French companies.
After all, you used some of your resources, that is to say Corus,
in buying a French company rather than investing in the United
Kingdom. Is that a reasonable conclusion to draw?
(Mr Pedder) We have got to look at where we can most
sensibly invest to try to generate the best return for our business
and follow our customers if that is where they are moving. As
I have said to you before, exporting products out of the UK at
this point in time is not a very good place to be. We have customers
that we have developed over a period of time who are in other
85. You export jobs then?
(Mr Pedder) As Mr Bagshawe said, we have customers
who are looking to source products from different continents into
their factories and we have to try and see whether we can make
sense of that.
86. Is the issue of corporate tax a significant
one? You refer to it in your paper and draw some quite interesting
statistics out saying that, for example, in France as a percentage
of tax revenue taxes on corporate income are 5.8 per cent and
2.6 per cent of GDP compared with 12.1 per cent of tax revenue
in this country and 4.3 per cent of GDP. How much is the differential
treatment of tax on corporate income relevant to the investment
(Mr Rea) I think it is one of the important factors
in the shopping list and from our point of view we would perhaps
look at some other more immediate issues bearing more heavily
on us, energy pricing, Climate Change Levies, items like that
which go into the mixture when companies are looking at where
to maintain or renew their investments or what product lines to
follow. Obviously the Government take on GDP and whether they
take it out of industry or take it out of the individual is a
long-term factor that is as important to us as any other wealth
87. You mentioned energy prices and I think
you said in your submission that your prices for electricity were
up to 40 per cent higher than your European competitors, yet the
DTI have told us that over the last five years real terms electricity
prices to industry have fallen by 20 per cent in the UK. Are these
figures compatible with each other? Does it mean that the divergence
in electricity prices between us and the continent has narrowed
or have their prices fallen too?
(Mr Rea) Energy pricing is an extremely complex topic.
You would not expect me to be anything other than biased.
88. This is an assumption that we tend to operate
on when businesses come to us talking about energy, because we
do it quite a lot and the complexity is not beyond us. If you
can give us some examples to justify the case you are making.
(Mr Rea) Forgive me, I meant no disrespect in that.
89. No, it is okay.
(Mr Rea) I am sure that we can have a half full and
a half empty glass with our colleagues in the DTI and both be
perfectly correct on energy pricing. The steel industry has suffered
from excessive electricity prices in the UK compared to our competitors
in mainland Europe, North America and the Far East for a very
long period of time. We would be delighted to provide you with
chapter and verse. We are talking here about electricity for intensive
use, bulk electricity purchase. The normal hiding place for Government
when challenging this is to talk about average prices to industry.
Average prices to industry are of no interest at all to an electric
arc operator who, when he strikes through his 100 tonnes of steel,
takes more electricity than a local town takes while he is running
it. Prices to industry are not directly relevant to bulk use of
electricity in steel. We have chapter and verse until it comes
out of our ears, we really have, on comparative prices of bulk
electricity purchasing. Can I make a point about gas because that
is an extremely important one at the moment which I think needs
to be well ventilated. In the last couple of years we have had
some advantage on gas pricing for industrial and for bulk use
in industries like steel. We have had some advantage from privatisation
and the restructuring of that gas market which has actually given
us an improvement compared to the rather poor position we had
for many years. That situation has been rubbed out in the last
six to nine months with the opening of the connector into Europe.
We have seen prices shooting up in the UK so that we are now right
back into the average of European prices. European prices are
set not by market forces but by arrangements tied to the price
of oil, it has nothing to do with gas markets as such. We are
right back into the bad situation and the benefits of privatisation
and liberalisation of the market have been thrown away.
90. When you said that prices were up to 40
per cent lower, presumably that is the worst case? What is your
(Mr Rea) At this present time, we are talking electricity
here, electricity for electric arc operators, Italian mills are
fractionally worse off than we are, something like one or two
per cent on the rate that is paid. Everybody else has cheaper
rates than ours. I have brought a graph with me which I would
be very happy to leave with you that has got the details as of
10 October, which is the nearest I can get you.
91. I think Mr Pedder presumably has a direct
comparison because you can just compare the bills, can you not?
(Mr Pedder) We can. I do not have it with me. The
general point that David Rea has made is correct. There is the
issue of differentials and there is certainly the issue of speed
of change again. If we can convey anything to you in terms of
competitiveness, and energy prices are one dimension of this,
all these are further drips on stone which is absolutely saturated
right now because of this tremendous fight we have to retain competitiveness
as the environment has moved against us more generally. On things
like energy costs where, as David Rea says, we are looking at
a massive increase as one hit electricity prices, where we were
hoping for some relief with the opening up of the new trading
arrangements, that has now been deferred. All these things are
added pressure points at a time when we are least able to absorb
these added pressure points. In terms of the direct comparison,
I can come back to you on that.
92. It is certainly not going to be anything
like 40 per cent difference?
(Mr Rea) Forgive me, Chairman, if I can put in the
record and say that I will happily leave this chart I brought
with us for this purpose. If you take an electric arc operator
in the UK dated, I said 10 October, 1 October, pence per kilowatt
hour for a medium sized arc furnace is 3.6 pence, for a large
arc furnace it is 3.5 pence. That is 3.6 or 3.5 pence per kilowatt
hour for electric arc operators. Comparable size contracts and
furnaces in Germany are 2.3 pence per kilowatt hour for exactly
the same type of kit. In France it is 2.4 for the 25 megawatt
and 2.1 for the 80 megawatt.
93. You also mentioned the Climate Change Levy.
In regard to oxygen you have said that the producers of oxygen
should be eligible for a rebate. How are your competitor countries
affected in that respect because obviously they have equivalent
energy taxes, or some of them do?
(Mr Rea) Can I take a slight diversion on answering
this as fully and helpfully as I can. If we secure full and final
agreement with the DETR on the climate change agreements we should
be in a position that is certainly not as bad as it would have
been in the first place and which makes us marginally the worst
in Europe. We have yet to settle the fine detail on those agreements,
we still have outstanding problems on them: state aid and the
clearance of those agreements with the European Community. If
they are settled then the hot and heavy end of the steel industry
will be only marginally the worst in Europe. If we do not get
that, and for the rest of our member companies that are not covered
by the IPPC agreements at the hot and heavy end of the industry,
we shall be singularly disadvantaged.
94. You mentioned a figure in your submission
of 42 pence per tonne of steel produced, can you put this in context?
How serious is that?
(Mr Rea) If we get to that figure it will be on the
basis of some very stringent requirements in terms of cutting
energy consumption and subject to very draconian penalties if
we even miss the target by one per cent. The rest of our members
who are not subject to those sorts of agreements will carry a
far higher burden.
95. This is the oxygen costs?
(Mr Rea) Yes.
96. You are saying you are going to have to
bear as an industry £6 million from the costs of oxygen because
of the application of CCL to oxygen. You are saying that is equivalent
to 42 pence per tonne. How significant is that in terms of what
the cost of a tonne of steel would be?
(Mr Rea) Unfortunately steels range in their selling
prices from about £180 a tonne to £5,000 or £6,000
a tonne, so it will depend entirely on the product configuration
at the time.
(Mr Pedder) I think more significantly, the £6
million is significant at a time when you are making losses and
struggling to find a way forward. Every pound is significant.
This is a tax or a levy that is imposed irrespective of that profitability,
it is there because we are there. It is not there because we have
done well in our markets or anything of that sort, it just happens
to be because we are there.
97. Would it be true to say that in relation
to the price of most steels it is not a particularly significant
task, you will find it is fairly minute in percentage terms? Is
(Mr Siddall) Yes, but it is £6 million of uncompetitiveness
for our industry.
98. Yes, I understand that, but in percentage
terms it is very small indeed.
(Mr Siddall) It is still £6 million.
99. Have you got anywhere with the Government
on your concerns that in this country we are producing 40 per
cent of our steel as recycled steel and under the Climate Change
Levy you are going to be charged more for recycling steel than
for producing it through the primary route of virgin steel, despite
the fact that recycling requires 69 per cent less fuel?
(Mr Rea) I would wish that we were making more progress
than we are. I fear that on this issue we are battering against
the Treasury who are somewhat notorious in their reluctance to
concede on the matter. We believe the case has been well made
and well argued. The points you have just summarised are quite
correct. We believe there is actually a perverse incentive there
in economic terms because recycling steel, melting scrap, is being
disadvantaged under this route. However, as yet we have not achieved
it and I have some gloom about whether we shall actually carry