The UK steel industry: Government response to the crisis Contents

2Government response to the steel crisis: creating a level playing field

9.Given that the UK exports some 52% of its steel to the EU and that an estimated 69% of imports are from EU countries it is vital that UK producers are able to compete on an equal footing with European countries.9 We heard that this is not the case at present. Witnesses representing the steel industry were at pains to insist that they were not seeking a taxpayer-funded bail-out or preferential treatment. Rather, they were seeking—and had been for some time—specific policy changes relating to business rates, energy prices, procurement and emissions to allow them to compete on a similar basis to European competitors.

10.The Director of UK Steel argued that, in addition to facing pressures from global market forces “we have our hands tied behind our backs because of Government policy loading costs onto us”.10 These costs, he said, arose from government policies relating to business rates and energy prices, in addition to the UK’s approach to procurement. This is an assessment with which the Minister for Small Business, Industry and Enterprise, Anna Soubry MP, was happy to agree, telling us that the industry “do not ask for any money. All they ask for is a level playing field. They are right to make that ask and they should get a level playing field. That is all they ask for”.11 She added that “at the moment, they cannot fight fairly, because they have one hand, arguably both, strapped behind their back”.12

11.The industry has identified five actions that are available to address the current crisis. Some of these actions are entirely within the gift of the Government; others require EU approval or coordinated action at an EU level. These actions, alongside the Government’s response to them, are summarised in the table below. We concentrate in this Report on energy prices, business rates and procurement.

Table 2: Government response to the “five asks”

Issue

Action sought

Reason for action

Action delivered

Energy prices: implementation of Energy Intensive Industries package

Full delivery of whole package within the next few months.1

The Energy Intensive Industries compensation package contains measures aimed at offsetting the costs of environmental levies on high energy users. The measures are required to be compliant with EU state aid rules and therefore need EU approval.

An initial Government undertaking to bring forward scheduled April 2016 introduction to date of state aid approval by EU, expected by end of 2015

An additional £45m was announced to be available to commence compensation for the costs of the Renewables Obligation from the date of state aid approval, alongside the provision of relief from the costs of the small Feed in Tariffs.2

On 25 November 2015 the Chancellor announced that the Government would provide an exemption for energy intensive industries from the policy costs of the Renewables Obligation and Feed-in tariffs. This would save £410 million a year by 2019-20. The government also announced action to mitigate the impact on household energy bills”.3

Business rates: inclusion of plant and machinery in evaluation make them 5 - 7 times higher than in competitor countries

Reduction of business rates to competitive levels

Witnesses told us of a “perverse” situation in which “if you as a company invest then the next year you pay more in business rates, because you have invested to make your company more efficient, more streamlined and more competitive. Whether you are making a profit or not, you are still paying more business rates.”4

None yet - “Full review” of business rates to be completed by the end of the year but outcome must be “fiscally neutral”

Procurement: UK steel companies are losing out on major procurement projects

Procurement processes to include social, sustainability and environmental considerations as well as price

Whilst major procurement decisions are subject to rules relating to fair competition throughout the EU, there is sufficient flexibility to Member States to apply guidelines governing procurement processes to allow factors other than price and quality to be factored into decisions.

Government published on 30 October new guidelines for departments to apply on major projects when sourcing and buying steel.

The guidelines should encourage purchasers to consider the environmental and social implications of bids, such as their carbon footprint and impact on supply chains and disadvantaged workers, including the long-term unemployed.5

Industrial emissions: Industrial Emissions Directive threaten further pressure on costs

A derogation from implementing the Directive

The Industrial Emissions Directive places requirements on industry in relation to emissions and the use of technology to reduce them. This would create additional costs to industry. Member States are able to designate specific plants to be given more time to meet the new requirements.6

In October 2015, the Government announced, subject to final approval by the Commission, a four and a half year postponement in implementing the Industrial Emissions Directive.

Anti-dumping measures: Chinese steel being sold below cost price in UK.

The term ‘dumping’ refers to the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.

Measures taken at EU level to prevent dumping of Chinese steel products into EU markets.

We heard that “what we have seen in September is the biggest month ever of Chinese exports globally. It is something like 11.5 million tons, which is almost as much as we produce in the UK a year”.7

None yet –

Issue raised with Chinese President in October, who undertook to take action against Chinese overcapacity.

Extra meeting held at EU level on 9 November 2015 to encourage action.

Energy Intensive Industries compensation package

12.According to the industry, the price of electricity in the UK for extra large users is the highest in the EU by some margin. Figure 6 indicates that prices for these industrial consumers have risen steadily in the UK since the start of this century and were the highest in the EU in 2014.

Figure 6: Comparison of European electricity prices for extra large consumers since 2003

Source: DECC, Statistical data set, International industrial energy prices International price comparisons, Table 5.4.4. Note that the definition of extra large user changed in 2007.

Figure 7: Electricity prices for EU steelmakers 2014 (p/kWh)

Source: Eurostat / DUKES December 2014

Other studies have confirmed that electricity costs are relatively high in the UK for industrial users.13 Whilst energy costs may not represent a high proportion of total costs, we were told that they nonetheless represented a “significant proportion” and that “the margins are very small, so any disadvantage is magnified”.14

13.Some of these relatively high costs can be attributed to policies designed to combat climate change. The Government estimates that climate change policies have added 18% to electricity prices for the steel industry, falling to 14% after compensatory measures are implemented.15 UK Steel explained that the compensation it was seeking was not a subsidy, but the correction of a “policy mistake”:

We are asking Government to correct a historic policy mistake. When the Government decided they were going to introduce the carbon price floor or pay for renewables, they decided that they would do that by spreading the costs around consumers. We told them at the time that we are an energy-intensive sector and are exposed globally, and that if they piled those costs onto us it would damage our competitiveness. At the time various Governments of all different persuasions did not agree with us and did not believe us. Those costs were applied to us, and that was something like £130 million a year that we have been paying that our competitors have not been paying. We told them that that was going to happen. It has happened. What the Government are doing now with the energy-intensive industries compensation package is correcting that past mistake.16

14.In its initial response to these demands, the Chancellor announced a package of measures in the 2011 Autumn Statement, known as the Energy Intensive Industries (EII) package, which is subject to EU approval under state aid rules. So far, approval has been given in respect of the costs of the EU Emissions Trading Scheme and the carbon floor price, but compensation for the renewables obligation and small scale feed-in tariffs, comprising 70% of the whole package, are outstanding, and are being borne by industry. Full implementation has been a major cause of frustration for the industry. The Secretary of the All Party Parliamentary Group for Steel and metal related industries, Nia Griffith MP, summarised it as follows:

If we go back to the Autumn Statement of 2011, the Chancellor set out quite clearly an intention to deliver on an energy-intensive industries package, and he specifically said that that would give relief from the EU emissions trading system, increase the climate change levy relief, tackle the carbon floor price and reduce the impact of the electricity market reform.17

15.Despite this intention having been set out in 2011, the previous Government only made an application to the EU for state aid approval for its full EII compensation package at the start of 2015, with the aim that funds arising would be available in April 2016. The present Government maintained this policy but told us that it had “already implemented a number of compensation packages for energy intensive industries which has resulted in over £50 million being paid in compensation to steelmakers for energy costs”.18 On 28 October, the Prime Minister announced that the full package would be brought forward from April 2016 to the date that EU approval is received.19 The Government has since said that “we are now expecting to have state aid approval for relief to our Energy Intensive Industries for the cost of renewables policy by the end of this year”.20 Then, as part of the 2015 Spending Review the Chancellor announced on 25 November that the Government would provide an exemption for energy intensive industries from the policy costs of the renewables obligation and feed-in tariffs. This is to be a permanent exemption rather than a compensation package, as originally envisaged.21 We welcome this change in policy on energy intensive industries, which should provide greater certainty for the steel industry. However, we regret that after the previous Government brought forward the compensation package in 2011 Ministers have still not succeeded in implementing it in full. Successive Governments have not prioritised the issue sufficiently to force it up the agenda at the European Commission, which could have approved the full package years ago. This delay has directly affected the competitiveness of the UK steel industry and been a contributory factor to the current crisis. We recommend that the Government provides a timescale for how this compensation will be provided to industry in its response to this Report.

16.We recognise that the full implementation of this package is not without broader consequences. The Minister explained the potential implications for consumers as follows:

When we talk about Germany, which is the right comparison to make because EIIs in Germany pay about half the price of our industries, be under no mistake who pays the shortfall. That is the individual consumer. If we were change our energy pricing, the only way that you would change it is to put the burden onto consumers. Personally, to be honest with you, I would not have a problem with that. I would be happy to make that case.22

17.In the 2015 Spending Review, the Government decided on a shift in the burden from industry to the consumer. The Spending Review document indicates that the permanent exemption from environmental taxes would be accompanied by an average increase of £5 per household on energy bills, although this increase would be more than offset by other measures, which, taken together, are projected to reduce the average household energy bill by £30 from 2017.23 It is not clear to what extent the additional £5 will pay for the exemption for energy intensive industries or how this levy will work in practice. We recommend that the Government provides further detail on the exemption for energy intensive industries and the means by which the additional costs to domestic consumers is to be calculated and implemented.

Business rates

18.We heard that business rates for steel companies in the UK are “five to seven times more” than in European competitor countries as a result of the inclusion of investment in machinery in the calculation of business rates. The steel industry maintains that it made representations before the 2014 Budget to make changes to this situation, but no action was taken.24 The Minister for Small Business, Industry and Enterprise acknowledged that the current policy has “bizarre” consequences.25 She explained that there will be a full review of business rates, but was at pains to point out that, in view of the policy of making any changes “fiscally neutral”, any reduction of rates for steel companies would mean “we will have to move the burden somewhere else”.26 Given that the matter will be under review until Budget 201627 and local government will be able to keep the rates collected from businesses,28 there does not appear to be the prospect of any immediate action and uncertainty about whether Government will help industry meet these costs remains. The Government does not require European Union agreement to reform business rates so as to provide a more even playing field for UK steel producers. Exempting plant and machinery from business rates valuation could demonstrate the Government’s commitment to rebalancing the economy, enhancing the UK’s attractiveness to inward investment in manufacturing and improving industry’s productivity, efficiency and competitiveness through investing in the latest equipment. We recommend that the Government demonstrates its support for rebalancing the economy towards manufacturing, and the steel industry, by reforming business rates as they apply to manufacturing, with priority given to the removal of disincentives to invest in plant and machinery, at the earliest possible opportunity.

Procurement

19.Procurement policy is currently the subject of discussion of a government-initiated working group, which is considering what can be done to help UK producers to compete more effectively for major contracts.29 The Government published, on 30 October, new guidelines for departments to use for major projects when buying steel. The Minister explained that these would increase the visibility of opportunities for UK suppliers and “help steel providers compete on a level playing field with international suppliers for major government projects and stimulate competition.”30 The new guidelines state that they are intended to ensure that government “applies a more strategic and transparent approach to the sourcing of steel in major projects.”31 We understand it is possible to include in invitations to tender provisions in relation to these factors without breaching state aid rules and that such flexibility is routinely used in other countries.32

20.We welcome the action the Government has taken to amend procurement guidelines to improve the chances of UK steel companies securing business for major projects. However, the impact of these changes will not be apparent for some considerable time. We regret that this change in policy was not made many months, if not years, earlier. Whilst the new guidelines are welcome, the Government—not just the Minister—needs to actively champion the use of domestic steel in large public infrastructure projects. We recommend that the National Infrastructure Commission looks closely at how the interests of UK steel industry and its supply chain can be considered in relation to large scale procurement decisions.

Conclusions on the response to the crisis

21.After the steel summit on 16 October, the Government established a set of working groups—each chaired by a minister—to consider issues relating to public procurement, international comparisons and competitiveness and productivity. Since then some of the steps taken in pursuit of the ‘level playing field’ can be attributable to these groups, though questions remain about the extent to which they themselves have brought about these changes and whether there has been sufficient engagement with sectoral groups or associations about the place of UK steel in supply chains. These signs of activity and talks are welcome, but they are not in themselves proof of changes to the business environment for steel. At the moment, the jury is still out on the effectiveness of the working groups.

22.With regards to the policy changes sought by industry to allow it to compete on a more equal basis at a European level, the Government’s responses since the closure of the SSI plant at Redcar are set out in Table 2. Ministers have now secured some action, for example a change to procurement guidelines and agreement for a derogation from the Industrial Emissions Directive. But there is no guarantee that the most important issue—combatting the dumping of cheap steel—will be resolved imminently and therefore produce better conditions for the UK steel industry.

23.None of the challenges being considered in response to the current crisis are new: industry had been making the case that these areas need to be addressed for some years. UK Steel told us that industry had been “highlighting broadly the issues that we are talking about today eight years ago”. The Minister concurred, explaining that on appointment “I had been told in no uncertain terms that there were grave problems in our steel industry”. Indeed she told us that:

[…] nine months ago, we knew that there were difficulties and huge losses in the steel industry; that is a matter of public record.33

24.Government could and should have been more energetic in identifying policies that adversely affected UK industry and in pursuing the Energy Intensive Industries compensation package in the EU. Earlier action on business rates and procurement should have been a higher priority. We recognise that, since the crisis developed, progress has been made, in no small measure due to the personal commitment and energy of the Minister for Small Business, Industry and Enterprise. But there is still more activity than concrete action and this will need to change if further damage to the UK steel industry is to be avoided. We consider action at an international level on dumping in the next chapter.

25.There are also, perhaps, questions to be asked of the industry with regards to its handling of the issues which led to the current crisis. For example, in respect of SSI, Tom Blenkinsop MP, Chair of the All Party Parliamentary Group on Steel and metal related industries, acknowledged that “admittedly, in the last 12 to 18 months, the company’s decisions were poor, to say the least.”34 We also question whether there has been sufficient attention given across the sector to supporting UK producers and accompanying supply chains. No doubt there are companies in the UK which have been active in supporting UK steel. For example, we heard that 75% of the steel for one of Nissan’s “most modern” vehicles is sourced from the UK.35 If the underlying causes of the current crisis have been known about for some time, we would expect the Department to be closely engaged with industry so as to have early warning of any major difficulties. Events there indicate that there is no effective early warning system in Whitehall, a failing which greatly reduced the chances of saving the assets under threat. This weakness must be addressed.

Compensation for SSI workers

26.Following the closure of Redcar steelworks and SSI going into liquidation, the Government announced a package, worth “up to £80m” for those affected, although up to £30m of this would be in the form of statutory redundancy payments.36 In response to our request for a breakdown of how these funds would be allocated, the Government informed us that there were three elements to the package, as outlined below. The Minister explained that the figures were in some cases estimates, or provisional, as “the ultimate spend will be demand-driven and in many cases will also depend on an individual’s circumstances”.37 The package is split into three parts:

(1)Redundancy Payment: To include Redundancy Pay, Holiday Pay, Arrears of wages, Notice Pay and missing Pensions Contributions, subject to statutory limits. We were told that to date, some £9.57m worth of claims have been paid or are currently being processed for payment by the Redundancy Payments Service and that “the first instalment of £1.1m has been made available towards a safety net fund to support SSI workers with short-term financial challenges”.

(2)Retraining: The Government says that it is prioritising programmes for those affected by Redcar’s closure. For example, it has mobilised the Jobcentre Plus’ Rapid Response Service. So far, up to £3m has been made available from the Skills Funding Agency’s overall budget specifically for retraining redundant SSI workers, and those in the supply chain, through local colleges. £2.65m has been paid towards support the redeployment of 50 SSI apprentices.

(3)Local economy: The Government is working with the local Task Force, led by Amanda Skelton, Chief Executive of Redcar and Cleveland Borough Council, to deliver on proposals which it brings forward.38

The provision of such support for those affected by the closure is important, but it is regrettable that the Government’s response has focussed solely on compensating and retraining those who have lost their jobs, and not also sought to protect assets of national importance.

27.Following the closure at Redcar, we welcome the rapid action the Government took to put together a package for those made redundant, but are not convinced that every effort was put into exploring how the plant could be saved from closure, within state aid rules. We regret the loss of facilities and assets and the inevitable loss of the skills needed to support them. Whilst we support the priority being given to encouraging local providers to take a lead on the allocation of some of this money, it is still far from clear whether the sums provided will be sufficient to support the economic regeneration and retraining required. The Government’s response should be judged, not in terms of how much money has been allocated in redundancy payments, but on the impact on the communities affected, and the proportion of those who lost their jobs that are in work in six or twelve months’ time. We will be keeping track of how the money announced is being spent and will return to the issue again. In the meantime, we recommend that the leader of the Task Force is provided with the necessary additional resources to enable her to carry this important work. We have commented here primarily on Redcar, but other communities across the UK affected by the closures mentioned previously will be facing similar concerns.

9 UK steel industry: statistics and policy, Standard Note SN07317, House of Commons Library, October 2015

10 Q6 [Gareth Stace]

11 Q95

12 Q98

13 See, for example, Fraunhofer ISI / ECOFYS, ‘Electricity Costs of Energy Intensive Industries, An International Comparison,’ (July 2015)

14 Q35 [Tor Farquhar]

15 EEF/UK Steel, Annual Review 2014 (May 2015), p 10; see also DECC, ‘Estimated impacts of energy and climate change policies on energy prices and bills.’ (December 2014), p 44

16 Q28 [Gareth Stace]

17 Q45

18 Department for Business, Innovation and Skills (UKS0006)

19 HC Deb, 28 October 2015, col 343 [Commons Chamber]

20 HL Deb, 9 November 2015, WA, [Lords written answer] p 9

21 HC Deb, 25 November 2015, col 1367 [Commons Chamber]

22 Q77

23 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, November 2015, p 39

24 EEF/UK Steel, Annual Review 2014 (May 2015), p 10

25 HC Deb, 17 September 2015, col 1262 [Commons Chamber]

26 HC Deb, 17 September 2015, col 1262 [Commons Chamber]

27 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, November 2015, para 1.219

28 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, November 2015, para 1.237

29 Department of Business, Innovation and Skills (UKS0006)

30 Department of Business, Innovation and Skills (UKS0006)

31 Crown Commercial Service, Procurement Policy Note: Procuring steel in major projects, Action Note 16/15, 30 October 2015

33 Q66

34 Q53

35 Q27

36 HC Deb, 13 October 2015, col 169 [Commons Chamber]

37 Department for Business, Innovation and Skills (UKS0004)

38 Department for Business, Innovation and Skills (UKS0004)




© Parliamentary copyright 2015

Prepared 18 December 2015