THE BLOG

The UK Steel Industry and Why I Disagree With The Economist

12/04/2016 10:33

I am sure I am not the only person who is a long time subscriber and reader of the Economist journal but who disagrees profoundly with most of what it says. The online comments section of the journal show just that. For example:

• The Economist is socially liberal whereas I am socially conservative.
• The Economist strongly supports uncontrolled free market forces whereas I (who also strongly support free market forces) also like to keep an eye on market failure and monopolistic tendencies.
• The Economist uncritically strongly supports globalisation whereas I am sceptical.
• The Economist only sees one way to measure the success of a country and that is GDP growth whereas I would like to look at other measures including how that growth is shared out

Basically, the Economist takes ideological positions while I try to look at problems from a pragmatic perspective. Nevertheless, it is a good read and I do enjoy the books section.

So it is with the steel industry where (surprise, surprise) I again disagree with the Economist. Maybe it is because I was born after the Second World War and was brought up in South Wales where the two giant industries of coal and steel dominated. Subsequently I saw the death of the coal industry and I may now see the death of the steel industry if nothing is done.

So what is the issue with steel? Well, in summary, Tata steel, which is the dominant player in the UK steel industry, has recently posted a £68 million loss for the last quarter. This equates to about a loss of million pounds a day, which, if true, is clearly an unsustainable position in the longer term. As an accountant, I know only too well that such figures are often manipulated to justify an action that you wanted to take anyway

To make matters worse the whole economics of steel is in disarray with low global demand for steel coupled with huge spare production capacity in China, which is keeping prices low. Accusations are also made that China is dumping steel on world markets and below cost.

Clearly, this situation is unacceptable to Tata. Furthermore, Tata does not see any "cloud with a silver lining" on the horizon in the form of a significant global economic recovery, which will improve the fortunes of the steel industry and, in my view, they are right to think this. Consequently, Tata is left with three main options although, clearly, there are several sub-options in each case:
• Restructuring/Reinvestment
• Sales to a third party(s)
• Outright closure

Restructuring/Reinvestment
The first option is to somehow restructure Tata's UK steel operation in the UK in such a way that is can become profitable and compete in world markets. Inevitably, any such restructuring will required advances in production technology and substantial levels of capital investment, plus a range of associated costs.

It is well known that a plan was put before the Tata board drawn up managers and unions in the company. The plan would involve around £100 million investment to transform the plant into a producer of high-quality steel for advanced industries and aimed to achieve cost savings of some £350 million per annum, which would allow the company to return to profit. However, it would require 750 job losses. The plan would take several years to implement and the investment costs plus the need to finance the losses that would be incurred over the period of transition would be in excess of £1bn. Tata were unable to accept this plan possibly because it was seen as over-optimistic and/or the risks being too great to justify the huge level of investment involved. This is a huge amount of investment and if Tata are not prepared to accept it then it seems unlikely that any other commercial lender or investor would be prepared to do so.

Sale to a third party(s)
Tata is currently pursuing this option. They will be selling-off the various bits of its UK steel operation to interested buyers who will have their own ideas about how they will utilise their new acquisitions and what sorts of changes they will make. It seems very likely that the UK government will need to have some financial involvement in this process in order to provide "sweeteners" and guarantees to potential buyers to go ahead with their purchases. What exactly the taxpayer will gain from this financial involvement remains unclear. The problem with this approach is that there are no guarantees that about what the end game might look like and whether what is left constitutes a viable UK steel industry.

Outright closure
In the current environment, if suitable sales of all or part of their steel business cannot not be achieved then it seems highly possible that Tata may decide to close down the whole UK business involving redundancy of its employees and sales of fixed assets.

There are examples in the UK (e.g., Ebbw Vale) where after many years of contraction, steel making ceased entirely and in Ebbw Vales, the plant was eventually demolished and the site used to create a modern learning campus. Clearly, such events involving huge redundancies are disruptive and cause great pain in the communities involved.

With this option, we would be facing a situation where the whole of the Tata steel operation is discontinued with significant and widespread implications for many

Where do we go from here?
In the light of the above analysis, the question is where do we go from here and as the White Rabbit said to Alice it depends where you want to get to. I suggest that where we want to get to is a long-term viable steel industry in the UK with minimisation of job losses and social disruption. No doubt, the Economist will take a different view from this.

In considering the above issues, I suggest there are three critically important points to keep in mind:

The UK's manufacturing heritage and future - the UK has a long and proud heritage in iron and steel production, which goes back centuries. However, it should also have strong future as well. Writing about the unbalanced UK economy (http://www.publicfinance.co.uk/2010/04/double-trouble). I emphasised the pressing need to focus on the role of manufacturing industry in the UK and to engender a resurgence in the sector. This point was emphasised for many years by, among others, Sir John Rose, the chief executive of Rolls Royce (one of the few remaining UK examples of world-class manufacturing industry). However, this view usually seems to fall on deaf years because of the obsession by London-centric governments (of all parties) on London and its financial services sector. The steel industry in the UK should be important in its own right as a producer of high quality steel for many countries and as the source of steel for UK manufacturing industry.

The strategic importance of steel - in the last few days I have read many commentators including the Economist, The Financial Times etc argue that steel is not a strategic industry for the UK. They believe that we can always get what sort of steel we need from somewhere in this world whenever we want it. I would dispute this. Firstly, as I have argued above, a strong UK manufacturing industry needs a strong UK steel industry not relying totally on the continuity of global supply chains in unstable parts of the world. This seems to be especially important in the case in relation to the production of military hardware where I really do not like the idea of national defence having to rely on the delivery of steel from an unstable region the other side of the globe. Related to this is that many commentators such as the Economist seem to have disarming naivety and over-optimism about the state of the world. Those of us who have lived in the Middle East were extremely doubtful that the "Arab Spring" would result in any form of democracy in the Middle East and the experiences of Syria, Egypt, and Libya etc show that we were right. However, until very recently, the Economist was still talking about the possibility of something positive coming out of the Arab Spring. I was a child of the 1960s and remember the cold war and the Cuban missile crisis. The world I see today is far more dangerous and unstable than in the cold-war period with the potential for conflict all around us in many different forms. Hence, I would strongly argue that we need a strategically viable steel industry in the UK rather than put ourselves at the mercy of globalisation in a turbulent world.

Economic and social impacts - as already noted the closure of any steel plant has major social and economic impacts. The situation with the potential closure of several steel plants and even the complete closure of the Tata steel operation in the UK is of even greater significance. Not only will jobs be lost in the steel industry but further jobs will also be lost further up the supply chain and in local businesses who rely on steel workers' wages to keep afloat. The normal way of assessing this is by the conduct of an Economic Impact Appraisal (EIA) and while such studies may have been conducted on the closure of individual steel plants, I am not aware of any study, which looks at the impacts of closure of the entire Tata steel business. I commented to someone that if such a study were undertaken, we should probably ensue we need a box of Valium at hand before we looked the results, which will be frightening. Such a study is needed before Government makes any decisions.

When I consider the three factors discussed above, I draw three conclusions.
• The UK needs to foster a stronger advanced manufacturing base and this will require high quality steel
• The UK needs a viable domestic steel industry in a dangerous and unstable world.
• The social and economic costs of closing Tata's UK steel operation are not yet quantified but will probably be horrendous.

In the light of this, it seems to me that some form of nationalisation or state ownership of the UK steel industry must take place. Now before the right wing of the Tory party start crowing about "lame ducks", it must be emphasised that I am not talking about old style Labour ideology of nationalisation to conquer the commanding heights of the economy. My suggested nationalisation is a pragmatic and non-ideological response to the situation I see evolving before me. In a paper entitled "Could state capitalism save the day" (http://www.publicfinanceinternational.org/opinion/2012/03/could-state-capitalism-save-day) I argued that the UK should learn from successful economies across the world, such as China, India, Malaysia and Brazil, where government involvement in business is accepted and has helped provide stability and boost business. Yes there will be risks and a cost to the public purse but there will be a certain costs involved in in providing sweeteners to private companies who might by Tata piecemeal and of paying benefits to redundant steel workers and their families which could also run into hundreds of millions of pounds per annum. And for those, in Treasury, who might suggest that they would find other jobs, I would say leave your Whitehall offices and visit Port Talbot.

So there we have it. In late 2015, I wrote a piece entitled "Ideological purity or people's lives" (http://www.malcolmprowle.com/search?updated-min=2015-01-01T00:00:00Z&updated-max=2016-01-01T00:00:00Z&max-results=4). This questioned whether this Government puts ideological purity (i.e. against state ownership) above the needs of the economy and people's lives and welfare. My final shot was whether this government is the party of One Nation Tories or Ideological Fanatics. Their response to this crisis will answer that question.

www.malcolmprowle.com

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