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06 April 2016

Steel: the Present, the Past...and the Future?



Steel is currently the metal of the moment - and not in a good way. The woes of Port Talbot, the UK’s last major-league crude steel production facility, have been filling the front and business pages of the press for the last week, since Indian owners Tata Steel announced their desire to get out of the business. It’s not really a new story; in fact, unless somebody pulls a rabbit out of a hat pretty soon, we may well be reading the last few lines on the last page of the book telling the long tale of the British steel industry. Dynamic entrepreneurs at the outset of the industrial revolution, huge private enterprises in the late nineteenth and early twentieth centuries, nationalisation (and attendant quasi-paralysis) then privatisation again and steady decline into the arms of  - by now - anyone who will take it on. That’s not a criticism of Tata, by the way; by all accounts, they’ve tried hard and have certainly put their money where  their mouth is. That caveat doesn’t change the curve of decline, though. 

Politicians' games

To go with this, in the last week or so, we’ve been subjected to the point-scoring outbursts of our political class. The ones in power make the bold statement that they’ll do “whatever it takes” to keep the business alive in the UK (incidentally, I thought that phrase had been trademarked by Mario Draghi…). It’s worth bearing in mind, as well, that “whatever it takes” may well, in the not too distant future, involve having to explain to the automobile worker in the West Midlands, for example, that part of his weekly wage will have to be diverted to subsidise uneconomic jobs in South Wales. There may be social reasons for doing that but they shouldn’t be determined in off-the-cuff soundbites.

And as for the opposition party… Well, taking the line that “you bailed out your banker friends, why can’t you do the same for the steel workers?” is pretty stupid. Memo to the Labour MP on BBC Radio 4 Any Questions at the end of last week: the financial crash was in 2008. Your party was at that time in Government. Your party bailed out “your banker friends”. You knighted both Fred Goodwin (for services to banking…) and Victor Blank, and your Prime Minister orchestrated the value-destructive forced merger of Lloyds (at the time still a sound institution) with the basket-case HBOS. Your posturing may get you a round of populist applause from the ‘typical’ BBC AQ audience, but you’re playing games with reality.

I’ve yet to hear a politician say anything that suggests he or she has actually bothered to try to understand the industry and its problems. Short-term political advantage yet again rules. 

The Industry

So, let’s put politics and politicians to one side and actually look at the industry. Making basic steel requires four principle ingredients - iron, carbon (in the form of coal/coke), energy and labour. The first two of those are global commodities; the price is the price. Certainly, shipping from Australia to China in the latest maxi-sized vessels is likely to confer an advantage over other buyers, but in the end there is little to do about that. The realities of mine location and the cost of shipping routes isn’t really negotiable. Energy is more interesting (although as an aside, it’s worth remembering that the percentage of energy cost in steel making is significantly less than in aluminium, for example, which is what killed that industry in various locations globally), and the cost per kwh of power for heavy industry in the UK is sharply higher than it is in most of Europe and the US, let alone China. Why should that be? Well, US energy consumers have been enjoying the benefits of fracking and shale oil and gas, France has run a nuclear power generation system for many years and Germany - oh-so-green Germany - is happily driving on with coal-fired power stations. China, of course, as is frequently noted by the press, is merrily opening new coal-fired units at a rate which would have left the eyes of the industrial revolutionaries watering with envy. And the UK, since it’s a UK problem we’re looking at? Well, the good old green UK seems to be the only major economy to have passed anything like the Climate Change Act of 2008, and then added to that the carbon price floor (which is higher than elsewhere in Europe). That Act was passed by the previous government, but, before any politicians start to try and score points, the current government - then the opposition - whipped their MPs to ensure the Act was passed. (And, for the avoidance of doubt, it’s UK not EU legislation…) Now, I’m not going to get involved in the climate change debate; let’s just accept that, whatever views one may have, the most sensible course is indeed to try and reduce atmospheric pollution, for all sorts of reasons. But the reality is that emissions produced by the UK are not even a gnat’s bite on the world - yet UK heavy industry is having to pay the price. So remember that, when the politicians cry crocodile tears for industrial manufacturing. And let’s not forget that while we may be congratulating ourselves on our green credentials, actually what we are doing is exporting jobs and simply standing by watching as the pollution happens elsewhere. Still, we can claim the moral high ground and signal our virtue.

Then we come to labour costs. The latest figures I can find suggest that the labour element in a tonne of UK steel is $200 and the equivalent in China is $10. Now, in my mind that comparison is undoubtedly massively biased. You can’t make such a simplistic point, because all sorts of other factors are at play - quality of the product, type of product, as well as a raft of considerations of social security and the relative cost of that versus pure wage numbers. Nevertheless, to ignore the basic reality that Chinese labour costs are lower than UK ones would be naive. 

The Past

So looking at all of that, it’s probably quite surprising there ever was  a UK steel industry in the first place. To understand better where it came from, we have to go back in history. The British Empire was remarkable and (pace anti-imperialists, anti-colonialists, #Rhodesmustfall and all the others who can’t hear a word spoken in its defence) that’s not a moral judgement I’m making, it’s an economic one. It was truly an amazingly successful economic machine. Military power to acquire the territories the raw commodities came from, sea power to ensure they could be safely brought home, a growing and available (cheap) workforce and a domestic and European market on the doorstep. What was not to like? And, of course, add domestic energy to that - it’s no coincidence that the UK’s steelworks stand in South Wales, the North East and the Central Lowlands belt; right on top of some of the richest coal mines (then known) in the world.  

The Future?

So if the present position looks shaky and the past looks strong, what of the future? First, let’s just debunk the sentimental. Yes, heavy industries - steel, coal - have dominated their towns and regions for generations. But nobody actually likes heavy industry. I guess most readers of this have been down a mine or two and have visited a clutch of smelters. They’re great - for a day’s visit. Especially smelters - molten metal, sparks flying, flames leaping; great value to look at. But eight hours a day, every day? I don’t think so. So while we can accept the community cohesion argument, the rose-tinted picture of generations willingly following each other is an exaggeration, not to say an illusion. Why was every mining mother desperate for her son not to go down the pit? Because - to borrow partially from Thomas Hobbes - it was poor, nasty and brutish. But there is a great value in the communities built around theses mammoth plants; sadly, I (along with many others) don’t know how to value it, but it shouldn’t be ignored. 

In pure economic terms, I can see two possibilities for the future shape of the industry. First, perhaps we should accept that it’s actually far more logical to smelt metal near the source of the raw materials and then ship product than it is to ship ores and concentrates - which includes filling ships with dirt; in the case of steel, that would involve shipping semi-products like slab to finishing mills. Could that then be the future for UK steel? Machining and manufacturing from raw product cast in lower-cost economies? My other alternative, which is potentially more intriguing but depends upon a rationalisation of the Climate Change Act (by which I mean bringing UK energy costs into line with our competitors), is to stop exporting the scrap we generate and modernise the plants, switching blast furnaces for electric arcs. That would be a long process, but it would bring the industry right up to date and preserve (I believe) the large majority of the employment.

I do not for a moment suggest these are the only two possibilities; they are however amongst those which could shape the future.

Last Page, or New Chapter?

But whichever solution in the end comes through, there has to be a balance found between the social and community aspects and the economic ones. Simply closing things down doesn’t meet the requirements of that balance. But neither does running under a constant subsidy. 

All that we’ve seen so far demonstrates that our politicians are more concerned with politics and soundbites; it’s time - actually well past time - to stop preening about how green you are (because frankly the UK produces less than 2 percent of global atmospheric pollution, so it actually makes virtually no difference) and start thinking about how to make that balance work. If not, steel won’t be the last heavy industry to disappear. And where will that leave us all?  Wouldn’t it be nice if somebody could think ahead, instead of waiting for crisis time………




  

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