17 September 2015
Steel Yourselves
by J.R.Thomas
One of the most famous photographs of Mrs Thatcher was taken in spring 1987 as the Iron Lady strode across the site of the ironworks of Headly Wrightson, a demolished and derelict wasteland in central Middlesbrough; sensible heels crossing rubble and ruts, she explained that Britain must move with the times and that the old should give way to the new which would give greater prosperity and more jobs to Teessiders. The time may shortly be approaching when George Osborne will need to make his way to the North East, with his own sensible shoes, to make a similar explanation of changing economic circumstances on a site, rather more picturesque, but just as traditionally industrial.
The train ticket he will require is to Redcar, to the Redcar Steel Works, a 160 year old heavy industrial site on a sea-cliff. Britain was once one of the largest producers of iron and steel in the world, with both the raw materials and the end users sitting close by each other – from iron ore mining to shipbuilding, linked by a dense railway network. All that has long gone, but in one area the United Kingdom has remained surprisingly strong – in specialist steel manufacturing. There are many users in the UK – especially the car industry and its suppliers – who need very high grade and specialist steels and there are big cost and quality control advantages in having the suppliers close to hand. But that advantage is eroding as car parts are made from aluminium and even specialist plastics (lighter, more easily moulded, and easier to transport). At the same time the steel industry has struggled to contain costs – oil and coal prices may be well down but steel uses lots of electricity and the cost of that has been driven up by the government’s green agenda and regulation. Labour costs are also rising, compared with those in other, mostly third world, producers. So most of the UK based steel producers, the big ones being Tata, Celsa, and Sahavirya, owned respectively by Indian, Spanish, and Thai parent companies, have become loss making, especially so in the last year as the base price of steel per tonne dropped from US$500 to US$280. A lot of that is driven by the weakness of the Chinese economy, China having enormous steel making capacity, much of it now becoming idle. Chinese manufacturers, with low wage, environmental, energy, and regulatory costs, are increasingly selling their production to western users.
The effects of that are starting to be felt, and to be felt most severely in some of the UK’s most economically disadvantaged areas – South Wales and the North East. Sahavirya’s plant at Redcar, the second largest blast furnace in Europe and a major employer on Teeside with 3,000 workers, is hugely loss making and the company has announced that it cannot repay £80m of bank loans which were due in June, loans which the banks have agreed to extend until the end of September. The company has reduced wages, and cut costs wherever it can, but says losses are increasing and are unsustainable. Officers of the company have attacked the governments “imposed” costs relating to energy, employment, and business rates, and praised its workforce for their dedication and sacrifice, whilst calling for a ban on dumping by Chinese exporters to Europe. Now it has sought a £100m loan from the government to give it working capital and a breathing space in the hope the market will recover, not least assisted by action by the European Union and national governments.
Competitor, Tata, with sites in the Midlands and Wales, says that it lost £768m on its UK steel business last year, and, although it is a significant consumer of the product in its Jaguar Land Rover business in the UK, it will not sustain that level of losses if it can get reliable and good quality alternative supplies elsewhere. “Elsewhere” includes Tata’s own low cost plants in India, which, with international shipping costs being at a low level, could be a very viable supply source.
Ironically, it was Tata that sold Redcar to Sahavirya in 2011, as Tata could not make it pay. The new owners at first seemed to do great things with the plant, with new working methods and improving productivity, and improving sales, but in the current market conditions it is hard to see how anything could make it pay without substantial government intervention. The owners in Thailand say that they cannot contribute any more to a rescue effort, and without government financial help and some help in fighting cheap imports, they will close the site and walk away. They have put the specialist insolvency division of PwC on standby, ready to hand over the keys at the end of this September.
The government has let it be known informally that they will not be making finance available, either short or long term, and it seems most unlikely that they will be able to do anything to assist competitiveness of the plant, either with or without help from the EU in Brussels. Apart from the breaches of the rule book on competitiveness that this would cause, there is no doubt that every other UK and European steel producer would be on the train to London and then to Brussels to call for similar help.
But one might guess that some deep thinking is going on about the situation between Messrs Cameron and Osborne. They are both aware that the Tories’ need to win more seats in the old industrial heartlands of England and Wales would not be helped by letting 3,000 jobs go in Teesside, (so much for the Northern Powerhouse would doubtless be the cry). Even more, what a gift this might be to the Labour party and its new leader who would be very keen to seize such a gift of apparent Tory “heartlessness”; they and their union backers would make the most of such a raft of redundancies, and be very tempted to use it for a lead- in to a new winter of discontent.
Cameron and Osborne are nifty political operators and might well consider that that might actually benefit the Conservatives more than Labour, especially so early in the new Parliament, giving time for memories to fade and for new initiatives to create employment in Redcar to bear fruit. They do not have, or at least, do not appear to have, the discontented back-benchers that Mrs Thatcher had to face down when she was taking some very tough decisions on industrial support. But she did have a larger majority; with a majority of 12 Cameron has to be more certain that his party will back him if it comes to a period of industrial turbulence and large scale demonstrations. So David – or George – may yet have to make that train journey north. If he does, he could do worse than to tread literally in Mrs T’s footsteps – where she walked is now a thriving part of waterside Middlesborough, with housing, a shopping arcade, and a business park of pleasant offices.
