Crisis of steel

Materials World magazine
,
3 Nov 2015

The UK steel sector faces its latest crisis with the closure of the SSI Redcar site. Khai Trung Le speaks with UK Steel’s Gareth Stace and Ian Warrington, of IOM3, on the future of the industry.

It was inevitable that the UK Steel ‘Innovation for Growth’ conference, held at the Telford Theatre on 24 September, would be dominated by the pausing of production and now-confirmed closure of the Sahaviriya Steel Industries (SSI) UK Redcar steelworks. The half-day conference, intended to examine the innovation necessary to ensure the survival of the sector, struggled to reconcile its celebratory intention with the threat towards one of the UK’s three remaining blast furnace sites.

‘The conference was about how steel as a material can be innovative, as can the sector, with its focus on R&D. Perhaps we didn’t achieve that, with the day overtaken by the news about SSI pausing production at the site. We wanted to talk about the medium- to long-term positives, not a conference of doom and gloom,’ said Gareth Stace, Director of UK Steel. ‘The conference was meant to challenge the industry. I wanted the speakers, most from outside the steel sector, to say, “look guys, the challenge to you is that we have all of these other materials that are competing against steel, and you need to do this, this and this.”’ But, with Redcar casting doubt over that unstable future, this challenging message perhaps went unappreciated by some within the UK sector.

‘Edwin Basson, Director General of the World Steel Association, tried to tell delegates that the situation the UK finds itself in is a blip, and as with other crises, it can generate innovation. But the macro view is very different to the European view, which also is very different to the UK view. Some member feedback said that this situation is very different to previous events.’

Basson’s talk was warmly received by IOM3 Senior Materials Advisor Ian Warrington, who remarked, ‘I think it was one of the most interesting presentations. Edwin gave a very good talk about the history and evolution of the economy cycle, and looking at the sustainability issues that have to be addressed.’ However, he was sympathetic to the mood of the event, addressing how the global view will not help support the UK sector in the short term. ‘Redcar is a difficult situation, and I understand the negativity that came out of the UK audience.’ 

Redcar

The closure of the SSI UK Redcar blast furnace and coke ovens, the second-largest steelworks in Europe, was confirmed on 12 October, resulting in the loss of around 2,200 jobs, affecting as many as 6,000 jobs in the local area and supply chain, and putting into further doubt the future of the UK steel sector. Despite extensive attempts at future proofing the mothballing effort since the announcement of closure was made on 28 September, the Insolvency Service confirmed that both the coke ovens and furnace will closed, stating no viable offers to purchase were received. Hargreaves Services, based in Durham, had expressed interest in running the coke ovens, although it has insisted that the company ‘has never contemplated buying the steelworks with a view to re-starting the blast furnace’.

Meanwhile, an £80m support package has been set up, aimed at supporting former SSI staff with training, locating work and supporting existing and creating small businesses in the region. However, the Government has consistently ruled out state aid towards sustaining the site, with Business Secretary Sajid Javid claiming that such an action ‘would have helped banks in Thailand, and I’m not going to use British taxpayers’ money to bail out Thai banks.’ The Government has also claimed that an open-ended commitment to the plant would breach state aid rules and EU regulations. Labour MPs including Anna Turley, MP for Redcar, and Tom Blenkinsop, MP for Middlesbrough South and East Cleveland, have criticised an unwavering adherence to EU regulations, citing the success of steel sector aid provided by other EU members, including the Italian Government’s support of the languishing Ilva steelworks.

Stace said, ‘In the steel sector, state aid is tightly controlled. But governments can help companies with environmental measures, and that is how Italy got involved with Ilva, giving the site €400m.’ However, Stace also questioned open-ended financial commitment to the Redcar site, which SSI UK was unable to make profitable during its four-year ownership.

‘SSI UK had a difficult task on their hands, right from the start. They had a very difficult business model that, as soon as global market conditions changed, became unsustainable. The issues UK Steel has talked about for the rest of the sector, such as energy and environmental costs, haven’t helped. But in the case of SSI, it might be argued that, if the Government was doing everything it could to resolve UK-wide issues, it would still be a very bleak picture for them.’

UK vs the world

State aid has been a contentious topic within the UK steel industry for many years, and opinion is divided on how the Government should be supporting the sector. ‘State aid can be two different things,’ Stace commented, ‘one is literally the state aid application for Government to provide further compensation to address unequal energy costs that we face, compared with our competitors. We’re asking the Government to get on and approve that application by the commission and start paying companies the compensation that was promised by Chancellor George Osborne in the 2014 and 2015 Budget.’

More contentious is what form financial support should take in times of emergency, and Stace would like to see a shift away from short-term support to resolving the four key conundrums facing the UK sector – high energy costs and business rates, environmental costs, increased imports and unfair trade. ‘If it’s just propping up the sector artificially for years on end, that isn’t a sustainable situation.’

More so than the question of state aid, Stace would like to see further support against both pricing factors outside of the industry, such as environmental costs, and the volume of imports, in light of a flood of cut-price steel brought by the slowdown in the Chinese economy, and argues that UK steel companies struggle to persuade overseas boards to invest in the region. ‘If you’re a steel company in a massively capital-intensive sector, with massive sunk assets, and you faced government policy that you knew was adding costs that weren’t born by your competitors, you might not be so confident about the future.’

However, Warrington believes that, as long as there is a definable market for steel, the UK and, perhaps more importantly the global steel industry, will continue to see support. ‘We need infrastructural investment to create the demand for those products, but it is a relatively stable market, in terms of market demand. It is a massive industry, and puts the UK in perspective.’

Regardless, both Warrington and Stace argued for the repositioning of the UK steel sector into high-value and highly specialised products. ‘We’re never going to be able to compete with the global scale of supply anyway, so traditional volume markets may be gone forever,’ said Warrington.

Northern Powerhouse

The Redcar closure also heralds complications for the Northern Powerhouse, an as-yet undefined ‘collective of northern cities sufficiently close to each other that combined they can take on the world’, according to Chancellor George Osborne. However, critics have lambasted the Conservative response to Redcar, seen by some as the first major trial of this commitment.

Minister for the Northern Powerhouse James Wharton has so far failed to convince doubters. He was absent from a Parliamentary debate on the steel sector called by Turley, has yet to visit the Redcar site, stating via Twitter he was ‘actually doing things rather than showboating’, and dismissed the Save Our Steel protest in support of SSI workers, saying on a radio interview ‘people stood on a beach is not going to solve the problem. I’m going to continue to work to look at the broader problems.’

Stace commented, ‘The Government needs to set outs its vision, in terms of what they are doing. The steel sector can feed very positively into the Northern Powerhouse, into the ‘march of the makers’ and the question of productivity. The Government needs to link up and tell us what they want to achieve. If we don’t work with the Government to create a level playing field to compete in a fiercely global market, that’s going to impact negatively on those initiatives.’

Steel and government

Turley remarked during the Parliamentary debate, ‘UK steel is at breaking point. This is a crisis for one of the most important foundation industries in the British economy. It employs 30,000 people across the country in highly skilled jobs, often in industrial heartlands with high unemployment. The UK steel industry supports the automotive, construction and aerospace sectors, as well as a raft of supply chains, and it is vital that there is a future for steelmaking at the heart of industry in this country.’

In response to the situation, the Department of Business, Innovation and Skills held a steel summit on 16 October to address the ‘very difficult market conditions’ the industry currently faces. Speaking ahead of the event, Stace implored MPs Anna Soubry, Minister of State, and Sajid Javid to ‘come to the table with firm action that will make a material difference to our sector in the short term, to enable us to compete in this fiercely competitive global market. If it comes with tea and sympathy, it won’t be worth the time of the CEOs gathered there.

‘The Government needs to identify what sort of steel sector the UK economy needs, and how we can achieve that. That’s two stages – short term and mid-longer term, and they mustn’t get confused, addressing the lengthier measures first before the short term emergency. We won’t have a viable sector to address if this continues.’

Ultimately, while the global steel sector continues to see growth, Warrington believes the UK may have to dramatically change to overcome the current challenges. ‘Basson spoke on an increase in wealth creation, and the global expansion of middle class consumption, therefore driving demand. Infrastructure has to change to support that growth, and within that lies opportunity. HS2 (a planned high-speed railway linking the north and south of the UK) is an example.

‘I think it’s also clear that it isn’t a traditional opportunity, but is about innovation and adding value. Not just supplying steel, but embedding technology. That’s the way the innovation is going to have to occur.'

However, the fallout of SSI's closure has already begun to take its toll, with announcements of the confirmed collapse of Caparo Industries, which entered partial administration on 20 October, and Tata Steel's proposal to stop steel plate production in the UK, resulting in over 1,200 job losses across Scunthrope, Dalzell and Clydebridge, and threatening the eradication of steel production in Scotland. The need to rejuvinate the UK steel sector may be matched only by its urgency.

 

The 16 October steel summit may not have heralded the immediate action seen by many as necessary to resolve the emergency – Business Secretary Javid announced three working groups will investigate the situation, with reports due over the Christmas period – but Stace was ‘cautiously optimistic that the urgent recommendations we have made are all now at the top of the Secretary of State’s to-do list.’ MPs Turley and Blenkinsop were decidedly more disillusioned, stating that the summit was ‘a waste of time’ and ‘nothing tangible came from this,’ respectively. Roy Rickhuss, General Secretary of Community, the steekworkers' union, urged action. 'His willingness to listen was welcome, now he needs to show the political will to act.