Our earlier blog highlighted the possibility of a US style intervention in the UK steel industry – a ‘conservatorship’ – in order to achieve a period of calm in the market, during which an effective restructuring of the steel sector can be made.
We stress that over the medium-term we see the UK steel industry as commercially viable and over the longer-term as economically essential.
But for any steel sector conservatorship to be successful, the government also needs to make progress on ‘5 Asks’ that we have highlighted at the Midlands Steel Task Group in recent months: energy costs; emissions policy; business rates; procurement; and temporary trade defence. The issue of business rates has been widely discussed and here we focus on the other four 'Asks'.
Current UK energy policy is more ambitious in pursuing carbon-neutral aspirations than is the current practice in the EU. As a result, high intensity energy users in the UK are paying considerably more than similar producers in Germany. This places the manufacturing sector at a disadvantage not only to global competitors but also its EU partners.
While higher carbon prices and hence energy prices may well be required to meet global environmental needs, better forms of compensation for energy intensive industries like steel is required (eg lower labour taxes).
The examples of Germany and Sweden may be instructive in this regard. A range of policy interventions provide German industry as a whole, including its energy intensive industries, with a range of long established reliefs from energy and climate change-related duties, levies and taxes. Unlike the UK package which is limited in scope, support is not confined to certain sectors.
Meanwhile, in Sweden the PFE programme has aimed to improve the energy efficiency of energy-intensive industries through incentives (ie reductions in the amount of energy taxes).
Similarly, some innovative use of environmentally-friendly policies as made by the Italians could be undertaken, but one that is both seriously environmentally friendly as well as sensitive to manufacturing, and in particular to steel sector, needs.
According to UK Steel, the EU Emissions Trading System (ETS) is a major but essentially unnecessary constraint on the steel sector. The so-called carbon leakage measures is designed to protect energy intensive sectors; however the current regulatory framework ensures that the most efficient plants, which should receive all the ETS allowances they need for free, are short of allowances compared to emissions and will be increasingly so.
At the same time, a cap on the compensation government can provide for the indirect costs of the EU ETS passed through in prices by electricity generators means steel plants are also paying for 20% of the ETS costs associated with any electricity they buy. This is damaging their competitiveness and ability to invest in new low-carbon technologies.
The European Commission’s proposal for reform of the ETS, released last July, was a chance to fix the system. It could have ensured that from 2021 industrial sectors genuinely at risk of being driven out of the EU by increasing ETS costs received the level of protection promised by politicians. Instead, the proposal appears to leave steelmakers in a similarly vulnerable position.
A more UK-centric procurement approach, replicating the perceived approach of our EU partners, could be a key delivery mechanism to support the steel supply chain. A number of large scale infrastructure projects, with high steel demand, seemed not to have been adequately sourced from UK producers.
With further projects in the pipeline, such as Hinkley Point power station and HS2, a more nuanced official procurement policy, consistent with EU regulatory frameworks, could and should be quickly explored.
In the case of HS2, a projection of the steel demand of the different construction phases of the project, with an overt favouring of locally-sourced steel through procurement frameworks and institutional pressure, may be needed.
For this to be successful however, efforts need to be made to ensure there is sufficient capacity of UK-based producers to meet any such demand and deliver it on a competitive basis, subject to normal market trading conditions.
With the HS2 bill proceeding through Parliament, consideration could be given to assisting in the structuring of any act to accommodate such a positive procurement policy.
Temporary Trade Defence
Chinese firms have been accused of deliberately “dumping” steel on European markets, by selling at a loss to undercut prices. It is estimated China’s top state owned steelmakers are losing US$34 a tonne on crude steel. This comes on top of losing US$11 billion in the first ten months of 2015 alone.
All of this makes the UK government’s recent decision to block proposals to scrap “the lesser duty rate” that would have allowed the EU to significantly raise tariffs on imported Chinese steel, somewhat puzzling.
Currently, EU tariffs on imported Chinese steel are 9%, with a slightly higher tariff on rebar steel of 13%. But these tariffs are insufficient to deal with the impact of apparently unfair Chinese competition, whose steel is around a third cheaper than European producers on EU markets.
It is also fair to say the current EU tariffs and anti-dumping measures lack the force of those imposed by the United States, which recently introduced tariffs of up to 266% on imported Chinese steel, to support its own steel producers.
In deciding to block proposals to scrap the “lesser duty rate” and impose higher tariffs, business secretary Sajid Javid emphasised the knock-on impact such tariffs would have on UK users of steel, who would then face higher steel prices.
But such fears are largely misplaced.
Firstly, steel prices are very low (indeed artificially low because of Chinese overcapacity and exports), and secondly, EU action would affect only users of imported Chinese steel and would be applied across the whole EU. So UK users should not be at a competitive disadvantage.
Of course, higher tariffs on imported Chinese steel are not a fix all solution for the UK steel industry and economists would generally caution against ‘protectionist’ measures that permanently distort markets – especially if these lead to greater global trade restrictions which can be detrimental to world growth, as was the case in the 1930s.
But they could nevertheless form part of temporary emergency support in the face of a surge in imports, as is recognised by the allowing of safeguard measures under Article 19 of the GATT which the WTO recognises. It is this defence which the United States will be appealing in raising tariffs on steel imports from China.
There also seems to be a lack of comprehension amongst of policy-makers of the sensitivity of the steel supply chain to issues of flexibility and immediacy of product delivery, quality of base product and the variety of steel product grades.
In summary, not only should ‘conservatorship’ of TATA Steel be actively considered, with any necessary legislative framework introduced; it needs coupling with action on the ‘5 Asks’ so as to create the space to enable the UK steel industry to be supported and restructured.
* David Bailey works at the Aston Business School and Paul Forrest at Birmingham City University.