Article / 31 March 2016 at 16:01 GMT

It would be a mistake to nationalise UK steel industry

Managing Partner / Spotlight Group
United Kingdom
  • Tata Steel plans to sell British steel plants 
  • This threatens 15,000 jobs
  • Labour call for the steel industry to be nationalised 
  • The government should work with the WTO to hold China to account

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 Beneath the gloss, the outlook for the global steel industry is not good. Photo: iStock

By Stephen Pope

The UK may have moved to British Summer Time last weekend, but for the UK prime minister David Cameron, there appears to be little sunshine as he is now facing a new economic and political challenge. 

Tata Steel, the Indian owner of much of Britain’s steel industry has declared it can no longer swallow the large losses of over £1 million/day and as a consequence it will try to sell its UK assets.

Chinese dumping

Tata has been squeezed by the dumping of Chinese steel into Europe, and its announcement suggested that if no buyer could be found it would consider closing them, endangering at least 15,000 jobs across the nation. In total, the UK employs 28,000 in the steel manufacturing industry.

Many, but not all of the problems flow from dumping which is the practice of selling a product in a foreign country for less than either:

• the price in the domestic country

and/or

• the average total cost of making the product

Chinese steel mills in the industrial hub of Hebei have repeatedly reduced prices of rebar mesh-wires used for building by between roughly $20/unit so using this devaluation as a strategy to offload excess stocks of steel. In short, they are practicing cyclical dumping as the Chinese steel mills face insufficient domestic demand for the quantity of the industrial alloy they are producing.

The European steel lobby Eurofer has warned that this course of action has created serious implications for European steel competitiveness when they are already operating on minimal profit margins.

The impact has been seen in the US as well where America’s United Steelworkers accused China of predatory practices. The US steel group Nucor called the practice of steel devaluation as being the blatant attempt to support Chinese industry at the expense of producers in the rest of the world.

Chinese dumpig Source: www.ken-szulczyk.com and Spotlight Education 

The chart shows that China has a domestic price of steel at P*D and to shift its excess supply that has resulted from a decline in domestic demand it offers the same product on the global market at price PI, where PD> PI.

The benefit for the importing country is that is consumers of steel pay a lower price; however, there is no free ride and the domestic steel companies in the importing country may face declining sales that will eventually lead to plant closures or even bankruptcy.

If then the exporting nation has squeezed out most competition it can move from cyclical to predatory dumping where they would raise prices once most foreign competition is gone. This can have serious implications if access to steel were to be used as an economic weapon in the years ahead.

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These guys are building, but a general drying up of demand in China
has led to dumping of excess steel on global markets. Photo: iStock

Is it just China to blame?

The British steel industry’s difficulties have partly been caused by the European Union’s inability to reach a timely agreement on higher tariffs on Chinese steel. Certainly, that point will not be lost by those activists that are campaigning for the UK to leave the EU.

Still, before we too quick to blame the EU for the ineffective response one should note that the British government has for the last three years blocked all efforts by the EU to engage the anti-dumping weaponry used by the US to confront China.

However, access to low cost energy for the steel producers in the UK became expensive as over many decades the trade unions refused to make the UK coal industry productive and efficient. 

Strikes were held to protect a small numbers of jobs in individual pits and the consequence was that sales were lost due to the unreliability of UK coal deliveries and the nation ended up losing the almost whole industry. The lack of reform has meant that the UK in 2015 accounted for just 0.73% of global steel output.

When Labour were last in power Ed Miliband introduced in 2008 his Climate Change Act which made energy extremely expensive for all industrial users. For profit margins to be maintained, end product pricing had to be increased so virtually created an open goal for fast and aggressive Chinese trade practices. 

Nationalisation

Of course the news from Tata Steel is an economic body blow. The Port Talbot steel works in Wales, has been the heart of that community since 1901 and it alone accounts for 7,000 jobs. Still, one has to look at the industry in context.

 Its sales in 2015 was worth £9.5 billion, just 0.56% of the total UK GDP. Exports were worth £4.9 billion, just worth 1.02% of the UK’s total exports.
 
The prime minister has said that the government is considering “all options” to save the plant.
 Anna Soubry; cabinet minister for business, said on Wednesday that those options include government support and subsidy which is an unusual stance for a Conservative government.

I will nail my colours to the mast and say I do not support the idea of the government nationalising the UK steel industry. 

Of course one feels for those that will become unemployed, however, the contribution to the UK economy does not make the steel industry in its current form a worthy case for state aid. The UK has bitter experience in this area as all nationalised industries are cursed with moral hazard through state ownership and captive customers. 

It is a proven fact that nationalised industries are less profitable or more likely, unprofitable to operate as the nature of the relationship between the government and the industry is that the state channels tax payer’s money in to provide a particular level of operation even in unprofitable sectors and activities.

The socialist argument is that the state should support a “social contract” that supports loss-making businesses for the general good of the local and indeed national community. This approach is seen as a fair return on the taxpayer’s money.

I question how quickly a lumbering steel industry could acquire sufficient orders? Maybe the government would be expected to step in and intervene by dictating to UK-based steel consumers how much product they had to take from UK steel. This however, would be a distortion of the market as it would not be letting private sector companies obtain their inputs at the best possible cost. That in turn will harm shareholder interests.

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 It really is looking that grim for Port Talbot's steel works. Photo: iStock

Of course, the Labour Party may claim that UK steel could be offered a government subsidy. However, where is the money to come from? Will not the EU block such a move? After all, the UK is hardly the most popular member of the club at the moment. 

Of course the danger of creating a state owned industry with large scale subsidies is that steel manufacturing will become complacent and inefficient.

Why so? Because it will not have to look after its customers to such a high degree as private sector firms do. It has a reduced motivation to find the most efficient operating process by lowering average total costs. It is also a licence for the trade unions to step up their level of militancy so as to show their support for Labour by harming any Conservative government.

One also wonders what happens if another industry is affected? Do we then expect the government penny then as well? Before long, every industry will claim it is a special case.

I will rebuff any left-wing counter argument about the rescue of Royal Bank of Scotland or Lloyds during the financial crisis. Banking was essential to the liquidity of the entire economy. If help was not extended, then in 2008 then the entire economy would have been lunged into a depression. That is not the case with steel.

So I loudly say no to nationalisation for the simple reason that nationalised industries tend to fail more than private sector firms because the profit motive does not keep them as efficient.

What is the solution?

China’s act of economic aggression should be met head on by all the affected parties. That implies the UK should reverse it opposition to using the call to arms from the EU and copy the US to apply pressure on China via the World Trade Organisation.

The WTO statutes state that members hereby agree as follows:

An anti-dumping measure shall be applied only under the circumstances provided for in GATT 1994.

Under Article 2 a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.

Sales of the like product in the domestic market of the exporting country or sales to a third country at prices below per unit (fixed and variable) costs of production plus administrative, selling and general costs may be treated as not being in the ordinary course of trade by reason of price.

Under WTO rules, countries are allowed to punish "dumping" to stop one country deliberately undermining its foreign rivals by artificially undercutting their prices.

The UK, EU and US can be aggressive in this manner as China would have little scope to complain. In January 2016 China appealed successfully to the WTO about the EU having imposed tariffs on Chinese imports of screws, nuts and bolts made of iron or steel.

China had never before asked the WTO to impose trade sanctions since it joined the organization in 2001, but the result in favour of China opened a route for China to claim for compensation.

China's ministry of commerce said in a statement that the EU’s tariff practice had a negative effect on exports from China around $1 billion and impacted over 100,000 jobs from thousands of fastener producers in China.

It was claimed that this had resulted in huge economic losses to the Chinese industry, which has expressed strong dissatisfaction and firm opposition to the measures. So it is time for the west to square up to China as it cannot behave like an economic bully.

Elsewhere, the steel industry in the UK has to re order itself and consider where it has either an absolute or comparative advantage. There are many types of steel as the material that construction girders are made of are different to the steel used in razor blades or missiles, tank tracks and surgical instruments.

Given there are many specialist steels the volumes required are smaller and the prices are much higher. They are all about technology, research and development, innovation and intellectual property which means higher value added.

UK steel could be a world leader in such areas and surely that is where the UK has to position itself if it wishes to be a steel producer. If it can be done, the private sector will scent the profit opportunity.

What is clear is that it is not a job for the government and the UK cannot compete with China, India, Brazil etc. for bulk steel.

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 A shift towards high-tech steel production could save UK sector. Photo: iStock

— Edited by Martin O'Rourke

Stephen Pope is managing partner at Spotlight Ideas. 

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