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Don’t blame China for UK steel’s demise

By CreditMan Monday, January 18, 2016

colin-sanders

Colin Sanders, Graydon UK's Head of Operations , investigates the myths and realities behind the UK Steel Industry

The steel sector in the UK has made for sensational headlines in recent months. On top of the existing troubles at Tata, SSI and Caparo, we now learn that Tata is to lay off a further 1.050 people, 750 of them at its Port Talbot operation. Much of the blame is being laid at the door of the Chinese, but Chinese steel accounts for only eight percent of the UK’s consumption.

‘Chinese Steel Flood Puts UK Jobs At Risk’ typifies the sensational headlines we’ve seen recently in the national press, TV and radio. But, is this fact or myth?

Let’s start with SSI. Redcar had been the home for steel production for many years under British Steel, Corus etc. More recently, after Tata closed down operations, the Thai owners were given much encouragement (and inducements) to restart production. But, if it didn’t work for the previous owners, why did anyone think it would it work as SSI?

In order to break-even, SSI would have had to sell ‘slab’ for around US$400 a ton when in reality, it was selling for nearer US$250 a ton. In a world market where steel prices had been falling for some time, this was clearly an unsustainable business. The writing was on the wall from day one, when all the major credit insurers refused to provide cover. Decision justified.

This may sound very cold and harsh but let’s take emotions out of the equation and deal with the reality.

The second case in point is Caparo, whose failure was rather unexpected and the credit insurers did take a big hit as a result. Most elements of the business, according to the most recent filed accounts, were operating profitably and group accounts showed a shareholders’ funds figure of £65m. It’s fair to say, that market conditions, falling prices etc., were having an impact but did the owners just give up the ghost because this was an easier path to take, as opposed to riding out the storm or putting in more funds? Only one entity of the group was kept, Merchant Bar. Again, though, should we be totally surprised at its failure? Unfortunately, Lord Paul’s family has history in this respect. It was almost 10 years ago that the original Caparo went into administration. Was this down to losses or poor trading conditions etc.? No, it was down to a pension fund deficit! It’s much easier (and legal, if somewhat immoral) to put your business into administration via a pre-pack as opposed to putting money in to make up the deficit. The timing with regard to the latest failure was also questionable, coming at the same time as the SSI and Tata announcements. “A good day to bury bad news”, as someone once said.

The Tata job losses were down to a reduction in production due to deteriorating trading conditions and falling steel prices worldwide. Sad though this is for the individuals who lost their jobs, and their communities, no business can sustain continuing losses. The Indian parent has provided substantial funds to support the UK operation but for how long? At some stage, the parent will want a return on their investment. That’s business.

So, why is steel-making so difficult in the UK? It’s a combination of factors: falling prices worldwide; high energy costs; and a struggling world economy for starters. Yes, imports have had an effect but not to the degree that the UK press would have you believe. The fact is, Chinese imports account for around 8 percent of steel in the UK. Chinese steel is NOT flooding the UK market and even China is reducing production as a result of a slow down of its economy and falling prices worldwide. Chinese producers combined are said to be losing in excess of US$4bn and are being propped up by the Chinese government.

The price of the commodities which go into producing steel have been falling for the last 18 months now. Iron ore prices are down from US$140 per tonne to around US$50 per tonne and are expected to fall even further. Coking coal has fallen from US$ 219 per tonne to less than US$ 80 per tonne. But these falls are nowhere near enough to compensate for collapsing steel prices.

Is there a long term future for steel production in the UK ? Let’s hope so, but the signs are not good. It would need government intervention to change things, but then so did the coal industry back in the 1980s and that didn’t happen either. The reality is that between the three entities named in this article, their combined annual losses in their last filed accounts was more than £1bn. In any industry, losses of this nature are unsustainable.

Colin Sanders, MCICM, FACP Head of UK Operations Graydon UK Ltd