Although it has been generally in decline for the last 30 years manufacturing is still a valuable part of the UK economy and in 2013 the UK steel industry was worth £6bn a year of which £4.9bn was generated by exports. It employed 20,000 employees - but increasingly it had been having less of an impact on the UK economy; in 1990 UK Steel represented 0.5% of UK economic output but now it is down to less than 0.1%.

Annual UK steel production is 12m tonnes whereas China produces 780m tonnes (48% of the world output). China has become the world’s steel producing behemoth and on the back of China’s rapid economic growth world steel production actually rose 96% between 2000 and 2014; mainly driven by China’s state investment in steel plants to provide the steel for China’s huge growth in infrastructure.

Enough of the economic lesson, what’s gone wrong?

The blame seems to be laid at China’s door because as part of their own economic slowdown they have over capacity, and rather than shut plants down they have been selling their over-production cheaply - €600 per tonne against a market price of €900. But this is not the full story as last year we only bought 687k tonnes from China when we actually imported 4.7m tonnes from the EU.

The pressure UK steel producers are under stems not just from cheap imports from China but other endemic problems:-

  1. High business rates
  2. A strong £ making exports uncompetitive
  3. High energy prices (UK costs are 50%) higher than in Europe
  4. High labour costs 

Collectively these factors together with a slump in world steel prices have made our plants uneconomic hence the raft of recent closures.

What will happen next?

The scale of the job losses, (2,200 at SSI in Teesside, 1,200 at TATA and possibly 1,700 under threat at Caparo) will potentially lead to one in six steel workers losing their jobs. In areas such as Teesside and Scunthorpe the where the plants are the major employers of the local communities the impact will be catastrophic. The plight of the steel industry is getting a lot of press coverage and rightly so and there have been calls for the government to do more to help the steelworkers.

And there’s the rub. When SSI went into liquidation the government announced an £80m assistance package for the workers in Teesside but when the rhetoric cleared it became clear that the amount included all the statutory redundancy entitlements that the employees were entitled to. And given that many of the workers will have spent all their working lives at the same plant these will not be insubstantial sums. There is not enough clarity yet to determine what sums will be available for retraining, education of small business investment and such help is to be applauded. It does however raise an uneasy question, i.e. to what extent should the government assist one set of workers and not another. When a major retailer fails there are often 1,000s of jobs lost but hitherto there has been no government intervention although the loss of jobs has an equally devastating effect on the individuals and their families concerned. The government’s attempt to ensure proper pre redundancy consultation takes place and thus minimises the state’s burden was covered in our article 'Another Risk For Directors' for  but there is a potential risk here of the government showing a preference to one section of the UK workforce; this could set a untenable precedent.

And the future? In the UK we have strong laws protecting employee rights and surely that is a good thing. Our manufacturing output is generally based on high quality output made by skilled staff. But strong employment legislation becomes a disadvantage when we are competing in a world market and trade protectionism is mainly a thing of the past - then our competitor’s lower production costs and cheaper imports really puts UK manufacturing under pressure. Paradoxically the decline in UK manufacturing as part of our economy probably means that UK PLC can absorb further shrinkage in manufacturing in the long term, but for those still out there making something there may be troubles ahead.

Lee Pryor
Partner

 

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