Steel Industry

Lord Mendelsohn Excerpts

Tuesday 25th April 2017 Lords Chamber

Asked by

[Lord Mendelsohn]

To ask Her Majesty’s Government what steps they are taking to support the steel industry; and what role it will have in the Government’s industrial strategy.

[Lord Mendelsohn (Lab)]

My Lords, I am very grateful to those who are participating in this debate. We have a very distinguished group of speakers with tremendous experience and wisdom in these areas, and I look forward to hearing your Lordships’ contributions. My own detailed experience of the sector is only recent. Like so many issues brought to the attention of this House, one can get a rudimentary understanding, but it is rare to get the feel of an industry. I know that the Minister has such a feel for these issues and I am grateful that he has made himself available for this debate. He has always had a very open and thoughtful mind when it comes to matters relating to the steel industry, and his participation is appreciated.

When Greybull bought the long products division of Tata Steel, I was intrigued. I was interested in what a very capable turnaround team saw in this opportunity. What has become British Steel is the dream of Nathaniel and Marc Meyohas, the principals of Greybull, who are operators of the highest capability and have brought new life into the industry and the business. I was fortunate to visit their main plant in Scunthorpe last year, where I met the extraordinary team that they have assembled, steeped in expertise, who have transformed its prospects. Recruiting Roland Junck, the globally respected industry figure, as executive chairman was particularly inspired, but the whole top team, who have served the plant for many years, were deeply impressive.

I was struck by two things when I visited. The first was the extraordinary quality of the staff, not just in skill and capability but in motivation. I visited the blast furnaces. In the Scunthorpe plant they are known as the Four Queens. I met the blast furnace manager. With colossal pride, as the molten steel streamed out, he nudged me and said, “You see that? That is schools, hospitals, roads and bridges—all our country’s needs”. The second thing that struck me was the extraordinary technology that is applied there. There are hugely capable and trained staff dealing with all sorts of technologically sophisticated approaches in these very large sites, with large equipment and large sales. The facility has computers almost everywhere and it is able to produce products with the imperfections almost entirely removed and to ever-higher specifications. It is a highly technologically developed business.

British Steel has committed nearly £40 million in new investment and is now making regular quarterly profits. It reversed the pay cut that was taken by the workforce as a means of ensuring the survival of the plant, and it did it as early as it could.

We have witnessed many closures in recent years—some preventable, possibly—with the resulting impact on communities. We have not served them entirely well with their transition. Last year our domestic market share fell to its lowest level on record, with only 39% of the steel used in the UK being produced here. Since 1995 employment in steel has fallen by 59%. I am sure there has always been a debate about what sort of size the market share should be and I think there is a case for 50%, but it is important that that 50% is profitable.

The global production footprint of steel suggests that the UK will not become a global leader in production but it is certainly desirable and deliverable that steel as a strategic necessity for our economy can be achieved, with the right policy framework. It still acts as a vital foundation industry for our world-class automotive, defence and construction sectors, and many others. It is an important part of our innovation and research base and it remains a crucial provider of highly skilled, quality and fulfilling work for more than 30,000 people, with an estimated four times that number in the supply chain.

It is notable that while other European steel industries have also suffered in the face of global headwinds, the UK has fallen furthest and fastest. We have gone from the second-biggest European producer in the 1960s to the fifth-biggest now, behind Germany, Italy, France and Spain. There remains a range of domestic barriers holding back our industry. As the BIS Select Committee in the other place pointed out,

“other European countries have both better valued their domestic steel industry and have been able to withstand global competition more effectively than … the UK”.

Put simply, the cost of doing business here is higher than in most of the rest of the continent.

The UK steel industry has suffered from a series of pressures relating to overcapacity, unfair trade and a competitive disadvantage with European competitors. There is broad agreement among everyone that we have to do a number of things to help: we have to promote UK steel’s use by government and business; we have to tackle unfair trade to ensure free and fair trading practices; we have to provide funding mechanisms for energy-efficient projects; and we have to work on what investment and support is needed in the long term, including skills and education in local communities. Most importantly, and the industry has been right to frame the problem in this way, the unilateral costs that are a direct result of historic UK government policy around electricity costs and business rates are utterly crucial. I believe that the recent initiatives which the Government have undertaken to compensate producers for high energy costs and to encourage government departments to procure UK steel are welcome steps in addressing the fundamental barriers facing UK producers.

However, this is about the fundamental business model. UK steel makes money, but not enough. There is a return on capital gap which is required in order to sustain this industry. For the sort of investment required in new plant, we need to ensure that it has the right level of profitability. It is well established that energy prices and business rates are two areas where we have an uneven playing field. Even after the Energy Intensive Industries compensation package, a 2016 analysis by UK Steel showed that British producers pay an extra £50 million per year in energy costs when compared to their EU competitors. The differential between the UK and Germany has been calculated as an extra £17 per megawatt hour. According to UK Steel, if that differential was removed, British firms would have increased their EBITDA by 70% in the period 2012-14, protecting jobs and enabling crucial investment.

UK steel-makers face business rates of up to 10 times those in France and Germany. We should not be in a situation where building a new blast furnace attracts a six or seven figure hike in rates. The current regime acts as a tax on investment that is not borne by European competitors. For example, in 2010 France reformed its new equivalent of business rates to remove plant and machinery from calculations to deal with exactly this problem; it has worked very well.

I am sorry that it took the steel crisis of 2015-16 to act as a trigger to focus attention. The Government have made some progress but it is too limited at this stage. This is not particularly partial criticism of the Government. There are certainly some matters which are not easy and straightforward. This will take a lot of political will and some careful thought but there is a pressure on whoever comes into government after the election—we can guess who might or might not—to show some renewed effort. There was some previous criticism of the industry’s managers and owners, but since the crisis it is clear that that has changed. New entrants have emerged and the existing quality management has been liberated. The workers in the industry and its trade union have shown not just capability but adaptability and a willingness, as they always have, to be part of a team accepting sacrifices and giving of their labour nothing but sheer excellence.

The industry is in good shape but the policy and regulatory environment is not, and this is where we must focus. We are in times where we can make changes. There have been changes which show that we can take a different approach. It is not just about leaving Europe; there is the opportunity of the industrial strategy. It is not just about the adoption by the Conservative Party of a price cap on energy markets or about progress in energy demand measures. All of these things suggest why doing more on the supply-side measures can be doable and timely.

The steel industry is the epitome of a modern, technologically-driven industry. I would argue that there are more high-tech, highly paid jobs in steel than in the IT sector in general. In business, the achievement is more important than the announcement. In government, it sometimes feels that the announcement is more important than the achievement. We have to set the course straight for what we are going to do to help steel. Others deserve our gratitude for keeping the industry alive and fit for purpose. It is the role and duty of those who make policy decisions on the regulatory environment to take the next steps. I am sure that all Members of the House will work with the new Government to that end.