Crisis in Steel: What Should the Government Do?

March 31, 2016, 4:25 PM GMT+0

The giant Indian industrial conglomerate, Tata, announced on Tuesday that it wants to sell – and sell quickly – its British steel company, including the Port Talbot works in south Wales which is losing a million pounds a day.

No one can see a ready buyer. There is a very real risk that Port Talbot will close, with 15,000 jobs going directly and probably as many as 40,000 in total when workers in the company’s supply chain are included too. The government says it will do everything it can to stop this happening. But so far it has failed to come up with a clear plan as to how to do this and the Prime Minister has warned that there are ‘no guarantees of success’. What should the government do? More important, perhaps, what can it do?

Back in 2007, Tata won a bidding war to buy Corus Steel, the successor to Britain’s nationalised steel industry, British Steel. It paid £6.2bn for the company and since then it has invested a further £3bn in it and its other steel companies in Europe. Now its investment in British steel plants is estimated as being worth ‘almost zero’. It was hoped that a plan to revive Port Talbot, drawn up by the management and the unions with help from the government might persuade Tata to stay in the game, but the plan was rejected by the Tata board at a meeting in Mumbai on Tuesday. Tata wants out.

How did it come to this? Tata’s initial purchase was made just before the global financial crisis that changed the outlook completely. Global demand in general, and for steel in particular, fell sharply. Most importantly, growth in the Chinese economy began to fall and with vast excess capacity in its own steel industry, it sought to offload its own unwanted steel on world markets. Its critics say it dumped it – in other words, sold it for less than it cost to produce. It is estimated that the labour cost of a ton of steel is $10 in China and as much as $200 in Britain.

But it is not just the global context that has hit British steel. Domestic factors have done so too, in particular high energy costs. The huge blast furnace at Port Talbot consumes more electricity than the whole of the city of Swansea. But the ‘green agenda’, sponsored by both the last Labour government under its energy secretary, Ed Miliband, and by coalition and Tory governments since has caused the cost of British to rise sharply. It has been estimated that French energy prices are 50% lower than Britain’s, and Germany’s 20% lower, giving their own embattled steel industries a crucial advantage over ours. Critics argue that our attempts to reduce the amount of carbon in the atmosphere are having the opposite effect. If we effectively force up the price of electricity here, more steel is made in China and their plants are fuelled by massively carbon-emitting coal-fired power stations.

On top of all that, British heavy industries such as steel have to pay much higher business rates than their competitors. It had been expected that the chancellor, George Osborne, would cut the rates in his recent Budget, but he backed off at the last minute, in the interests of curbing the government deficit. His decision was described by his former colleague as business secretary, the LibDem Sir Vince Cable, as ‘another penny-wise, pound-foolish feature of the chancellor’s deficit-reduction plan’.

The government now finds itself in a position where Tata wants a quick sale and is giving no guarantees that it won’t close its British steel plants if it doesn’t find one. The government is under no illusions that it can summon up a willing buyer in the short time Tata seems to be offering. For one thing, as well as taking on a concern losing a million pounds a day, any new buyer would assume the pension liabilities of the company, estimated at £15bn. Some fear that Tata actually prefers closure to a sale on the grounds that it would reduce competition with its other steel plants.

The government says it will do all it can to help save Port Talbot and the business minister, Anna Soubry, seemed to include in the options the renationalisation of the industry, even if only for an interim period, a policy advocated by Labour. But the Prime Minister has ruled this out. His critics say this is a purely ideological response, but others argue that, given the current circumstances, what might be intended as only a temporary renationalisation might turn into something more permanent, and the record of governments running industries is not good, they claim.

In any case, the European Commission would have something to say about the state aid that would come with nationalisation, or indeed with even less radical government assistance. EU rules on state aid to industry are strict. Margrethe Vestager, the competition commissioner, said earlier this year: ‘EU countries and the commission have put in place strict safeguards against aid to rescue and restructure steel companies in difficulties. This avoids harmful subsidy races between EU countries and the [the risk] that uncontrolled state aid in one country can unfairly put at risk thousands of jobs across the EU’.

In that case, say the EU’s critics, it should be doing more to stop the dumping of Chinese steel on world markets. Here, though, it seems that the British government itself has been in the forefront of resisting such a move. Britain has been pushing its EU partners to recognise China as a market economy within the World Trade Organisation, a status that would make it harder for the EU to deploy anti-dumping measures against China. The government’s critics say this is because it is desperate not to alienate the Chinese government, not least because it wants China to invest in major infrastructure projects, such as the proposed (and embattled) nuclear power station at Hinkley.

Inevitably, all these arguments are feeding into the debate over British membership of the EU. Supporters of exit argue that if we could only free ourselves from the sort of EU rules Ms Vestager imposes, we could look after our steel industry as we saw fit, impose tariffs on Chinese steel and subsidise plants like Port Talbot as much as we wanted. Their opponents counter that if we wanted to go on trading in the single market, then we would find that all the current restrictions would simply be reimposed.

As the government’s options seem to narrow some are arguing that we are failing to see the bigger picture. Surely, they argue, if governments were prepared to spend tens of billions of pounds of taxpayers’ money to bail out the banks after the financial crisis, they should be prepared to spend a fraction of that to keep our steel industry in business. After all, they say, isn’t steel a vital strategic industry or, as Len McCluskey of the Unite union put it, a ‘foundational’ industry? Even Peter Lilley, a former Tory industry secretary known for his free market views, says it would be ‘unthinkable that we could survive’ as a major manufacturing nation without our own steel industry.

But Jon Moulton, the private equity investor, says that the case for the steel industry as a ‘strategic’ British asset is weak. There is so much excess steel in the world for the foreseeable future, that Britain will never have any problem in securing the steel it needs, he says. Some also argue that we should actually welcome cheap Chinese steel because its low cost helps British manufacturers who import it to keep their own prices low and so protect other jobs in the British economy.

As for the comparison with the bank bailouts, it doesn’t hold water, some argue. The banks were saved because it was believed that if they had been allowed to go to the wall, the whole economy would have collapsed through a lack of finance. Steel, or at least the British steel industry, is not essential in that sense, they argue.

The logical outcome of this line of argument is that the government should face up to the likelihood that it will not find a buyer for Port Talbot and let it go to the wall. This would of course be devastating for the thousands who would lose their jobs and for the Welsh communities for whom steel-making has been at the centre of their identity. However much the government would be able to pump money into retraining those jobless steel workers and promoting newer, more profitable industries for them to work in, the death of the steel industry would be a blow from which South Wales would take decades to recover. It would also be a huge symbolic blow to Britain’s status as an industrial nation, indeed as the pioneer of industrial society.

So what should the government do?

Let us know what you think.