Is there a lesson to learn in steel?

Is there a lesson to be learned from the turmoil now hitting the British steel industry of which Tata Steel is at its heart?

According to sources in the steel industry, UK media has misunderstood the root problems of the industry, much of which has had a torrid time since the days of British Steel.

Sources suggest the current issue has nothing to do with Chinese steel imports (the UK imported only 500,000 tonnes of Chinese long products last year). The central issues of competitiveness are those €/£ exchange rate and energy costs, it is said.

In 2015, the UK imported 5 million tonnes of EU-produced flat products, while Tata Steel, which has four major UK steel sites – Port Talbot, Scunthorpe, Teesside and Rotherham – can produce some 5 million tonnes a year of flats at its Port Talbot facility.

At the start of this year, Tata Steel, which employs around 15,000 in the UK, announced plans for 1,050 job cuts, on top of the 1,200 it axed in October 2015 and the 720 it cut last summer.

Other steel firms have played their part in the jobs cull. In October, Thailand's SSI announced it was closing down its Redcar works with th Steele loss of 2,200 jobs, then parts of Caparo Industries' steel operations went into administration putting 1,700 jobs potentially at risk.

The steel industry says it has been hit by a combination of factors: high UK energy prices, the extra cost of climate change policies, and competition from China with allegations that Chinese steel is being sold in the UK at unrealistically low prices.

In the UK steel production has declined has fallen dramatically from around 16 million tonnes in 1994 to 10.5 million tonnes in 2015. Likewise, the number of UK workers employed in steel production has dropped from around 50,000 in 1990 to some 15,000 in 2015.

                              Weak demand for steel

Demand for steel worldwide has not recovered to the levels seen before 2008. Many countries, including China, have experienced weak growth and global demand is likely to remain sluggish – falling 1.7 per cent in 2015 and up by just 0.7 per cent this year.

Accordingly, global steel prices have fallen sharply. And the automotive industry – a major user – must have benefitted from this, But has the drop in steel prices been reflected in car prices throughout Europe?  Meanwhile, China's own economic slowdown has caused its steel makers to switch focus to export markets as their home demand stalls. Added to which, the industry may be aided by government.

UK imports of Chinese steel have increased to 687,000 tonnes of steel in 2014, up from 303,000 tonnes in 2013.

However, UK steel imports from the rest of the EU are significantly higher than these imports from China, being 4.7 million tonnes in 2014.

But China is selling its steel at lower prices than EU steel makers. Steel imports into the UK from the rest of the EU cost on average €897/tonne in 2014, while Chinese steel imports were €583/tonne, according to the EU's statistics agency, Eurostat. This has led to accusations that China is selling at unfairly low prices.

High UK energy costs for energy-intensive businesses like steel production are also a factor, says the industry, added to by the extra cost of climate change policies.  But the steel industry, in the form of UK Steel, claims that government policies to compensate producers for these additional costs have been too slow.

It is said, for example, that UK industrial energy prices are 50 per cent above those of major EU economies.

                             Tata Steel wants out of the UK

EU rules certainly restrict how much support governments can give to particular industries. Member states may not use public funds to rescue failing steelmakers. However, EU countries are allowed to boost steel firms' global competitiveness – for instance by funding research and development or helping with high energy bills.

Almost 18,000 people are employed in the steel sector, and some experts say that up to one in four of these jobs could be at risk over the next few years.

Meanwhile, the outcome is that Tata Steel seemingly wants out. It wants to cut its losses and quit the UK.

If the unthinkable happens and automotive car and van products from China hit UK high streets and key export markets at prices lower than the products are manufactured in China, might this cause massive financial losses to the UK-based company such that Tata Motors might quit the UK, and dump JaguarLandRover?

At the moment all looks secure but in the automotive world, nothing is forever.

However, what is currently happening in the steel industry must sit heavily on the minds of senior automotive and parts supply executives. Businesses run by Chinese companies may not be played to the same rules as those adopted in Europe and North America.

We shall see. As the saying goes: Those who live the longest will see the most. But the future is going to be tough. And some lines will have to be drawn in the sand by both governments and automakers. China looks an attractive market; but China could come back to bite.