It was good news to read over the week-end that the UK government has not given up on the UK steel industry. The industry and others including me have long been explaining that very high energy costs and business rates are big handicaps to the UK industry. It has also been well known that there is massive overcapacity worldwide, led by the large investments in steel in China, which has slashed prices for the product. If the UK persists with much dearer energy than leading competitors it will be our industry which closes, whilst the CO2 will be produced elsewhere with the jobs and the profits.
The Chinese currently account for around one half of world steel output. They have announced plans to cut up to 150 million tonnes of annual capacity, almost as much as the entire EU industry makes each year. Such reductions will make a big difference to future prices as they are implemented. It could mean that the current low level of steel prices will be temporary, with prices rising again as capacity is reduced. World demand for steel is likely to rise from here as advanced economies gradually recover from the slump of 2008 and as more emerging economies raise living standards. As they do so more people want and can afford cars, domestic appliances and other products with a steel content.
The issue is how will the UK manage to get its energy costs down to assist the industry? Can it do so enough to make a material difference? The government is talking of subsidising the energy costs more, as it has started to do. It’s not an ideal solution, but given the large interventions made in our energy markets to push prices up it may be the only short term fix. The government will of course need clearance from the EU to do so.
Government is in a stronger position when it comes to business rates and other domestic impositions. There it could take some action to allow the industry to keep more of its revenues.
The government has pledged to buy more UK steel as part of UK public sector contracts. Several of the large infrastructure and equipment programmes have a substantial steel content.
It may also be necessary to help create cheaper energy on a longer term basis if the work to save steel is to endure. I have often written on how this could be done, after two decades of expensive interventions the other way. The sooner we do this the better. It is our only hope of keeping and expending our industry.