The Time to Transform UK Steel?

UK steel has been struggling for years, often in the headlines for all the wrong reasons: financial distress, change of ownership, job redundancies and plant closures.  This is an industry that in 1971 employed 320,000 but now employs just 15,000. The problems of the UK steel market are often blamed on competition from the Chinese, but this is just part of the problem.

Yes, this time its the Chinese who are over producing steel and dumping on the global market depressing steel prices.  But commodity steel has always been a deeply cyclical industry, long before the Chinese were overproducing there were other culprits.  That is the nature of the steel industry, its boom and bust. The trick is to survive the downturns and come out the other side and reap the financial rewards.  Survival is something that the UK steel industry is struggling with.  

Arguments that its not possible to produce steel competitively in developed countries are blown out of the water when you look at the success of the German steel industry. 

The comparison between the UK and Germany is stark.  Both face the same global pressures and competitive disadvantages such as higher energy costs due to costs associated with the Renewable Energies Act. However, steel remains a solid part of German industry and has been described as its backbone, with Germany the largest producer of steel in the EU and the seventh largest in the world.

How is it that Germany can maintain a successful steel manufacturing industry, but the UK struggles? 

The German steel market survives the downturns partly due to the transformation of its steel industry and strong links with German manufacturing companies in the: automotive, construction and other industries. German steel products are more differentiated, commanding a higher price and distancing themselves from the more competitive and cyclical end of the market. 

Another key difference is the long term approach taken by German management.  This long term approach is needed due to the length of the steel cycle, typically around ten years.  The long view provides the company with the stability needed to deliver on transformation goals despite the ups and downs of the cycle and ensures it is financially strong enough to weather the downturns.

A supportive ownership structure and long term financing ensures the stability of Germany’s largest Steel company ThyssenKrupp.  The AKBH Foundation holds 21% of ThyssenKrupp shares.  This ownership structure prevents ThyssenKrupp being a takeover target and means that the company can run a balance sheet that is strong and can hold net cash (that it might need for the downturn) without fear of attracting an asset stripping investor. German steel companies also benefit from close links with the banking sector ensuring guaranteed long term funding at low rates.

It’s a different story in the UK. There has not been a significant stake holder in the UK motivated by the long term prospects of UK steel. The instability caused by a constant change of ownership in the UK’s steel assets, makes long term planning for the future impossible.  Financing is often arranged on a short term basis at relatively expensive rates by the new owner, leaving steel in an unstable and vulnerable state.

Is there a future for steel production in the UK? Julian M Allwood, Professor of Engineering and the Environment at Cambridge University thinks so.  He has produced a research paper titled ‘A bright future for UK Steel’. 

He outlines a strategy for the transformation of UK steel but says it cannot be achieved by the private sector alone and will require government support.

He suggests a transformation based on two initiatives.  Firstly the global supply of steel for recycling will treble over the next 30 years and the UK needs to invest in innovation to increase steel production from recycled steel.  Secondly, the UK should upcycle to higher tech steel compositions and not just the lowest value commodity steel where margins and profits are low.  He argues that they need to connect the steel industry with UK’s leading skills in architecture, construction, aerospace, automotive and other manufacturing sectors.  This is a similar strategy to that of the successful German steel sector.

Government support for industries is always controversial but Allwood highlights the Danish Wind power Initiative in 1976 that provided subsidies to support its fledgling wind industry.  The German government has used tax incentives to foster industries seen as having growth potential such as the development of the solar panel sector.  Other forms of government support in Germany have been through the FraunhoferGesellschaft, a part publicly funded research organisation that provides applied science for companies that would otherwise find the cost prohibitive.  

There is also an environmental case for producing steel in the UK rather than follow the current trend of outsourcing to developing countries.  These countries have significantly lower environmental standards and regulations than developed countries. Reduced energy use is also a big argument for producing steel through recycled raw materials.  China uses recycled scrap steel for just 18% of its input materials, compared to 50% in Europe where well regulated and committed recycling markets give a greater supply of scrap.

Having a long term vision for the UK steel market will help to create a strong and valued workforce. 

Germany places great emphasis on vocational education combining academic studies and on the job training for apprentices that is globally admired.  The UK education policy has a strong focus on STEM with a goal to ‘empower future generations through Science, Technology, Engineering and Mathematics to grow a dynamic innovative economy’.  Future generations choosing a career in the steel industry should be confident that it has a sustainable future.

The UK steel market needs an overhaul in order to become the backbone of UK Industry.  There is a lot that can be learnt from the German steel industry. A strong vision for the UK steel market has been outlined by Julian Allwood but this would require the support of the government to deliver.  It feels like the time for some big picture thinking about the future of UK steel.  What does the UK want to see in terms of: careers, environmental policies, innovation and the support of other UK industries.  More doubt and confusion may be thrown up with/if Brexit, but perhaps what is most worrying is a world economy where more and more industries will be shifting to places where it’s easier and more harmful to do business.