Redcar doesn’t want to lose jobs - but neither does China

October 21, 2015 1:51 PM

First Redcar and then Tata Steel announced further job cuts in the steel industry. Exactly what is going on and is there a case for the government to intervene using taxpayer cash to prop up the current price of steel or bail out the suffering plants to protect British jobs?

The Steel Industry in the UK

A large motivating factor in the outcry is that the jobs under threat are of national historic importance to the country. During the industrial revolution producing steel was of national importance in order to grow the railways, build machinery and expand. By 1870 Britain produced 60 times more steel than it had in 1800 and in 1875 Britain produced 40 per cent of the world’s steel. But by 1896, only 20 years later, Britain’s share in the world steel market dropped to 20 per cent. The industrial expansion slowed and so did production of steel.

Then in the post war period the steel industry went through a lot of uncertainty as successive governments nationalised, privatised and re-nationalised the industry. Conflicted objectives and a lack of innovation meant the industry wasn’t free to develop and grow as it liked due to the uncertain climate.

Steel production volume continued to fall and so did exports. Currently Germany ranks 7th in the world for total output, making it the biggest producer in the EU, with Britain ranking as 18th.

The Steel Industry in China - Steel is being overproduced

In a similar story to Britain's, Economic growth in China has slowed and growth in the construction sector has run out of steam after a period of extraordinary growth. This has led to significant production overcapacity, a global steel glut and a dramatic drop in prices.

The Chinese government exercises significant control over the country’s steel production facilities, considering it to be an industry of national importance. In response to collapsing prices, the central government started calling for the merger of smaller steel companies in order to increase efficiency in the sector.

However the Chinese industry is dominated by local steel plants, with local authorities as major shareholders the plants provide local jobs and welfare systems. In response to the threat of closure by the national government, local governments have been encouraging local plants to expand on credit until the plant is too large to merge. This has led to continued growth in the steel industry despite reduced domestic demand, so more and more steel is available for export. In the 12 months ending February 2015 China exported 55 per cent more steel than they did in the previous period.

But just because Britain can’t match China’s prices, it doesn’t mean China is the only country to increase steel exports. Russia and Ukraine have also increased their steel exports in order to compete with China globally.

The Steel Industry in the EU - Innovation is key

We’ve already seen that Britain’s importance in the global steel production industry has been diminished, but that isn’t just because of China’s political problems and the price of steel. Comparing Britain to other EU countries, it’s easy to see that the British steel industry hasn’t been helping itself.

Germany for example, the largest steel producer in the EU, uses two thirds of its steel output in producing semi-finished or finished goods domestically through vertically integrated companies. Due to this vertical integration companies can produce goods more efficiently within their organisation structure than if they imported from China.

France has gone down the route of research and development. By developing new processes and materials which they hold the intellectual property rights to, companies are able to protect themselves from outside shocks which helps them continue raw processing.

As for Italy, a high incidence of accidents, environmental problems and relaxed labour laws all create a competitive environment, although perhaps not one that Britain should be encouraged to imitate.

Should the UK Government intervene?

Firms such as Tata Steel were bound to cut jobs eventually; British steel has been of declining importance on the world stage for a while now. The international evidence seems to suggest other countries are frankly doing better than we are in this area - We’ve lost our comparative advantage.

But many campaigners have hit upon a very pressing issue - the burden of taxes on the steel industry. Specifically ‘green’ taxes and business rates, both of which the TaxPayers’ Alliance have campaigned against before.

Over the years we’ve reported on the crippling effects of business rates, especially on small businesses, and launched our Freeze Business Rates campaign in 2013 to point out that this tax stunts entrepreneurship and leaves high streets empty. If we want Britain to be a competitive place for companies to do business, especially small businesses, taxes need to be simple, low and straightforward. Hopefully the Chancellor’s recent announcement on business rates will go someway towards this.

The green taxes currently under scrutiny, the carbon price support mechanism and the EU emissions trading scheme, also cause headaches for business. The current pricing system needs reform, there is little evidence that these policies work domestically and emissions have been moved abroad, to countries like China, who can produce more without the burden of extra carbon charges.

In both of these cases you will note the steel industry has not been singled out for exemption. We need a simpler tax code, not one riddled with exemptions that large companies can take advantage of but leave smaller businesses with a bigger burden.

Could these changes have saved the Redcar steelworks? Maybe not. The drive towards recycling means that the steelworks may have closed eventually, but if we change these regulations now they may be able to give another business, or another industry a better chance at competing on the world stage.

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