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What the steel crisis can teach us about Britain’s new industrial strategy

Steelmaking workshopThis post is by Green Alliance’s Dustin Benton, head of energy and resources, and Jonny Hazell, senior policy adviser.

Forget the theory: the first test of Britain’s new industrial strategy will be how it handles the steel crisis. Steel used to be the sign of an advanced manufacturing nation, and it still provides the sort of skilled employment outside London that Theresa May has promised to protect. It’s at the heart of the debate about exporting carbon emissions and Brexit Britain’s industrial future. The world will inevitably draw lessons from how it is handled.

UK steel is in crisis. It is shutting in the face of subsidy-driven Chinese over production. Anti-dumping tariffs would help (British ministers blocked these in 2014) but they can’t address the steel industry’s structural problems.

Why UK steel is floundering
The UK is a high cost economy, and this isn’t going to change. British wages are expensive and, despite the hype, the UK climate policy accounts for less than one per cent of steel production costs. We’re also global price takers: blast furnace steel, the type made in Port Talbot, Redcar and Scunthorpe, is now entirely dependent on imported raw materials (iron ore and coking coal). The recent devaluation of the pound should have made domestic steel producers more competitive. But a cheaper pound buys fewer imported raw materials, meaning British steel producers haven’t benefited from the devaluation.

The real problem is that the UK’s integrated steel mills are no longer modern. They have long suffered from underinvestment in the equipment needed to keep them competitive. Tata’s decision to invest in its Dutch steel mill and sell Port Talbot is an admission that UK plants are uncompetitive. Back in 2014, EY’s Global Steel report said “permanent shutdown of capacity is the only real solution to bring balance to the market.” The cold logic of competition means British workers are losing out.

So much for the problems. The question is how can a new, British industrial strategy encourage a globally competitive, skill-rich steel sector and avoid propping up failing enterprises?

New business model that works
Amidst all the closures, one company, Liberty House, has been reopening steel facilities in the towns where steel jobs had been lost. Its business model is based on converting recycled steel into high value products for infrastructure projects, such as electricity pylons and wind turbine towers for the UK market. It claims to be turning a profit from the previously loss making assets it has bought over the past three years, securing new jobs in the process. Other companies like Sheffield’s Outokumpu have focused on high value, stainless and specialist steels and are surviving in an exceptionally harsh environment.

The reason for their success is threefold. First, they use newer technology: electric arc furnaces. Unlike blast furnace steel, their inputs are scrap steel and electricity. Recycling retains much of the value from the original steel, and it is a less energy intensive process than blast furnace production. The UK may not be competitive on labour costs, but resource costs make up the largest share of steel production and, in this, the UK can have an advantage.

Second, steel scrap and electricity can be entirely domestically sourced, so electric arc steel is able to add more value in the UK. There’s plenty of supply: exports of low value scrap are around the same level of UK finished steel imports. If we build renewables at the pace needed to meet Britain’s carbon budgets, the UK will be a net electricity exporter, with periods of very low electricity prices.

Third, electric arc furnaces are much cheaper to build and more flexible to operate than blast furnaces. This has enabled producers to focus on modern high value-added steel products rather than sweating old and expensive assets while belting out commodity steel. Outokumpu survives because it makes stainless steels that can’t yet be manufactured in lower cost markets like China. The UK has the research base in materials science to develop new, more advanced steels. And, because demand for steel falls as countries become wealthier, it is likely that the mature markets UK producers sell into will demand more low volume, high value steel.

An opportunity for UK industrial strategy
Add these together and you can see a future for UK based, high skill, low carbon heavy manufacturing. The industrial strategy should support the direction industry has taken rather than propping up the existing business models of individual companies or facilities.

Government should also draw some wider lessons. To secure industries that are both globally competitive and provide skilled jobs, its industrial strategy will have to find a way to cut manufacturing costs. For steel, the solution has been greater resource and energy productivity. This could be generalised: optimising non-labour productivity would add £10 billion to British manufacturers’ earnings, and increase profitability by 12 per cent.

Our own analysis shows that non-labour productivity allows workers to keep their jobs, and a switch to remanufacturing, recycled inputs and servitised manufacturing (selling products and services together) would significantly reduce unemployment in areas hardest hit by deindustrialisation. Moreover, many of these jobs are medium skilled and medium waged, which is the kind of employment that has been hardest hit as manufacturing’s share of the economy has declined. They are also higher quality jobs, providing more consistent hours and higher job satisfaction than the national average.

The final lesson is that industrial strategy should harness technology change to build UK competitiveness in a low carbon world. We still need heavy industry. Making it low carbon is the 21st century’s manufacturing opportunity. The Paris climate agreement is the global ratification of our low carbon goals, so the UK should not be afraid to support manufacturers to reorient their businesses. Doing so would deliver on the political promise of restoring manufacturing employment while putting the UK in the vanguard of an increasingly low carbon, resource efficient global economy.

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Green Alliance is a charity and independent think tank focused on ambitious leadership and increased political support for environmental solutions in the UK. This blog provides space for commentary and analysis around environmental politics and policy issues as they affect the UK. The views of external contributors do not necessarily represent those of Green Alliance.