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Tata Steel

Tata-Steel-Reuters.jpg

Tata Steel has announced that it intends to sell all parts of its British business. The Port Talbot site, which employs around 5,500 of its 15,000 UK workforce, is believed to be losing around £1m a day. Tata Steel has previously announced a series of job cuts.

The Welsh Assembly has been recalled. Parliament has not yet been recalled, despite the wishes of the Leader of the Opposition Jeremy Corbyn [1]. Ministers will meet to discuss the severe problems facing the UK steel industry, with Business Secretary Sajid Javid returning early from an Australian expedition to lead the government’s response. The Business Secretary said:

There are buyers out there. It might require some sort of government support and we are ready to look at all options.

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UK production has declined. (Source: BBC/ISSB)

Factors

Tata said that trading conditions had “rapidly deteriorated” in the UK and Europe due to a combination of four factors: a global oversupply of steel, cheap steel imports, high costs and currency volatility [2].

The first two factors are connected: China now produces around half of the world’s steel. Home demand has waned, so China exported a record 112 million tonnes of steel to world markets [3].

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China produces half of the world’s steel. (Source: House of Commons Library)

This glut of steel has driven down prices, meaning more limited and specialist operations within the UK are being affected. The other two factors were delineated in a paper in the House of Commons Library [4]:

At the same time, the cost of overheads in the UK is high by international standards. Industrial electricity prices in the UK are more than 50% above other major EU economies. Business rates are also high in the UK, and the strong pound has made UK exports less attractive.

The Referendum Prism

Given the proximity to Britain’s referendum on its membership of the European Union, this proposed sale by Tata is being viewed through that lens. The UK Independence Party claimed that Tata’s problems were “a direct result of EU policies”. This claim has not been thought through.

Trade is an EU competence, so the UK cannot act unilaterally. The EU has already imposed duties of up to 16% on some Chinese steel products [5]. The European Commission had sought to remove the “lesser duty rule”, meaning that anti-dumping tariffs against China could be raised even higher. The British government are seemingly for higher tariffs, but regard scrapping the “lesser duty rule” as a disproportionate response. It is Britain, among other countries, that has prevented the introduction of very high tariffs on Chinese steel into the European Union [6].

Electricity costs in Britain are high relative to other major EU nations, so the EU policies on climate change cannot be considered a principal factor in these high energy costs.

Even if Britain were not a member of the European Union, it would still be a member of the World Trade Organisation, and would be abiding by its rules for the formulation of tariffs and trade agreements [7].

Moreover, if unchained by the EU common external tariff policy, the British government decided to pass massive anti-dumping tariffs on Chinese steel, then the British buyers of steel would suffer that price surge. These higher costs would be inculcated into key export industries, such as cars.

There are also EU rules around procurement and state-aid, blocking support for “manufacturers in difficulty” but permitting the nurture of “long-term competitiveness and efficiency” [8]. It is strange to hear demands for the nationalisation, subsidy and economic protection of steel manufacturers coming from people who had previously wanted to leave the EU to make the British economy more dynamic.

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This map was produced prior to the recent sale proposal. (Source: BBC)

The primary factors influencing steel prices are global, but the effects are felt locally, with job losses in the British steel industry. No nationalisation, no petition and no hash-tag can stop the glut of steel currently being sold on world markets. Crisis leads to panic, and panic leads to politicians supporting policies they would otherwise avoid entirely in calmer times.

Nationalisation, subvention and state control change none of the underlying problems for Britain’s steel industry.

References

[1] BBC, 2016. Tata Steel: No 10 rejects Labour call to recall Parliament. Available from: http://www.bbc.co.uk/news/uk-politics-35926836 [Accessed: 31st March 2016]

[2] BBC, 2016. Tata Steel: ‘Nationalisation not the answer’ says Javid. Available from: http://www.bbc.co.uk/news/business-35929617 [Accessed: 31st March 2016]

[3] Islam, F., 2016. Understanding The Steel Crisis: 10 Key Points. Sky News. Available from: http://news.sky.com/story/1669533/understanding-the-steel-crisis-10-key-points [Accessed: 31st March 2016]

[4] Rhodes, C., 2015. UK Steel Industry: statistics and policy. House of Commons Library. Available from: http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7317#fullreport [Accessed: 31st March 2016]

[5] Blenkinsop, P., 2016. EU to set dumping duties on Chinese, Russian steel imports. Reuters. Available from: http://www.reuters.com/article/steel-eu-china-russia-idUSL8N15C266 [Accessed: 31st March 2016]

[6] Mason, R., and Davies, R., 2016. David Cameron accused of failing UK steel after EU proposal rejected. The Guardian. Available from: http://www.theguardian.com/business/2016/feb/10/david-cameron-accused-failing-uk-steel-industry-blocking-eu-lesser-duty-proposal [Accessed: 31st March 2016]

[7] WTO, 2016. European Communities – Definitive Anti-Dumping Measure on Certain Iron or Steel Fasteners from China. Available from: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds397_e.htm [Accessed: 31st March 2016]

[8] Ruddick, G., 2016. Would Brexit help Britain’s steel industry? The Guardian. Available from: http://www.theguardian.com/business/2016/mar/30/would-brexit-help-britain-steel-industry [Accessed: 31st March 2016]

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One comment on “Tata Steel

  1. Shrey Srivastava
    March 31, 2016

    Thanks for this blog post regarding Tata Steel’s British closure; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

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