THE UNITED KINGDOM STEEL INDUSTRY

Competitive industry

Added Value

  Steel's gross added value per employee is now more than double the UK average and almost twice that of the UK computer and related activities sector.

Exports to Europe

  In broad terms, the UK steel industry exports half of all its produces. And three in four of our exports go to European markets. Europe has been the equivalent of our domestic market for 15 years or more.

  As UK's manufacturing base has shrunk, so the steel industry has focused on exporting, with new processing lines primarily dedicated to serving export markets. These investments are now in jeopardy, cut off from Europe by the adverse movement of the euro against sterling. But still over 160 countries take steel directly from the UK.

Productivity and investment in IT

  In the past 20 years UK steelmakers have improved productivity nearly five-fold. That is 10 per cent a year, nearly three times better than UK manufacturing as a whole. The full and rapid introduction of automated and IT systems has played a vital part in this rejuvenation, accounting for about a third of the sector's investment each year.

  The UK sector is recognised by independent analysts as one of the most efficient in the world. They rate UK steel's performance (in terms of man-hours per tonne) among the top four in the world along with Japan and the best of the US mini-mills and German performance.

European framework

  Two European treaties frame what is permissible in the EU steel industry, depending on the products in question. As a general rule of thumb, the European Coal and Steel Community (ECSC) Treaty, also known as the Treaty of Paris (1951) covers semi-finished and hot-rolled steel products. Its provisions, for example, are much more restrictive on what is permitted on state aid than the EEC Treaty (also known as the Treaty of Rome 1956).

  On issues covered by the ECSC Treaty, the Commission and Council of Ministers, not the British Government, have jurisdiction. This Treaty, which is due to lapse in 2002, places the steel industry in a unique legislative environment.

Decline in UK manufacturing

  In the last 10 years steel consumption by UK industry has fallen 10 per cent. German and US industry use on the other hand has increased 10 per cent and 28 per cent respectively.

Source: Iron and Steel Statistics Bureau/UK Steel Association.

UK demand for steel continues to grow, but it is in imported goods

  Total UK steel consumption, including end products such as cars and washing machines, grew 9 per cent, with imports of goods containing steel rising 68 per cent from 5 million tonnes equivalent in 1989 to 8.4 million tonnes in 1999. Steel contained in imported finished goods is now the biggest "source" of steel used in the UK, accounting for over a third of total UK steel consumption.

  Foreign steel mills have increased their share of UK steel deliveries over the period 1989-99 from 29 per cent to 44 per cent. UK mills' deliveries to the home market have fallen from 11 million tonnes to 7.7 million tonnes, a 34 per cent decline in market share.

  Source: Iron and Steel Statistics Bureau/UK Steel Association.

Increase in steel exports

  Over the last 10 years, thanks in large measure to a 55 per cent increase in productivity, UK steel producers have increased their exports by 23 per cent, but have recently fallen back from a high of 8.5 million tonnes in 1997.

  Source: Iron and Steel Statistics Bureau/UK Steel Association.

THE UK POLICY "TRAFFIC LIGHT" TEST

  Having described the broad context in which the UK steel industry operates, this section applies a "traffic light" test to issues from a manufacturing or steel perspective: green light for policies that are good for manufacturing, amber for worrying issues that could become serious and red for those that should be changed as quickly as possible.

GREEN—"KEEP GOING"

Inward Investment

Foreign investment in UK manufacturing is vital. For example, all, bar one, of the UK's major automotive manufacturers is foreign owned. A third of the steel companies in UK Steel Association ultimately have foreign parentage. Here are entrepreneurs who have voted with their pockets to be based in the UK for its manufacturing business potential. Without them, UK manufacturing would be much smaller calling into question the country's ability to survive as a trading nation.

Low inflation/stable economy

  It is beyond dispute that the British economy is performing much better these days. Inflation is low and stable. No reputable economist expects that to change in the near future. The public finances are also in good order.

Government's announced capital investment

  The Comprehensive Spending Review announced major capital investment plans over the next three years (10 for transport). As long as these monies are indeed spent on capital stock, and not on inflationary wage increases that would force the MPC to raise interest rates, we believe that the Government will have taken the first steps to improve conditions for UK manufacturers. From this move, we would expect to see positive gains—higher UK productivity and some softening of sterling against the euro compared at least with what it otherwise would have been.

Close to major consumer market (now 350 million soon to be 500 million)

  The single market is now well established, presenting a major world market of 350 million at a time of rapid globalisation. It is the UK steel industry's "domestic" market. With the accession of the Eastern European states, this market will grow to 500 million. Although it will still be a mature market compared to China, its citizens, nearly half China's number, will be consuming more than four times the amount of steel per capita.

AMBER—"BEWARE"

Status of manufacturing in the UK

The UK is a trading nation and outshines some competitors on significant measures. For example, the UK exports nearly 40 per cent more per head than Japan and 45 per cent more than the USA. In 1999, 70 per cent of those exports were in manufactured goods as opposed to services. And most of those goods contained steel. Manufacturing may only account for 20 per cent of UK GDP, but it employs 4 million people and is crucial to the UK's international viability.

  The loss of critical mass in some areas of manufacturing threatens to undermine this ability to compete. As the UK's manufacturing base contracts, customer industries are delaying their investments in the UK. With weak investment, not only is worn out capacity not being replaced, but new technology is also being adopted at too slow a rate (see page 26 re Euro).

Time is running out—investing for maintenance only

  Too great a proportion of investment is going into "maintenance" projects. The generally published figures may not show it, but steel's order books do. UK based companies are holding off on investing in new or cutting edge plant and processes.

  The danger is clear. If our competitors attract new generation manufacturing investment at the UK's expense, manufacturing in this country will have to deal with the prospect of terminal decline. It is deeply worrying to see the UK edging forever closer to a negative spiral, where dependent supplier companies will be left without an internationally competitive domestic customer base. It will have a domino effect and force such companies to move their next generation investments elsewhere too. Meanwhile, capital intensive industries like steel will become even more dependent on exports until they are able to spread their risks by developing assets abroad.

  Government policy formulation for the long and the short term has good reason to take closer account of manufacturing, not only in reality, but also in policy presentation.

  Ensuring that detailed, full cost compliance and/or impact analyses guide policy decisions to achieve and maintain a positively competitive framework for manufacturing would be immensely helpful.

UK corporate taxation is higher than generally realised

  It is often claimed that the UK corporate tax rates are amongst the lowest in the world. This confuses the levels at which taxes are set, which are indeed low in the UK, with the amount that is actually paid. Unexpectedly, therefore, the UK raises proportionately far more tax from businesses than most of our European competitors including Germany and France for example.