UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 281-vii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

WELSH AFFAIRS COMMITTEE

Globalisation and its impact on Wales

Tuesday 24 April 2007

MR PHILIPPE VARIN and MR JAMES LENG

MR MICHAEL LEAHY OBE and MR MICHAEL WALSH

Evidence heard in Public Questions 545 - 602

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Welsh Affairs Committee

on Tuesday 24 April 2007

Members present

Dr Hywel Francis, in the Chair

David T. C. Davies

Mr David Jones

Mr Martyn Jones

________________

Memorandum submitted by Corus

Examination of Witnesses

Witnesses: Mr Philippe Varin, Chief Executive, Corus and Mr James Leng, Deputy Chairman, Corus, gave evidence.

Q545 Chairman: Good morning, welcome to the Welsh Affairs Committee. For the record, could you introduce yourselves, please?

Mr Leng: Good morning, everybody, I am Jim Leng, from yesterday deputy chairman of Corus.

Mr Varin: I am Philippe Varin, the chief executive of Corus.

Q546 Chairman: For the record I wish it to be recorded that I was the chair of the All Party Steel and Cast Metal Group, I am a member of the steel union, Community and, as most people know, Port Talbot Steelworks is in my Aberavon constituency. Whilst this is an inquiry into globalisation and it might seem a little parochial, I will take advantage of being in the chair by asking a question on Port Talbot first. We are of course as a Committee aware that Corus went through significant restructuring in 2003 and as a consequence there was major investment, particularly in Port Talbot. Could you tell us what plans there are for investment in the medium and long term for Port Talbot?

Mr Leng: Perhaps Philippe will take it over, but just to say that in terms of our investment track record in the last three years and post the major initiation of the restructuring within Port Talbot, the capital expenditure in our facility there has been something like, over the last three years, averaging 2.3 times what it was in the three years leading up to the restructuring. We have been investing at the rate of about £100 million per annum on average in each of the last three years. Philippe will, if I may ask him, comment specifically about the plans.

Mr Varin: As part of the restructuring programme that you were mentioning that we launched at the end of 2003, we have invested significantly in the heavy end of Port Talbot. The objective of the heavy end of Port Talbot is now to reach 5 million tonnes production; we are not yet there but we are confident we can get there and the question for the future in the Welsh operations, meaning Port Talbot and Llanwern, is what should be the future configuration of the rolling mill and to what extent should we invest more to have more efficient equipment there.

Q547 Chairman: In global terms how do the assets in Port Talbot compare with other plants within now the Tata empire?

Mr Varin: The Port Talbot competitiveness is an important point. If you look at what we have done in Port Talbot in raising the capacity of the heavy end of steelmaking to potentially 5 million tonnes, a big part of the savings that were expected in 2003 has been offset by the increase in cost of energy in the UK, which is obviously still for the future an element of concern. Another element of concern is obviously the CO₂ and the consequences of the CO₂ credit system and allocations to Port Talbot, so what is absolutely essential, with or without Tata, is that the cost of steelmaking in Port Talbot is kept as low as possible and the future of the heavy end of Port Talbot relies on improved competitiveness and the cost of the heavy end of Port Talbot. If Port Talbot is competitive in the future, I think its future is good with or without Tata and has a place in the new and enlarged company.

Q548 Chairman: Is that competitiveness conditional upon further investment?

Mr Varin: Not on the heavy end, the heavy end has its investment, it is really about operations, cost of energy, CO₂. The question on future investment is more on the downstream, on the hot rolling mills, it does not depend on the heavy end.

Q549 Chairman: Could you outline to us over the last decade the way in which research and development and product development has changed in Port Talbot, and do you envisage any further change? What is the interface between Port Talbot and higher education?

Mr Varin: If I put Port Talbot in the context of the company, it is fair to say that between 1999, the date of the merger between British Steel and Hoogovens, and 2003 the company has not invested enough. The chairman has said that our capital expenditure investment had been in the period at the level of 50%, or 52% exactly, of the depreciation level, and we have put it at 140%, but to be clear on the R&D side, the research and development side, the company has not invested enough in research and development as well. Since 2003, first we went into a restructuring programme in the UK to focus steelmaking on three sites: Port Talbot, Rotherham and Scunthorpe, focusing Teesside on slab production, and at the same time to manage to develop more what we call differentiated products. These differentiated products have led to further investment downstream, for the time being especially in Ijmuiden in the Netherlands and in Scunthorpe in the rail, wire, rod business and in Port Talbot for the time being - obviously, Port Talbot will have an impact on what we do on the automotive programme, but our focus on Port Talbot is much more on delivering a high level of delivery service to UK markets, probably 90%, and we are focusing on our supply chain developments. Port Talbot will benefit from the increase in research and development that we do at the level of the company.

Q550 Mr David Jones: Good morning. Mr Varin, sticking with Port Talbot, to what extent are Corus's other operations in Wales and the rest of the United Kingdom dependent upon the presence of heavy steelmaking in Port Talbot?

Mr Varin: As a company Corus has a fantastic asset in the UK which is its market share. We have currently more than 50% of the market share in the UK and if you look at the corresponding market share in Germany for Thyssen or in France for Marcelo and so on we see that the UK score is pretty high. We are currently targeting 55% market share for the flat products for instance. The way that we do it is definitely using our distribution network because we are an integrated product producer in distribution, and so we are developing the quality of our downstream facilities, especially in Wales on the rolled products. The question that you raise is to what extent this position depends on us having a position on the heavy end. I would say very directly to you our goal is to have our heavy end in Wales but it has to be competitive because, at the end of the day, if we are not in a position to produce slabs, which is a semi-product, at a competitive cost, then the alternative - which is a possible alternative - is to bring some slabs from overseas. At the end of the day we have to sell to our customers in a competitive way, so it is not impossible to supply slabs and have downstream products and distribution in the UK. It is not, obviously, our preferred solution, we would prefer to supply these from the heavy end of Port Talbot.

Q551 Mr David Jones: Remaining with that issue of cost and competition, what competitive advantage, if any, would you say the mill at Port Talbot has?

Mr Varin: Port Talbot is a very good logistical position. It is on the sea, the only problem that we have is that we have logistics costs that are pretty high because we have a long term contract with ABP and we are in the process of trying to improve it. Today, having a plant which is 5 million tonnes, which is a critical or good size, located on the sea, it is a good position in Europe. Ijmuiden, which is a bit bigger, 7 million tonnes, is in a very strong position, so it is possible but the electricity price is an issue because in the UK the last winter was okay because it was a warm winter, but the previous winter we were obliged to buy our electricity at more than £60 per megawatt hour which is equivalent to €100 a megawatt hour, whereas in mainland Europe it was possible to have the same megawatt hour for €40 or €45, so €100 in the UK to compare with €45 in mainland Europe, which definitely is an issue. For the future the CO₂ credits and the way they are dealt with is also a matter for concern.

Q552 Mr David Jones: What in your view are the long term prospects for steel production and steel employment in Wales?

Mr Varin: We have done so far everything we can in terms of upgrading the equipment in Wales but also in Scunthorpe and in Rotherham to have a critical size, with proper equipment. What is at stake really is the cost position of Port Talbot. To be clear, there is no immediate question and for four or five years to come there will be steelmaking in Port Talbot, but the question is in the long term can we reach a sustainable position. This relies on our cost position. Today when we produce a slab from Brazil or from India it costs about $150 to $160 a tonne; when we produce in Port Talbot today the cost per tonne is more than double. Obviously, in Brazil or India it is an integrated plant with raw materials and the raw materials are very expensive; we can expect to see the raw material price reducing in the future but they will remain expensive, so we have to reduce our costs at Port Talbot as much as we can.

Q553 Mr David Jones: The key to that is energy?

Mr Varin: It is one of the elements, but it is not the only one, and the efficiency of our operation is also one point. Port Talbot can still progress compared to Ijmuiden.

Mr Leng: If I may just support that, it is cost, every piece of cost. Philippe has driven a strategy of driving up the value chain but large majority of our products are commodities, the price is set in the global marketplace, and every element of cost is a critical component. There are some big elements of cost to which Philippe has alluded, but it is attention to all the details, to every item of cost, because it is so critical in making a commodity product where pricing control is not in our hands.

Q554 David Davies: May I just ask two questions following on from that? Firstly, I wondered why electricity is so much cheaper in mainland Europe than in the United Kingdom, if you know the answer to that, and I also wondered whether the prices that you were talking about of £150/£160 a tonne to produce in Brazil, India and China, is that right, and £320 a tonne over here ---

Mr Varin: It is dollars.

Q555 David Davies: Dollars, right. Does that include the costs of transport from Brazil and China over to the United Kingdom?

Mr Varin: To quickly take your last point, it does not, and for a slab to come from Brazil would be $30 a tonne to be added to $150, so it would be landed at $180, and if you take from India it would be $40, so if you take $160 as the basic price it would be landed at $200.

Q556 David Davies: It is still significantly cheaper to bring steel in from the BRIC countries.

Mr Varin: If you take the current price of raw materials the gap is significant. We expect iron ore and coal to reduce in terms of price in the future so this gap will be less, but it will remain. If I come to your first point on electricity, it is a pretty broad question because it relates, obviously, to the energy mix in mainland Europe, be it nuclear in France or coal in Germany versus what we are using in the UK. I will not elaborate on this, but I would make a point which is important, which is the following: our competitors in mainland Europe have access to long term contracts so they are able to have supplies at a price which is fixed for five years or even more, and indexed in Germany, for instance, on coal prices. In the UK, for historical reasons, there is no such long term pricing, it is only short term pricing, which was pretty good for the industry when the UK was in excess of gas because the spot price was still very competitive, but now that we have seen the shortages over the last year, we have seen spikes and so on and our objective would be to have also some long term contracts in the UK. It would be possible and it would be a win win game for the power generators to be able to have some customers committing for a long period and for the power generators to build new capacity on the back of long term contracts. It is something that in the UK we should develop.

Q557 David Davies: Thank you. You have described the importance of having a skilled workforce as being critical; why is it so important to have a skilled workforce for an industry like this and what is your assessment of the level of skills available?

Mr Varin: If you take the cost of employment in the UK compared to the cost of employment in India, the gap is very significant, it is one to six or seven, so you cannot compete on the cost of manpower. It is absolutely essential, therefore, that we compete on productivity and the value added of our products, which is the reason why the skill element is essential. The strategy of the company after the restructuring period and for the last two years in Europe has been to focus on value added products or high service products through the strong engagement of our people. If you visit our plants and you discuss with the people on the floor, you will see that now they are really involved in continuous improvement and for this obviously we give them more autonomy which is linked to the upgrading of their skills. There is no other way.

Q558 David Davies: What are we going to do as the skill levels in countries like India and China start to rise? They are already turning out a lot of people with degrees in India at the moment and very high tech industries are being set up there; we are going to lose the skills in Wales that we have, but we are still going to be at a labour cost disadvantage so that does not sound particularly good for the future, does it?

Mr Varin: It is a moving picture; we are in a race and we have to keep our advantage here. Last week I was with the people from Tata to visit our R&D facilities; you do not get the skills and the metallurgical knowledge and so on overnight and they were very impressed by our capabilities on the automotive markets to develop the new alloys for new cars, on packaging, on construction and so on. We have to continue to run; I am convinced that it is the only way for us.

Mr Leng: It is fair to say you make a very valid point, it is inexorable that there is a gap and how do we retain better product, but also Philippe's point about our market share, our proximity to the market, customising the product from within the market, those are the challenges. Those were some of the issues that led Corus within globalisation to say as a purely West European industry is this sustainable, not in five years but in the lifetime of assets, because when we put assets down they are over 30 and 40 years so we have to be very careful that the policies which the Government can influence and to an extent control and direct, all these issues, are sustainable to this long term investment. Those are the challenges. If I may just widen it slightly, the issue of our sale to Tata has not changed in the immediacy, as Philippe has talked about, the challenges that we are faced with, they have not changed. It maybe has crystallised one's thought processes about the longer term out there, but those challenges, were every bit as relevant before our acquisition by Tata as they are today.

Q559 Mr Martyn Jones: You have touched on the problems we have had with electricity price rises, particularly in the UK but also in Europe compared with the rest of the world. I wonder if you could expand on that in terms of how your competitive position is affected by that and also give me some guidance as to the overall cost per tonne of producing steel within the different countries in your European operations.

Mr Varin: If I take the first part of your question, which is the compared cost of steel in mainland Europe versus the UK, you have to be careful because it is more plant by plant. If you are in mainland Europe, with a site which is inland, you could have a big disadvantage. I can be very specific and tell you that if you compare the slab steelmaking in Ijmuiden, which is our plant in the Netherlands, on the sea, compared to Port Talbot, we have today a difference which is £25 per tonne which is not insignificant when you look at it. If you convert it into dollars, it is $50 difference. It is about logistics and energy costs and what we were mentioning. On the energy I am not sure I can add a lot to what I have said, but just to tell you that if you look at the global picture today the advantage the BRIC countries have - Brazil, India or Russia - it is really three things: raw materials - iron ore and coal - and the differences are very significant. When we import iron ore today to our plants in Europe we pay per tonne of iron ore say $60 per tonne and if we use about 1.6 tonnes it is about $100 per tonne of steel for the iron ore. If you compare this $60 per tonne of iron ore to the cost in Russia, Brazil or India it is about $15 per tonne so $15 versus $60, it is a big gap. The same is true for coal. The other gap is on electricity, because we have big differences there, and the third one is manpower because as I told you in the UK the cost of one of our employees per year is about £39,000, it is £5,000 in India. These are the three areas where the difference is.

Q560 Mr David Jones: I would like to turn, please, to emissions trading and the section of your memorandum relating to climate change policy is highly critical of the EU emissions trading scheme and the way that it impacts on your industry. In fact, you say that Government policy to address climate change is one of the most significant issues facing the industry, and that it is having a "profound effect" upon the industry. Could you please tell the Committee in a little more detail what effect it is having on the steel industry in this company and in what way that effect differs from the effect experienced in other countries?

Mr Varin: The current system to deal with the CO₂ targets that the UK has to meet and that different Member States in Europe have to meet is inappropriate. An allocation of CO₂ per plant in absolute terms, decided by each Member State, is very dangerous. For what reason? The first is that you are good or bad in terms of CO₂ per tonne of emissions, but this does not matter. You get an allocation if you negotiate with your government and if you look at the allocation which has been given, for instance, in Poland to the local producers and what has been given in the Netherlands and in the UK, this is not linked at all to the performance of the plants, so I do not think that the system today is a good incentive to the bad guy to do better.

Q561 Mr David Jones: Just interrupting you briefly, to what extent does that allocation differ as between Poland and the UK?

Mr Varin: It is a discretionary decision of each Member State, so as a company or a plant - because it is a plant by plant allocation - you negotiate with the authorities and you get the allocation. It can be very positive because if you have a credit you can sell and it is fair to say that all the industries have enough credits on the first phase. The result is that they sell their surplus and today you can buy CO₂ credits per tonne at one or two euros, absolutely nothing, because there is a surplus and so the system is inappropriate. The second thing is that in a commodity which is priced worldwide, which is the case with steel, the day when you do not have enough credits you are hurt on your costs because you have to buy CO₂ per tonne, and your competitors in India or China or Brazil - and sometimes in China they are two or three times worse than you are - are not penalised and import their steel in Europe. Here again I think that the current system is one that is intra-EU and it is wrong because it is a distortion of competition for European end producers vis a vis the rest of the world.

Q562 Mr David Jones: And also within Europe.

Mr Varin: Yes, intra-Europe.

Q563 Mr David Jones: Compared with other steel producing nations in the rest of Europe, where would the UK rank? Is the UK Government generous or is it in your view restrictive?

Mr Varin: I must say we had a positive discussion with the UK Government and we were helped by a lot of stakeholders to try to find the appropriate solution. So far we have managed to grow our production, including in Port Talbot, and I am not complaining about the direct impact today, we have managed to deal with the situation, but where I am flagging the problem potentially is, I must confess, that we have been nevertheless hurt by the energy price, the electricity price, because what has been done in terms of CO₂ for the electricity producers is to auction part of the CO₂ for the electricity producers. Frankly speaking, they have done very well really because they were able to price electricity, because it is a local commodity, increase the price of electricity and not to be hurt. Even worse, the German producers have made huge windfall profits because they have priced all their electricity taking into account the CO₂ uplift, which has been impacting them on only a few per cent of their production. The bottom line is that the electricity consumers such as we are have taken the pain. For the first phase where we are we have managed the situation, but we have been impacted by the electricity increases. The key question is beyond 2012, because today what Brussels has to decide is, what is the future of the current system beyond phase 2? Phase 2 is 2008 to 2012 and what we are seeking to do is to get rid of the allocation by plant and to come to a sectoral approach where each plant in the EU would be given a credit in CO₂ per tonne which would be equal, say, to the average of the industry, so the good would be rewarded and the bad would be incentivised on progress.

Q564 Mr David Jones: Your memorandum seems to advocate a global, sectoral approach.

Mr Varin: The sectoral approach that we would put as a solution for the UK going forward has the potential to be opened to other regions because the steel industry emits probably between 3% and 4% of the emissions worldwide in CO₂, so it is important that the system put in place in the EU can be expanded on a sectoral basis to other regions.

Q565 Mr David Jones: What do you think are the prospects of having such a global scheme for the steelmaking sector?

Mr Varin: It will be a process that will not happen on day one and we should be prepared to have a transition period, but if you do not have a sectoral approach to these CO₂ problems we will not make progress to globalise. It is a way to answer the globalisation.

Mr Leng: If I may just add on that point, we said before this is a global product, priced globally and you cannot have within that a material driver to your effectiveness and cost-effectiveness which is regional CO₂. 90% of the new capacity is going to those parts of the world that do not conform to Kyoto, so Philippe's point is that it will just exacerbate those parts of the world, because this is a global problem.

Q566 Mr David Jones: What incentive is there for BRIC countries to adopt such a global scheme because clearly it is at the moment giving them a considerable competitive advantage? What is the incentive for them, why should they do it?

Mr Leng: Just to add to that, that is a good point, because what you are having is a decoupling. You are now getting the new capacity in the world - and Philippe can speak better on this - and the bigger picture is that the new capacity in the world for steelmaking is being sited where the indigenous raw material is. Our plant in South Wales was sited there because it had raw materials; but it no longer has those raw materials, so this decoupling is one of the big picture things on globalisation. Crude steel, slab steel, is in the main being sited in those parts of the world where there is raw material and at the moment is not conforming to the Kyoto Protocol.

Q567 Mr David Jones: What is the incentive?

Mr Varin: We do not have the answer to this question. The only point we want to make is if you want to go on this route - and there will be further steps - the only way for us is to start with a sectoral approach that you can expand. There are things we should not do. There is some mechanism today available in Europe which is the clean development mechanism, where you can fund some developments in India or China which reduce the CO₂ in those countries instead of reducing in Europe. We should use this clean development mechanism, the CDM, to incentivise the players in China or in India, for instance, to enter into this kind of mechanism. We should not give for free this money.

Mr Leng: Coming back to that, if I may, it just shows that all elements of our production, all elements of the attractiveness of places to do business, they all matter within this context so, yes, there are some big issues but there are a lot of additional issues where we cannot afford to be internationally uncompetitive, whether it be taxation or whatever, and I do not want to get into these things. It is every element that should be attended to because every piece counts, every piece.

Q568 Mr David Jones: If the trading scheme is not reformed in the way you suggest what, in your view, is the future for the European steelmaking industry?

Mr Varin: If you go to, let us say, alternative approaches that can be thought of like auctioning and say all the industries are going to buy the CO₂ credit that they need on the market, or at least part of it, I am very clear that if you think the carbon price long term is, say, €30 per tonne, which is only an assumption, when you produce one tonne of steel today we emit 1.6 tonnes of CO₂, so it means that you would add on your costs €45 or $60 per tonne, so there is no way that we would produce this type of scheme because our disadvantage would be even worse. The consequence would be that we do not expand at all or even we would start to shrink the production, with the consequence that production would be relocated in BRIC countries. We would import steel, so we would continue to produce at least as much CO₂ in these countries and it would be even worse because we would have to transport steel which is not a light commodity, so we would restrict us with an end-game which would be completely counter-productive.

Q569 Mr David Jones: The extinction of the European steel industry.

Mr Varin: Yes.

Mr Leng: It is this issue of where is the steel. Is slab the new definition of raw material? We do not know how that is going to play out, but that is a key question. Close proximity to the market and customising the product, there is a huge amount of technology, there is a huge amount of value added in that situation within the market.

Q570 Mr David Jones: And in terms of raw production.

Mr Leng: You can extrapolate that, if in fact you know there are three raw material producers in the world having 80% of the world supply. If that weakens and loosens up, if it is a competitive disadvantage to have indigenous raw material, but inexorably you can more closely correlate this in my personal opinion so that there will be an uncoupling of where steel in the longer term will be produced.

Q571 Chairman: Could you clarify what you have actually done in terms of making representations to the UK Government on the specific issue of emissions trading? Have you actually had a meeting with the Secretary of State for Trade and Industry outlining the points that you have made here in your paper?

Mr Leng: As Philippe mentioned, we have been very strong advocates of the position of steel. Philippe is chairman of the European Steel Federation as well so we have been having a pro-active voice in the issues and the challenges and the potential competitive international disadvantages of the current system.

Mr Varin: We are exactly at the point where these meetings are now being scheduled in the very short term, in the month to come, because we have been challenged by Brussels as an industry, because we said we are not happy with the current system, so Commissioner Dimas and Commissioner Verheugen have said we are open to alternative solutions, but please come with some proposals. It has taken the European steel industry about one year to come to a consensus that the industry should come with a proposal that every plant will demand measuring CO₂ in the same way, accepting to declare where they are and accepting to be penalised depending on their CO₂ emissions. That would have been unthinkable two or three years ago, which just shows the degree of concern and perception of the importance to move to a low carbon economy. It has taken one year for the industry to come to a consensus and this consensus has led to a draft proposal which is starting to be discussed in Brussels - it is not a final product yet - and in the two months to come we will have an appropriate exchange with the UK authorities.

Q572 Mr Martyn Jones: You say in your memorandum that increasingly Chinese steel products are competing directly with those made at Corus. Does this have implications for steel production in Wales?

Mr Varin: The answer is it has implications for the European industry. I just remind you that the Chinese situation is for me one of the big question marks over our industry today. China historically has been an importer of steel. In 2005, because production had grown quicker than demand, which is growing at more than 20% per annum, China was starting to break even and was starting to export as much as it imports, so the net was zero. The previous year it was about 30 million tonnes of imports and before it was even more, but in 2006 we have seen China becoming a strong exporter, 34 million tonnes have been exported and met in the world and Europe has seen about 7 million tonnes of imports. We have flagged up the situation to the Chinese authorities as the US has done, there have been discussions at high level in Brussels and the Chinese authorities. The Chinese authorities recognise that it is not a logical thing for China long term to be an exporter of steel because first they produce steel with a quarter of their production highly polluting, on obsolete equipment - it is about 100 million tonnes of production, so it creates for them a problem with the environment. Secondly, has no high grade iron ore so they are obliged to import iron ore. Thirdly, it is energy intensive and their problem is the supply of energy. Fourth, it is a strain on their infrastructure, so from the Beijing standpoint it makes much more sense to make manufactured goods in China than steelmaking, but the question is the control of the Chinese government on what happens in the provinces. The truth of the matter is that they have tried to put up some barriers - there were some rebates for exports, licensing of iron ore to try and put some hurdles on the road of the exporters, but probably not enough. We are in the situation that the Chinese authorities last year took the commitment that they would reduce their exports to Europe significantly and they mentioned the figure of 2 million tonnes for the year, but in the first quarter of this year they will already be at 2 million tonnes, so it is worrying matter because of the dollar versus the Euro position and it makes the price in Europe very attractive when you import. This is something that Commissioner Mandelson is completely aware of and we follow this very carefully because this could be a risk. It is okay for the time being because demand in Europe is okay, but if demand softens in Europe we could have another supply of imports from China.

Q573 Mr Martyn Jones: Speaking of demand, you say also in your memorandum that the Indian marketplace is likely to take off; will that actually benefit the steel industry in Europe and in Wales?

Mr Varin: It will be good news for Corus because in the new combination with Tata we see a lot of potential to develop our own products and so on on the Indian markets. Just be aware that India is today consuming 42 million tonnes for one billion people so it is 40 kilos per capita, very low. If you take the Chinese they are ten times higher per capita so I think the potential of India is absolutely huge. The answer is definitely yes, it is positive news, because I do not think the production in India will follow the same pace as in China so India, in my personal view, will be in a situation to import steel and obviously this is good for the whole industry and for Corus in particular.

Q574 David Davies: How big does an integrated steelmaker have to be to be competitive in today's market?

Mr Varin: I think 5 million tonnes when you are on the commodity market. If you are a niche player you can be smaller but the big capacities are between 4 and 5 million tonnes up to 10 million tonnes or a bit more.

Q575 David Davies: There has been quite a bit of consolidation in the industry over the last few years; is that going to continue and, if so, is there any danger, may I ask you bluntly, that Tata might decide there might be competitive advantage to closing down Corus in Port Talbot and reducing the number of players in the market?

Mr Varin: The situation in Port Talbot, as I told you, is completely related to the cost position of Port Talbot and not related to the consolidation, except the consolidation process generally speaking puts more pressure on prices and so on, but it is an indirect effect.

Mr Leng: It seems to me that consolidation is going to continue. If you look at the supply chain, if you look at all manufacturers there are 80% with three, if you look at big users in the auto industry and the packaging industry there are 80% with five. The steel industry had to respond to those challenges and it becomes the meat in the sandwich if it does not. Therefore, where are we now five or six years ago? Remember, Corus was a national player - two national players, British Steel and Hoogovens wishing to be a regional player. That is now within Europe and that is why Corus was born, Arcelor similarly was born the same way, but it is not enough now, you have to be a global player, hence the move we made and the moves that Mittal have made, and others inevitably will follow. At the moment the top five producers have 20% globally, that is all. We have a view - and it is a view which is not prescriptive, it is not science - that maybe when there is 40% within the top five producers you can equally have an equality of discussions and negotiations with the big users and all the things we have been talking about. It is inevitable that there will be more globalisation and more consolidation within this global industry - I think it is almost inevitable that this will continue, hence why we felt we had to effectively take that move as our response, as the Corus response, to the dynamics of this global industry.

Q576 David Davies: You have more or less answered my next question in different ways, but when you talk about decoupling and moving sites closer to where the raw materials are produced or to where finishing lines happen, is this likely to be a strategy for Tata and, if so, what effect is it going to have, or is it simply the case that providing Corus continues to be profitable in one way or another then they will not be looking to do that sort of thing at the moment?

Mr Leng: They do not have the facilities to do that at the moment, they do not have this capacity. The point that we took is this: if this was going to happen down there medium term we had better have potential solutions within the enlarged company rather than be sitting out there and be more and more isolated and left alone, while in the world around us others were performing better. Corus is still not as profitable as the leading competitors in the world and in fact that gap has been growing, our profitability, our free cashflow, in a very capital-intensive industry, so our view was that.

Mr Varin: I reinforce what you say, Jim, which is that the announcement money would give us some options if we had a problem, but it is not our goal today. What we are also contemplating with the announcement money is to be able to supply some raw materials, having some access to raw materials at cost which of course is steel and iron. The good news is that with Tata the company has skills in mining because they have mines in India and they are looking at opportunities all around the world, and if we can have access at least from partial integration to raw materials for the Corus plants in Europe this is a very positive thing. We are not yet there, but this is positive news.

Q577 Chairman: If I could ask the last question leading on from that statement about raw materials, you say in your memorandum that you forecast that in three years time the BRIC countries will producing 50% of steelmaking in the world. What implications will that have on Tata's operations beyond India and will this influence their investment decisions?

Mr Varin: If you look at the growth project of Tata today, they have clearly a first block of projects which are green field in India, in Orissa, which is probably the most advanced, in Jharkhand and in Chhattisgarh they have two other projects, so there have been three projects in India. One is starting to progress very seriously, with the others being launched and so on. That is one thing. They are also expanding outside of India; they have made three acquisitions recently, one in Thailand, one in Singapore and one in Vietnam so they are starting to have a position in Asia. For the enlarged company access to the Asian markets, which is a very big portion of the 50% of the BRIC countries, is absolutely essential.

Q578 Chairman: Could I follow that up with a specific question about raw materials? There are vast reserves of coal still in Britain, particularly in Wales. Would it not be an indication of Tata's commitment to steelmaking in Wales that they would consider seriously the Margam new mine?

Mr Varin: You are referring to the Margam mine and we, as you are aware, have applied for a licence. We have some delay for it to have access to the data and look at the case. We will look at it very carefully with the skills of the Tata team who are expert in coalmining and I think the question will be very simple: what kind of cost of production we can access, knowing that the current price of coking coal, which is close to $100 per tonne, is a peak position, it is not a long term price, so we have to take a view on how the long term price will compare with the customer forecast that we can make.

Chairman: Thank you very much for your evidence this morning and thank you for your memorandum. If you feel that there are additional points you would wish to make, we would be very pleased to receive a further memorandum from you. Thank you very much.

Memorandum submitted by Community

Examination of Witnesses

Witnesses: Mr Michael Leahy OBE, General Secretary, Community, and Mr Michael Walsh, Head of Research Department, Community, gave evidence.

Q579 Chairman: Good morning, for the record could you introduce yourselves, please?

Mr Leahy: My name is Michael Leahy, I am general secretary of Community which is the major union in steel.

Mr Walsh: I am Michael Walsh, I am head of research at Community.

Q580 Chairman: Thank you for your memorandum, which we found most useful. In that memorandum you refer to the "increasing concentration of ownership". Very briefly, what do you consider to be the implications of that increasing concentration of ownership in terms of employment in the industry?

Mr Leahy: Having listened to Philippe and Jim giving evidence we clearly believe that there is going to be further consolidation in the steel industry throughout the world, generally because the steel producers have been extremely diverse and the consumers have been very consolidated, so we anticipate that that will carry some pace into the future. In terms of the UK, we have a substantial proportion of steelmaking owned now by one company, Tata, an international company, and there are some major concerns as a consequence of that, not least of all because we believe that Tata paid for Corus a high price; certainly £6.08 a share is a very high price to pay for the company. As a consequence of that, the indebtedness of the company is extremely high and we know that the whole of that indebtedness will fall on Corus, principally in the UK - all the guarantees will fall on the UK side of the business. We are extremely concerned about that, particularly from the point of view of investment for the future, and you had a discussion earlier about investment, particularly in Port Talbot. Of course, it is the truth that in the past we have had a paucity of investment in the steel industry since privatisation in 1990; unfortunately, the previous management paid very little attention to investment in the steel industry and invested year on year less than depreciation. As a consequence of that the company nearly went bankrupt. I have to say that Philippe and Jim have done an extremely good job in turning the company round and it is now profitable, but part of that is due to the increasing market in terms of China, which is consuming a lot of steel and, as a consequence of that, steel prices have risen. That is not going to last long term, there will be an equalisation, and our concern for the UK is that we are competitive; imperative to that competitiveness is investment, and in terms of what Philippe said about investment in the steelmaking side of course, you will know yourself, Chairman, that it was only as a consequence of the tragedy that we had in 2001 that the No. 5 furnace was rebuilt. That was not really an investment, that was done as a consequence of that and was not paid for by Corus, it was paid for by insurance, so there has still been a lack of substantial investment in the steel industry in South Wales and, generally, in the UK.

Q581 Chairman: If you could pause at that point, your memorandum says that the acquisition of Corus by Tata provides "great opportunities". Could you explain to us, looking to the future, what these great opportunities are?

Mr Leahy: It opens up the market worldwide to us. Philippe said in his evidence that it is now a worldwide company and the failure of the past management of Corus was the clear failure to make decisions early. In fact, they were going to go into a merger prior to the Hoogovens merger and it was a case of yes they will, no they will not, they hesitated. We were in favour of the Hoogovens merger, as indeed we were with some form of relationship or takeover, or whatever that may be, because there is protection in being a global company. However, there are substantive drawbacks, bearing in mind the price that Tata has paid and whether or not we are going to get the investment that is vital to the future of the steel industry, particularly in South Wales.

Q582 Mr David Jones: Good morning, in your memorandum you say that "Community considers that there are strong grounds for confidence that the steel industry in Wales can be profitable throughout the cycle and can sustain roughly the same number of reasonably paid jobs." Could you expand on that; on what do you base that assessment?

Mr Leahy: We believe that currently the Port Talbot plant particularly is not in balance. Philippe said in his evidence that the optimum level is 5 million tonnes plus to have a balanced plant; at the moment the steel plant is producing or we are hopeful that it will produce around 5 million tonnes, but the mill is only capable of producing 3 million tonnes. Therefore, there is an imbalance, you need both the steel production and the rolling facility to be precisely in balance and, therefore, it will need substantial investment in the mill if that balance is going to be achieved. Over the years - and I have been in the industry a long time - the solution to the problem post-privatisation was rather than to invest it was to sweat the assets, and what happened was that the solution to the problems of the industry was to reduce the workforce. We have had 10% year on year productivity in the steel industry, we have a workforce that is, in terms of its skills and its ability, second to none in the world, but we need the tools to do the job, we need a balanced plant in order to achieve what we regard will be worldwide competitiveness around $240 to $250 per tonne out of Port Talbot. We have every confidence that we can achieve 5 million tonnes and 3 million tonnes - that is steelmaking through the mill - but then the issue is that it will still not be competitive if there is not investment in upgrading in Port Talbot.

Q583 Mr David Jones: What assurances do you have that such additional investment is likely?

Mr Leahy: None. There is a committee that has been formed, an integration committee, with Tata and Corus and they accept that they will review the matter over the next 12 months because the investment in the mill, although Tata said that for the next two years the investment programme that was already in place would continue, the mill in Port Talbot was not in that plan, so they are going to review that and make a decision over the next 12 months. Our view is that if that investment does not proceed then there are serious problems for the future in terms of Port Talbot and South Wales in general.

Q584 Mr David Jones: You have mentioned the additional investment since 2003 which has had a significant effect I take it in terms of positive development of the steel plant in Port Talbot.

Mr Leahy: The investment in South Wales has been fairly minimal, the investment largely has gone into the CEI business which is Scunthorpe and the engineering skills business. In terms of South Wales it is not large amounts of money. If you compare what Philippe said about South Wales, three times that investment was going into Ijmuiden over the same period. Ijmuiden, when the merger took place, had already borrowed something like £1.5 billion so it had a great deal of investment at the point when the company merged. In fact, British Steel was debt-free at that time and indeed it had £700 million in the bank, and it gave it to the shareholders and took on 1.5 billion of debt. Tata, in terms of its commitment, has got Ijmuiden which is one of the lowest-cost producers, certainly in Europe, and it will not be far behind in terms of the world either.

Q585 Mr David Jones: On the question of competitiveness - and you were present during the last evidence session and you heard what the witnesses from Corus had to say - it appears to be the case, and you acknowledge this in your memo about proximity to major customers being a significant factor, what are the competitive advantages would you say that the steel industry in Wales has?

Mr Leahy: Precisely that. When British Steel was in being, British Steel had 66% of the market but when Corus came to a shaky end it had something like 48% or 49%; it is our view that we should have at least 58% of the market because we are an island essentially and we have the skills and we have the product and we should be doing far better in terms of market share. We believe reasonably we should have around 58%; we are currently between 50% and 55%, but we think we could move that significantly up. When we were talking to Mr Muthuraman (?), who is the chief of Tata Steel, he believes it could go up as far as 70%. That is the figure that he quoted to us.

Q586 Mr David Jones: Again dealing with competitiveness, you heard what the previous witnesses had to say about the effect of the EU emissions trading system. Do you share their analysis in terms of its effect upon competitiveness?

Mr Leahy: Absolutely. My colleague, who is an expert on this, can probably answer better than I but, in short, yes, we do agree.

Mr Walsh: Yes, indeed. In particular - it was not raised in the evidence given so far - the impact of the new entrant reserve provision: we described that as a perverse decision in our evidence. I really think it was, I cannot see any reason why the Government should have inflicted that on us when it is not applied in the same way in any other steel-producing country in the European Union. As the minister acknowledged in the Commons just a couple of months ago, it is going to hit Port Talbot particularly hard, Port Talbot will not get the allocation it needs to produce its optimum level.

Mr Leahy: It is, Chairman, a disincentive to invest, and that is the problem.

Q587 Chairman: In your memorandum you are very positive about the benefits, social and economic, of globalisation and you say that governments have a role to play in delivering those benefits, and you also say that it is "well understood in other EU countries ..." but not in the UK. Could you elaborate on that?

Mr Leahy: In the evidence of Corus, when we are talking about globalisation and energy and when we are talking about emissions, the problem is that as we understand it in our country we do not take the position of - we want fair trade because we think it is beneficial, particularly for developing countries; however, if we are in a situation where it is unfair trade, for instance when you look at Corus's graph in terms of this question of emissions, is it reasonable for us to ensure that we reduce our emissions and China, Brazil, India just put it into the atmosphere and then import their steel cheaply into the UK? I think that that is perverse, and we understand that the minister responsible Peter Mandelson is saying that they are going to put down trade barriers. If that is the case we will have this extraordinary situation where in the UK we have to ensure that emissions are substantially reduced and, as Philippe said, this will not be a level playing field even in Europe, it will be substantially worse outside Europe and on the other hand we are talking about reducing trade barriers. That does not make any sense, economic or social sense, at all to us.

Q588 David Davies: We have covered between us the disparities in environmental measures across Europe but in your memorandum you talk about public procurement being used as a tool by some other governments. Can you give us some actual examples of that, where public procurement has been used to the benefit of competing countries?

Mr Leahy: My colleague who is head of research knows far more about the technical details of this, but in the case of France, for instance, they earmark industries as having a positive strategic role to play in the economy; that is not the case in the UK for instance and we believe that there is much that can be done, particularly in the arms industry where there are no barriers in terms of procurement. It seems to us that in France, Germany, Spain they have a very liberal approach to this but in the UK we have these strictures, in other words we play cricket and they play some other game.

Q589 David Davies: Forgive my ignorance, but I thought that the EU rules were supposed to be that everything goes out to tender and anyone within the EU can compete for a contract, but what you are suggesting is that that is not so in some countries. Is there some legislative means perhaps by which they can earmark certain industries as being able to do things differently and to buy from within their own countries, is that what you are suggesting?

Mr Leahy: I think they find mechanisms not to apply the strictures that our Government applies.

Q590 David Davies: I believe you are right and I believe that is going on as well, but it would be useful for all of us if we could get some examples of some actual case studies of where this is happening.

Mr Walsh: In regard to freedom of discretion, governments are able to get an exemption from the general competition rules for defence procurement - the wide areas of defence procurement - and we do that to some extent, but we do not include within that areas metals, so aluminium and steel might be protected. A lot of the material on this is anecdotal but there is just one fact - and this has been put right, by the way, but I will tell you it is a fact and it might be of interest to Mr Varin, who probably knows it very well - in the early years of this century the French rail system bought rail from the Corus plant at Hayange. 99% of the French need for rail came from that plant. Here Network Rail took only two-thirds of its rail from Corus UK, the rest of it came from Italy or Germany or Austria, so they insisted on spreading the order out when British producers could easily have met that demand in full.

Q591 David Davies: Have you got any other examples of trade and foreign policy? We have talked quite a bit about energy and environmental policies but are there any other examples that spring to mind where you think government policy has been disadvantageous to British industry?

Mr Walsh: Again we go back a few years (but sometimes the evidence only comes out after a time) when Corus was at its lowest ebb, really on the ropes, hot rolled coil product from South Wales was coming in from Egypt and there was a general suspicion that it was being dumped in the UK and in the European Union as a whole. There was a vote in the Council of Ministers where the main steel producers all voted to introduce measures to protect the European steel industry against these imports. The UK used its vote to block the action but it did not happen so the steel came in at that critical time.

Q592 Mr Martyn Jones: You say in your memorandum that views are divided as to whether high prices and exceptional profitability in the steel industry are embedded or temporary. What is your view on that?

Mr Leahy: I think that the fact of the matter is that steel prices have been very much influenced by China and their consumption of steel. We believe that prices will remain steady. They will fall because steel is a cyclical business and we are going through a period of high prices but it will be far more stabilised because of the consolidation that is going on in the steel industry. We are going through a peak period and prices will fall, so inevitably from the point of view of the UK (and I think that Philippe Varin has illustrated the problems that we have in the UK) we need to make sure that we are globally competitive and we are doing much, particularly in the South Wales plant, to make that a reality. We believe we can achieve that but we cannot sustain it long term without investment and it is because we have had this paucity of investment over nearly 15 years that we are trying to catch up. Our counterpart in Moiden (?) has had significant investment when the South Wales plant has had little or none, so we are playing catch-up and unless that investment goes in there is no way that we could be internationally competitive.

Q593 Mr Martyn Jones: You refer also to many projects in Asia and Latin America where they are building new steel-making plant. Do you think that increased domestic production capacity abroad will develop to fulfil the rising demand for steel? And will this close off a market for UK exports if they have their own domestic production?

Mr Walsh: No, I do not think that will be a significant factor directly. Our markets are much more within the European Union and North America and other industrialised countries, but of course there will be a diversion of exports into markets that are ours as a result of the production increasing elsewhere.

Q594 Mr Martyn Jones: This is obviously a damaging effect of globalisation. In principle, you are in favour of globalisation according to your document but this could actually damage our position.

Mr Walsh: Yes, Corus gave the example in the evidence about India as a vast and growing market and there are others as well.

Q595 Mr Martyn Jones: Of course, yes.

Mr Walsh: But there is also the Corus strategy of going upmarket with differentiation and that is an area we have only just started thinking through. In Shotton in North Wales there is the Living Solutions development which I have got great hopes in and I think it will be a winner in the future. So there is much to play for and no need for great pessimism about the future.

Mr Leahy: No, and there is a great deal of innovation going on in the steel industry in the UK and of course, as Corus have said, it is a great opportunity to export our skills in metallurgy that we have in the UK. A decision was made to consolidate R&D between the Netherlands and the UK in Rotherham but for one reason or another that did not happen, which was a shame, but the whole issue here is if we are in favour of globalisation we are in favour of fair trade, but it has to be fair trade and the problem is that clearly with the strictures that have been put on the UK - and we are not against those strictures because we are in favour of looking after our climate - but on the other hand they have to be applied equally across Europe and it is important if other countries who are not compliant with the Kyoto Treaty are importing steel into the UK that we have a fair trade policy.

Q596 Mr David Jones: Could we please now turn to UK energy prices. You have expressed concern about the level of UK prices as compared with other European countries. To what extent is this affecting the competitive position of the steelmaking industry in Wales and the rest of the UK?

Mr Leahy: It is as Mr Varin has described. I think that Port Talbot and Llanwern particularly are doing all they can. They are recycling much more energy than they used to. Corus talk about importing slab into the UK as an alternative to producing steel in the UK. Of course, that would have a profound effect on energy because increasingly we can recycle energy that is produced through the blast furnace production into the downstream activities of the plant. If energy is going to be a major issue in terms of cost, then if you are not producing your own steel there is the impact of energy because you have to reheat the slab and so on and so forth, so the energy costs would be a substantial proportion of cost in those circumstances. So it has a major impact on how profitable the industry can be and, as Corus have said, there is a difference in policy and strategy of for instance the Netherlands Government in relation to energy because we have a free market where most European countries are a regulated market.

Q597 Mr David Jones: And there is a significant difference, is there not, you mentioned in your memo that in the last quarter of 2006 energy prices in Germany and France were some 15% lower than the UK and that was an improvement upon 2005, so it seem to me that must be a very significant disadvantage in terms of competitiveness.

Mr Walsh: Corus in their evidence made the point that the competitive gap between the UK steel operations of Corus and the European Union average had widened. That was not true of the initial period. We narrowed the gap quite significantly, I think by a third or a quarter, and now it has widened. I think the main reason why it has widened is the additional costs that we have had in the UK for energy. It is not just a Corus problem. Of course you know that Alphasteel have had problems in Wales because of energy costs and supply issues. I have not heard Celsa complain but I am sure that they find it difficult too.

Mr Leahy: They would do because the electric arc process is a substantially high-cost energy, it is high consumer of energy, even more actually than the blast furnace route and steelmaking route.

Q598 Mr David Jones: You mention in your memo that you have made many representations to the Government on the issue of excessive prices of energy over the past two years and also on your concerns about the serious decline in generating capacity over the next decade and you say that you have not obtained any substantive response. What sort of representations have you made? Have these been in person or by letter?

Mr Leahy: We were with Alistair Darling yesterday making this point, and we have had meetings with Mr Wicks, we sit on the TASDAC committee, so this is a focal point of representations we make because it is a serious concern to us.

Mr Walsh: Just on that I think there was certainly a more encouraging response from the Secretary of State yesterday than we have received previously. Of course we had submitted our evidence before we saw the Secretary of State.

Q599 Mr David Jones: And are you hopeful that there may be something in the Energy White Paper which is due to be published? Did he give you any indication that there is cause for hope?

Mr Leahy: No, he did not but he was quite encouraging and we want to produce some more evidence and he says he has got an open door to do that. We would prefer to do that, incidentally, with ourselves and Corus together because it is a mutual problem.

Q600 Mr Martyn Jones: As I said before, you seem to have chosen to embrace globalisation, on balance, as a force for good. I think that is what you said. How have you prepared as a union for the challenges that globalisation will present?

Mr Leahy: We have relationships globally right across the world with various organisations, including the International Metalworkers' Federation and the European Metalworkers' Federation. We have a number of partnership agreements. Our particular problem is trying to persuade the Americans particularly that they should not have tariff barriers and that that is a short-term solution, it does not solve the problem long term. So we have our differences across the world but principally certainly in the third world we have some very good relationships and we believe that it will do much for the developed world if they develop their industries for the ultimate good of our members as well. We come back to the point that if this happens we need it on a fair trade basis and so in all our discussions with our colleagues across the world - because I am, for my sins, President of the steel and non-ferrous metals section of the IMF - we encourage developing countries to develop. We explain to them the value of trade union organisation across the world and we seek to develop and help them in terms of education and training. For instance, we have done a lot of work in Russia and Poland and various other countries to develop their trade union organisation and develop partnerships with employers. It is reasonable to say that we do not agree all the time with Corus and probably we will not agree all the time with Tata, but I think that we have a reasonable partnership. We understand what the issues are and we agree on most things, but not all things.

Q601 Chairman: Could I ask the last question. I was interested in your explanation about your global links but you did not mention China, and it strikes us that in terms of Chinese steel production it moved rapidly from being the largest importer to being the largest exporter without any apparent real advantages in terms of energy or raw materials and so on. How do you explain that and how have you engaged with the Chinese steel industry and their trade unions?

Mr Leahy: Through the IMF we have sent a delegation to China. There is a different view. The Americans are very anti-China because they see them as taking their jobs and really do not want to build relationships, but I think the consensus within the International Metalworkers' Federation is that we need to develop relationships with the Chinese, and of course we all know that that is dominated by the government so you would not be meeting trade unionists in that sense, you would probably be meeting government officials, but we take the view that we need to reach out and have a dialogue with the Chinese and we are attempting to encourage the IMF to do that. However, there are voices within the IMF, particularly the Americans, who certainly are not engaged in that process at all. They see the Chinese as stealing their jobs essentially.

Mr Walsh: There is an acute need for the development of an independent trade union voice in China. It has not been widely reported here but last week 32 Chinese steelworkers were killed in a single accident when a ladle overturned on them, which is a horrifying way to die. What we have is evidence of many, many accidents and indeed repression against steelworkers in China and I think that is something that ought to be on governments' agendas as well. This plays its part in trade and international development.

Q602 Chairman: I think my question was so long the main point of it was lost in your reply and I apologise for that. How do you account for the rapid change around that has occurred in China?

Mr Walsh: Production had been increasing steadily at 20% a year and there did not seem to be any restriction. The obsolescent plants did not go out of business because of local autonomy and they just had produced enough to be able to sell it at a time when world markets were rather promising and they were able to sell steel that was not needed at home at a comfortable profit. They were taking advantage of the market situation.

Chairman: Could I thank you both for your evidence this morning and also for your memoranda. Again, if you feel that there is something further you wish to add we would be pleased to receive it in a memorandum.