Is going ‘green’ hurting British steel?
Chris Beauman, Senior Advisor at the European Bank for Reconstruction and Development and member of the Centre for Climate Change Economics and Policy Advisory Group looks at the impact of climate change policies on the UK steel industry.
Both Redcar and Scunthorpe have suffered severe squeezes on margins. Uncertainty about climate policy after 2020, both EU and UK, has not been helpful for investment. But it is part of a complex panoply of other factors; the most clear and present being massive downward pressure on prices as a result of oversupply on the global market. This blog addresses three key issues: structural changes in the European steel sector, China and the global market and climate change policies.
Structural changes in the European steel sector
The problems at Redcar and Scunthorpe stem from their recent history and the impact of structural changes in the European steel sector.
Both Redcar and Scunthorpe are large integrated steel plants, producing steel from iron ore and coke. Redcar had been identified in the early 1970s as the centrepiece of the nationalised British Steel’s expansion, but that expansion was aborted by the oil crisis and Redcar struggled to find a role. In 2010, its owner, Tata Steel Europe, decided to mothball the works, but unexpectedly SSI, which needed a source of semi-finished steel slabs, appeared as a buyer. SSI bought Redcar for about $500m, a fraction of the cost of building a greenfield plant nearer home, and was willing to pay a premium for Redcar’s slabs. Since then the global price of slabs has fallen substantially, and slab supply goes only to the lowest cost producers (e.g. Russia).
Scunthorpe, also owned by Tata Steel Europe, is largely focused on steel long products (bar and rod for engineering; rails; sections and beams for construction); it also makes slabs for heavy plate, including two Scottish plate-rolling mills. These products are particularly vulnerable to competition from foreign imports because they compete mostly on price.
Redcar and Scunthorpe are not alone in the challenges they face. Increased competition has forced the European steel sector to shift its focus to higher value products for the automotive and energy industry. Tata announced in October its exit from its marginal business in plate and now focuses primarily on flat products, sourced from two large integrated works, Ijmuiden, its coastal site in the Netherlands, and Port Talbot in South Wales where it has invested £300m or so in recent years and benefits from the strength of demand from the UK automotive industry. It remains one of the European steelmaking giants, along with ArcelorMittal Europe and ThyssenKrupp Stahl (TKS). The most profitable of Europe’s significant steelmakers is Voestalpine (Austria), largely in higher value steels. The most important sector for these steelmakers is automotive, although the power business is also significant.
China and the global steel market
Why make steel in Europe at all? The raw materials come from far away, and the costs of labour and energy are higher than in emerging economies. The answer is that Europe represents some of the most attractive markets for steel, both in manufacturing and in construction.
Construction steels are generally lower value (e.g. rebar) and they can be made in low-cost and flexible minimills from local scrap and hence provide a convenient ‘Just-in-Time’ service to the construction industry. But unless construction steels can compete on cost they are vulnerable to imports.
Steel for manufacturing also has to compete on cost, but even more on service and reliability. Leading European steelmakers are also increasingly seeking to add value by cooperating with their leading customers to develop special grades (e.g. high strength steels).
However the global steel industry has been suffering from the emergence of chronic overcapacity, especially overcapacity of 300mt or so in China, and the explosion of Chinese exports (now at about 110mt pa). Raw material prices have fallen substantially in line with steel prices, especially as huge new supplies of iron ore came on-stream in Australia, at the wrong moment.
The availability of increasing amounts of cheap Chinese steel in global markets has led to massive downwards pressure on prices, which, having weakened since 2011, have fallen 20 per cent or so in the last year, and in some products more. As a result steel makers all over Europe have been struggling to compete, particularly those making commodity steel products like Redcar and Scunthorpe.
The steel sector and climate change policies
So steelmakers in the European Union face falling prices and yet have to pay largely fixed high labour costs and increasing energy prices. As climate change policies tend to increase energy costs to what extent are they part of the problem?
For the integrated players like Redcar and Scunthorpe electricity costs are small but they do face costs on their carbon emissions via the European Union Emissions Trading System (EU ETS). Nevertheless, these costs have so far been very low as a result of the free allocation of emissions permits. The real problem of ‘carbon leakage’ for them is principally the blight of uncertainty about the future price of emissions permits in the 2020s and beyond, which does have a negative impact on new investment in Europe.
Steelmakers using electric arc furnaces on the other hand are directly affected by rising electricity prices. Hence many countries have introduced schemes, blessed by the European Commission, compensating firms for policy based price increses. For example the Government has promised UK energy-intensive £500mpa up to 2019/20.
Climate change policies are not, of course, the main source of the problem the UK steel sector currently faces. Energy and labour costs are high before counting in any impact from climate change policies and UK firms, particularly those producing lower grade steels are struggling to compete a price level set by cheap Chinese exports. When operating margins are very low every additional percentage in cost does hurt. There are tipping points of bankruptcy and closure which are not easy to predict. However, uncertainty about future policy does act as blight. There is nervousness about committing major new investment to plants in Europe when the support that energy intensive sectors (like steel) will receive post-2020 is yet to be defined.
The pressures that steel imports are creating in the European market show how important it is to address the challenge of designing and implementing a workable global scheme for Border Carbon Adjustment. Without such a scheme, effective carbon pricing in energy-intensive sectors will be swept aside by the realities of industrial survival.