Peter Jones: How Scottish steel industry was hammered

But amid the problems, Britain could get on track for a novel solution, writes Peter Jones

A worker welds steel in a factory in Huaibei, in north China's Anhui province. Picture: Getty

If you are reading this on a train and have also been concerned about the troubles of the steel industry, take a close look at the trackside out of the window. You might just be looking at a solution, albeit a temporary stopgap, for steel’s woes which are expected to deepen today with further closure and cutback announcements. It is also a solution which could help the environment.

But first, should we just say goodbye to steel-making? Politically, of course, nobody wants to say that. Blast furnaces and thundering rolling mills are the epitome of, and at the very core of, an industrial society, no more so than in Scotland. There is enormous emotional pressure to retain at least something of that heritage, even if it is not much more than a vestige of what was once a mighty presence.

But in economic terms, it is a vestige. According to a House of Commons briefing, the steel industry employed 34,500 Britons in 2014, just 1,100 of them Scots, or 0.04 per cent of the active Scottish workforce. Although the impact on Lanarkshire, home to most of what remains, would be heavy, disappearance of steel-making would not be an economic disaster.

A better case can be made in strategic economic terms. Somewhat surprisingly, Britain has a small balance of trade surplus in steel, exporting 7.6 million tonnes (mt) in 2014, but importing only 6.4mt. A major loss of production capacity would not just worsen the existing trade deficit, but would also leave the country’s construction firms more exposed to the uncertainties of the global steel market.

This market has changed dramatically in the last decade. One of the factors behind China’s phenomenal growth in recent decades has been the rapid and enormous expansion of its steel-making to the point where its production has become a near-global monopoly.

In 2000, China produced 129mt, 15 per cent of global production of 849mt. In 2014, Chinese steel output had risen to 823mt, a more than six-fold increase. It now accounts for just under 50 per cent of world steel production.

That was fine while the Chinese economy was roaring along and consuming all that Chinese mills could spit out. But now growth has slowed and there are fewer new buildings, railways, bridges, etc, so there is a lot of steel production which no longer has a Chinese buyer.

Their solution has been to export the excess production. In 2000, China was, in net terms, a steel importer, but by 2014 it had become the world’s biggest exporter, selling 93mt to the rest of the world, with net exports not far behind at 78mt. In Britain, Chinese steel has quadrupled its market share in four years.

Not surprisingly, when supply increases faster than demand, prices fall. In steel’s case, they have plummeted, with the price of slab steel down from £330/tonne to £185/tonne, a 45 per cent fall with most of the price drop occurring in the last year.

And naturally enough, if you are in the construction business, you will seize any chance to cut costs. At the start of 2013, China’s steel-makers supplied Britain with no “rebar” (the reinforcing rods used to strengthen concrete), but by the end of last year they had captured 37 per cent of this market.

UK steel-makers suspect much is being sold at below-cost prices, an offence under world trade rules, and have asked the European Commission to investigate whether it is being wrongfully dumped. But even if that turns out to be the case, it will take at least a year, probably longer, before any action could be taken.

Commodity price is not the only issue. Steel-making involves vast amounts of energy. The specialised steel produced at Clydebridge, for example, requires temperatures of more than 1000°C. But UK industrial energy prices are about 50 per cent higher than mainland European prices and the gap with Chinese energy prices may be even higher. And over the last year, the value of the pound sterling has strengthened, while the Chinese government devalued its currency by 4 per cent in August, a move intended to stop the economic slowdown by making exports, including steel, even cheaper.

While that has its benefits to us – for example, cheaper Chinese steel is one reason why the new Queensferry crossing over the Forth is under budget – there will come a time when prices go up, even if only driven by currency movements, and construction in Britain will suffer as a consequence.

Avoiding this currency fluctuation risk is one reason for working to keep our steel industry intact and give Britain’s builders a little more certainty. But it will take more action, particularly on energy prices and also on other government-controlled matters such as business rates and carbon taxes.

These risk falling foul of EU rules on state aid, though there may be loopholes presented by environmental rules designed to promote recycling. Interestingly, Britain’s steel-makers make most of their steel not from iron ore quarried out of the ground and expensively shipped here, but from scrap. Skanska UK, for example, a major producer of rebar steel, claims that 98 per cent of its product comes from scrap, enabling it to meet some tough environmental standards.

A problem with a lot of scrap is that it is very variable in quality. But on the North Berwick to Edinburgh train recently, it suddenly occurred to me that out the window I could see hundreds, if not thousands, of tonnes of consistently high quality scrap – disused and discarded rail lines.

And that’s just on 18 of 10,072 miles of UK railway tracks. Collected and shipped to steel plants, it might just be a cheap source of millions of tonnes of high-grade steel and a nice little earner for Network Rail to boot. Add in some public procurement rules demanding that exacting environmental standards be met (which Chinese producers probably cannot do) and you might have the basis for sustaining a steel industry through the present price slump.

The downside would that construction costs of things like the Queensferry Crossing would be higher. But the gains, from preserving an industry and helping the environment, may be greater.