ANALYSIS: Is there a future for steelmaking in the UK and Canada?

In a comparative approach, Steel First and sister company AMM examine whether the steel sectors in the UK and Canada are too small to survive or too big to fail.

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Global overcapacity in steelmaking and the consequent collapse in prices have thrown up a host of challenges for the steel industries in the UK and Canada, both of which have been buffeted by job losses, plant closures and bankruptcies.

The market turmoil has led to calls for government intervention in both countries, seeking reductions in the business rates for domestic steelmakers, or pushing for swifter action against the dumping of cheap imports, or trying to alter procurement guidelines to prioritise domestic steel in national infrastructure projects.

Canada and the UK have steel sectors of similar sizes, and rank 17th and 18th, respectively, in the World Steel Association (Worldsteel) 2015 league table for crude steel production.


Sources: UK Steel, Worldsteel, ISSB, Canadian Steel Producers Assn, Metal Bulletin Research.
(* = estimate)


Given the challenging market conditions, is it possible for a domestic steel industry of such a size to sustain crude steel production?

At first glance, the Canadian steel industry appears more strongly positioned, as it has plants with newer technology and a stronger domestic supply chain than in the UK, which is more reliant on older blast-furnace technology.

Crude steel production in Canada is also more evenly balanced, with 47% of the 12.60 million tonnes of crude steel produced in 2015 coming from the recycling of scrap in electric arc furnaces (EAF). The UK, meanwhile, produced roughly 17% of its 12.2 million tonnes of crude steel through EAFs in 2014.

Logistical issues
In a low-margin environment, strong logistics and an efficient domestic supply chain are critical.

More than 70% of the Canadian steel industry is based in the province of Ontario in east-central Canada, close to iron ore mines and steel consumers.

Given the just-in-time deliveries required by these consumers, it is critical for the Canadian economy that steel continues to be made in Ontario, according to Marty Warren, district director of trade union United Steelworkers.

“Convoluted supply chains, long lead times and high transportation costs are simply not consistent with the manufacturing of today,” he added.

In comparison, the UK steel industry faces a number of logistical issues.

For example, slab produced by Sahaviriya Steel Industries (SSI) UK at the now-closed 3.6 million-tpy slab plant on Teesside in northeast England was mostly exported by sea to the company’s home base in Thailand to be processed, in a highly uneconomical strategy.

Similarly, Tata Steel UK’s current operations also suffer from geographical inefficiencies. Its Scottish plate mills at Dalzell and Clydebridge, which are in the process of being mothballed, were formerly supplied with slab produced 400km to the south at Tata Steel’s plant in Scunthorpe. The resulting plate was then sent back to Scunthorpe to be distributed.

A more market-centric strategy – as adopted by the Gupta family, owners of international steel and metals group Liberty House – may be the way forward for the UK steel industry.

Liberty House restarted operations at its hot rolled coil mill at Newport in South Wales in October 2015, importing steel slabs to its own port facility rather than using the onsite EAF to produce its own slabs, because of the high cost of electricity in the UK.

Liberty House intends eventually to create a fully integrated production-to-distribution UK business, it has said, having bought downstream operations including ten engineering businesses formerly owned by Caparo.

“It’s much harder for the liquid end than it is for downstream, where there is a market and you can reset the cost base. But the biggest challenge is that participants aren’t acting quickly enough to adapt to it,” Liberty ceo Sanjeev Gupta told Steel First in December last year.

Environmental policy
Another cost challenge for steelmakers is adhering to environmental initiatives, including stricter emissions targets and lower energy consumption targets.

The EU has taken a global leadership position in lowering carbon emissions, promoting renewable energy and driving for higher energy efficiency standards.

“There is a contradiction here,” Roman Kucinskij, consultant at Steel First sister company Metal Bulletin Research (MBR), said, referring to the notion that maximising decarbonisation in the steel industry could not be achieved without raising the costs of power generation and the price of energy.

The cost burden arising from Phase III of the EU’s Emissions Trading System (ETS) could add as much as €15 ($17) per tonne to EU crude steel prices, according to a recent study by MBR.

Steelmakers in the UK celebrated a small victory recently after the government secured European Commission approval to grant backdated state compensation for the cost of renewables to energy-intensive industries (EIIs), with a full exemption to come by April 2017.

There have also been moves in Canada to curb greenhouse gas emissions, although the effect on steelmakers is expected to be limited.

“We are working closely with the Province of Ontario as it implements its cap and trade programme to ensure there are no unintended consequences for our industry in terms of additional direct or indirect costs, and we believe our concerns in that regard are being heard,” Joseph Galimberti, president of the Canadian Steel Producers Assn, told AMM.

“We don’t think that a programme seeking to mitigate greenhouse gas emissions can be effective if it negatively affects domestic production and increases reliance on imported steel [often produced in countries with fewer environmental regulations],” he said.

Canada is already among the quickest of countries in concluding trade cases and implementing definitive measures, and further measures to improve the handling of trade cases could be sought.

In comparison, a motion to support tougher action by the EU against the dumping of imported cheap steel products was defeated in the UK parliament by a margin of 49 votes in late February.

Boosting end-user demand
Both the UK and Canada have seen a recent decline in domestic end-user demand.

Trade body UK Steel estimates that demand in the country fell by 2% year-on-year in 2015, mainly due to poorer activity levels in the engineering and oil & gas sectors, although the construction and automotive sectors grew by 8% and 4%, respectively.

In the UK, there have been industry calls to strengthen the domestic supply chain through prioritising the procurement of domestically produced steel in government infrastructure projects.

The UK Labour Party, which currently is not in power, has raised concerns regarding procurement for the country’s naval fleet.

“The ministry [of defence] has admitted to me that Tide-class tankers are being made in [South] Korea with Korean steel,” Stephen Doughty, the member of parliament (MP) for Cardiff South and Penarth in South Wales, said in a parliamentary debate on February 29.

And fellow South Wales MP Stephen Kinnock, whose Aberavon constituency includes the Port Talbot steelworks, asked: “Why on earth is the defence ministry’s latest order for a set of Royal Navy frigates going to be based on Swedish steel?”

UK trade union Unite called on Tata Steel to commit to making planned new products in the UK in early February, while workers at carmaker Jaguar-Land Rover wrote to Tata chairman Cyrus Mistry last December, asking for reassurance about the company’s commitment to UK steelmaking.

More recently, the UK government was criticised after domestic steelmakers such as Sheffield Forgemasters were excluded from the procurement process for the Hinkley Point C nuclear plant project in Somerset, south-west England.

In Canada, the steel industry has been hit particularly hard by a drop-off in demand in the energy market.

“We are concerned about the decline in oil prices and the implications for our customers,” Galimberti said. “At the same time, we know that the Canadian energy sector is both resilient and innovative, and we are encouraged on that basis that investment in Canadian projects will continue.”

Canadian domestic steel demand is likely to get a boost from the infrastructure spending plans of recently elected prime minister Justin Trudeau, who has promised an extra C$60 billion ($46 billion), bringing the total infrastructure budget to C$125 billion ($96 billion) over ten years.

“We view this as a significant opportunity for domestic steel producers and look forward to collaborating on procurement policy with the federal government to ensure that we are in position to fully participate in the projects that this investment will support,” Galimberti said.

According to MBR, car manufacturing represented an estimated 25.6% of domestic steel consumption in Canada in 2015, but demand from the sector could drop if the new government adopts the Trans Pacific Partnership (TPP) trade agreement, which would remove tariffs on Japanese car imports into the country.

“We are mindful of the potential of the implications for Canada’s automotive sector associated with our participation in the TPP,” Galimberti said.

Should consumers take priority?
With UK and Canadian steelmakers facing a plethora of challenges arising from unprecedented global competition, some believe that the interests of steel consumers rather than steel producers should take priority in governmental thinking.

“If the UK steel industry continues to be uncompetitive, it can no longer be sustained and certainly should not be propped up using taxpayers’ money,” Mark Littlewood, director of free-market think tank the Institute of Economic Affairs told Steel First.

“Even with the government allocating subsidies and cutting costs for steelmakers, the industry’s decline seems to be irreversible,” Littlewood said.

“Instead of trying to prevent the inevitable from happening, politicians should do more to help those affected to adapt to this change,” he added. “[Steel] consumers across the continent are now benefiting from cheaper prices.”

Compared to Canada, the UK domestic supply chain is much weaker, with 64.17% of domestic production in 2014 being exported.

In Canada, producers and consumers alike are reliant on each other’s success, given that the majority of domestic steel production is based in Ontario, highlighting the need for just-in-time deliveries to serve end-users such as the automotive industry.

“Given the industry’s extensive domestic supply chain, we believe it’s important to encourage continued investment in the sector and to drive production growth in Canada,” Galimberti said.

Conclusion
In terms of output, the UK and Canadian steel industries are of similar size, but UK steel producers appear to be under far more pressure than their Canadian counterparts.

While Canada is highly exposed to energy prices, it benefits from logistical advantages in the positioning of the automotive industry, and strong government action on dumping to protect producers.

Meanwhile, the UK has been hit by a combination of home-grown issues, such as a poor supply chain and inefficient logistics, as well as burdensome environmental policies and sluggish EU action on the influx of cheap imports.

The Canadian steel industry faces tough challenges, but altogether fewer of them, and benefits from a political will to protect domestic steel production. The road ahead for the UK steel industry, on the other hand, looks much more bleak.
 
 

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