Scunthorpe Isn't Saved

A Facile Debate In Parliament Doesn't Alter the Realities Of the Mess British Steel Is In.

Last weekend Parliament voted to take control of British Steel to keep the blast furnaces running. (While it is possible to shut a blast furnace down it’s a complex and time consuming process. Running out of fuel – coking coal – would wreak considerable damage on a furnace, almost certainly damaging it beyond economic repair). Because of fears that the furnaces might be allowed to run out of fuel the House was recalled on a Saturday. (The last time the House sat on a Saturday was in 1982 when it discussed the rather more momentous Argentinian invasion of the Falkland Islands). Adding to the melodrama, the Royal Navy was alerted to escort a coal carrier into port. In a depressing display of near unanimity (the point of an opposition is to oppose) the House agreed that Scunthorpe should be “saved.”

So Happy Easter! You’re now about to be on the hook for British Steel.

The legislation is now in place for UK taxpayers like you and me to control and, if necessary, own two old blast furnaces. The UK remains able to produce primary steel in bulk (sort of). In the interim the Secretary of State is in control, having hired an industry veteran to be CEO. That’s reassuring; making steel is complicated.

Making Steel

Steel is an alloy of iron, carbon and a selection of other metals like manganese, cobalt and chromium and other elements. The proportions determine the properties of the steel; getting the mix wrong means the steel won’t meet performance specifications which is why some industries prefer “virgin” steel to that made from scrap steel by electric arc furnaces – the certification of the contents of scrap metal is almost non-existent. That’s OK if the steel’s performance is not critical but bad news in demanding applications of the defence and nuclear industries.

The blast furnace is fed a mix of iron ore, lime, other metals and coke. The latter burns in oxygen to provide the heat required (well over 1,600 degrees centigrade) and, crucially, delivers a series of chemical reactions that turn the iron ore into pure iron and then steel. Manipulating the feed controls the amount of carbon in the steel. The process runs continuously. The Scunthorpe blast furnaces each deliver about 200 tons of steel an hour.

It is possible to make high specification steel in a modified electric arc furnace. Sheffield Forgemasters (nationalised in 2021 and now owned by the MOD) does precisely that. It makes about 40,000 tons of such steel a year.

That’s a tiny fraction of the UK’s 7 million ton a year demand, but enough for plenty of warships (a frigate weighs 7,000 tons, far from all of which is high grade steel) and armoured vehicles (40 to 70 tons or so each), plus gun barrels, artillery shells and the like. Saving Scunthorpe therefore has absolutely nothing to do with securing defence infrastructure. It’s about retaining a manufacturing capability that can’t make a profit in the current marketplace. If that sounds familiar it is – the Tata owned blast furnaces in Port Talbot closed last year for similar reasons – they were losing money.

Scunthorpe’s furnaces are a link in a manufacturing chain which starts with extracting minerals. Although iron ore is abundant in the UK there are no working iron mines in the country. We do excavate a little coal. For all the hullabaloo about the Whitehaven mine, the coal it produces is too high in sulphur for steel manufacture. It would need to be blended with coal from other mines.

Making one tonne of steel requires about three quarters of a ton of coal. While the UK has abundant coalfields, coal production in 2023 was just 500,000 tons. . There simply isn’t enough coal produced in the UK to feed Scunthorpe; making steel requires imported coal too. It's the same story for most of the other components of steel, except for the scrap of which we export 20 times more than we import so electric arc furnaces can be fed with UK sourced materials. Getting the electricity for them – and EAFs need a lot – is a different story. Courtesy of net zero electricity is increasingly rare and expensive.

UK Steel Economics

The Scunthorpe plant blast furnaces have a nominal capacity of 3 million tons a year, enough to satisfy just half the UK’s demand. The rest we import from overseas, the top sources being Turkey, Germany and Spain who between them provided 30% of the 5.4 million tons we imported. India sent us 6% and China just 3%. Those portraying Scunthorpe’s demise as a Chinese threat to the UK are, at best, overstating Chinese influence on the UK’s steel supply.

We also exported 3.3 million tons of steel mill products, some of which will probably have been reworked imported steel – turning (say) German steel ingots into rolled steel joists for France. Like all modern industry, the logistics are complex as raw materials travel from factory to factory until they eventually become finished products. (Then they probably travel again, but that’s not relevant).

Scunthorpe’s blast furnaces are old and will need replacing or extensive refurbishment at some stage. That’s not cheap, particularly in the UK where emissions are expensive. The current owner, Jingye, was planning on closing them and replacing them with electric arc furnaces. The UK has some of the most expensive electricity in the world. If it’s cheaper to use electricity than coal (in the form of coke) to make steel the emissions costs must be astronomic.

That’s no surprise, making one ton of steel in a blast furnace produces over two tons of CO. Emissions pricing is complex as the UK operates its own emissions trading scheme but is in the process of re-joining the EU one. The detail is complex but the current price is £41.84 per ton of CO2, over £80 per ton of steel. https://www.gov.uk/government/publications/determinations-of-the-uk-ets-carbon-price/uk-ets-carbon-prices-for-use-in-civil-penalties-2025 That’s an awful lot on a product whose price is falling to £300 per ton (low grade rebar) . Even the higher grade coil steel costs just £600 per ton. In this environment it’s far from surprising that British Steel lost £227 million in 2023.

How is it that EU steel makers can deliver a profit and Scunthorpe can’t? Because the EU subsidises them, lavishly. For example Thyssenkrupp just got US$ 2.2 billion to build a new factory. By comparison the UK’s Steel Strategy is considering £2.5 billion for the entire steel sector. Across the EU the total subsidy was €15 million in the past six months alone.

The steel manufacturing playing field is not level; it is distorted by subsidies and, like European agriculture, is far from a free market. Scunthorpe is in an unenviable position as it must import all its raw materials. Worse, there is oversupply in the global steel market and China – the worlds largest steel manufacturer – is culpable for this, among others. British Steel's capital costs are high, as are its energy costs and emissions costs. Building a compelling business case to manufacture steel in the UK is a challenge. If (or when) British Steel is nationalised we’re on the hook for its losses. The government may be searching for another buyer but the global supply of fools with money and an interest in making steel in an aging plant is tight.

The pragmatic business solution is simple. Scrap the furnaces, build steel warehouses and import virgin primary steel as required from reputable suppliers. Maintain a strategic reserve, play the markets. Keep processing steel in existing plants and find some way of feeding the Scunthorpe manufacturing facility with liquid steel so that it can continue its other operations. That’s pretty much what Jingye proposed. According to their most recent accounts (to 31st December 2023). Indeed they had invested £103 million on such a plan.

Parliament has a different vision of Scunthorpe’s future, but it’s not clear what it is. MPs hate emissions, so they must hate the blast furnace that they have just “saved”. They claim to be securing production, but Scunthorpe relies heavily on imported fuel and feedstock. Political posturing is no substitute for clear policy.

Industrial Strategy

Retaining steel making only makes sense as part of a policy of reindustrialisation and that’s far from quick, cheap or straightforward. It would involve reopening coal mines, iron mines and a massive increase in rail and road infrastructure. Finding and training the workforce would take time too. It’s not necessarily a bad idea; indeed it may be a good one. But it's not a policy best decided by a short notice Saturday afternoon debate.

In the foreword to his department’s consulting document from which it hopes to develop a strategy for steel, the Secretary of State for Business, Jonthan Reynolds wrote: ”…For example, it is estimated that offshore wind alone will require 25 million tonnes of steel – primarily plate steel – out to 2050. This represents a potential £21 billion market for UK steel.” Scarborough doesn’t make plate steel.

Other British steel works (that is, British owned steel works located in the UK, not the Chinese owned British Steel ones) do. For example Liberty Steel Dalzell, but they don’t use blast furnaces and so are dependent upon electricity, which net zero makes ever more expensive. Whoever is developing the windfarms will be keen to get the lowest priced steel they can find. That might well not be from the UK. (The steel plate also needs shaping, joining, fitting out, painting and transporting to the installation location – the price of steel is just one factor in determining which is the lowest cost option. Making stuff from scratch is complicated almost beyond belief).

The UK de-industrialised in the 1980s for a variety of reasons. The Treasury could not afford to invest to modernise decrepit production lines, unionised workforces destroyed productivity through strikes and the state owned industrial monoliths were unable to adapt quickly in a world that was speeding up – in part due to the increasing capabilities of computers. In part de-industrialisation was inevitable, driven by the rise of cheap to operate industrial robots and, through globalisation, the availability of cheap labour in countries with softer and therefore cheaper environmental legislation. Much of UK manufacturing could not compete.

Replacing Manufacturing

To replace the employment and national income the UK would climb the value chain, specialising in generating Intellectual Property and (especially) delivering finance. We were to become a service based economy.

That worked, sort of.

Skilled steel workers, shipbuilders and coal miners were less than chuffed about becoming call centre operators – particularly when those jobs shifted to India. Supply chins became longer and the UK became even more dependent upon trade and shipping to survive.

It was thought that it didn’t much matter as the balance of trade remained positive, with the UK’s surplus in services cancelling out the deficit in manufactured goods and food. Which, as the chart below from Trading Economics shows, it did. Sometimes. Notwithstanding the spikes round 2020 (presumably related to Covid) the UK’s balance of trade seems in steepening decline.

That matters. Money spent abroad is lost to the economy and therefore represents a lost opportunity for the economic growth that we desperately need. Presumably the hope is that “saving” Scunthorpe will reduce the UK’s net steel imports, thereby retaining the revenues in the UK. That makes sense, although of course if British Steel can’t operate its blast furnaces profitably (and it’s struggling to) tax or government borrowing will have to increase to cover British Steel’s £250M a year losses. That won’t stimulate growth.

Scunthorpe employs some 2,700 workers. Keeping them from joining the 1.6 million unemployed and/or the 9.2 million economically inactive works out at £93,000 per Scunthorpe job. That level of cost can only make sense as part of a wider strategy to rebuild British industry and with that employment and exports. That would deliver economic growth, restoring the country’s finances and delivering an attractive future for the nation. Is it possible?

The Missing Link

Making stuff required factories and supply chains, much of which will inevitably be overseas where the raw materials are. That’s not a bad thing; it’s the basis of trade. Provided the work done in the UK adds value that is recognised by customers who are prepared to pay enough for the UK firm to make a profit, its a good thing. If some of those customers are overseas the price they pay for the finished steel products should offset the value of the imported coking coal, iron ore and other metals.

Of course, there’s no point making stuff if customers won’t buy at a profitable price. Wise governments realise that they don’t have to figure out what they’re going to make where; that’s what the private sector does. The wise government sets out to make the UK a desirable place to build a factory through a combination of a low cost base, a benign tax regime and a skilled workforce.

Unfortunately successive governments of all flavours have increased costs, most notably through net zero and now through employers’ national insurance. The corporation tax regime is uncompetitive and courtesy of a rotten educational system, skilled workers are rare and expensive.

A wise and credible government could axe net zero immediately. This one is in thrall to Ed Miliband’s lunacy. The current Chancellor has not raised Corporation Tax rates (yet) but her increase in employer’s National Insurance is staring to bite companies, hard. Lord Gove got close to fixing the education system, until the blob got its vengeance. Today’s counterpart, Bridget Phillipson is doing her best to unwind his reforms.

So the UK is not an attractive place to do business and that is getting worse. Add in weak infrastructure, a housing shortage, rising crime and a disgruntled society and one can readily understand why businesses are leaving the UK as well as millionaires. While many of the causes of the UK’s current economic woes predate this government, they’re the ones in charge. To date they have done little to reverse the national decline and a fair bit to accelerate it.

Ultimately whether British Steel survives, thrives or dies will be determined by the marketplace, not wishful thinking in Westminster.

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