The UK steel industry is in disarray after SSI closed its Redcar steelworks, Caparo Industries went into part administration and Tata Steel announced 1,200 job losses.
The growing crisis has grabbed wide media and political attention. Chinese premier Xi Jinping’s state visit this week has thrown the spotlight on alleged dumping of cheap Chinese steel on world markets. Yet some commentators have also pointed the finger at UK electricity prices.
Carbon Brief looks at the facts around the steel crisis and UK electricity prices.
Steel – going cheap
The crisis in the UK’s steel industry has been triggered, first and foremost, by plunging global steel prices. These have halved in the past year, the BBC says, taking prices below 40% of a 2011 peak, as the chart below shows.
Richard Warren, senior energy and climate policy adviser at manufacturers’ organisation EEF, tells Carbon Brief that falling prices have been the biggest factor in squeezing steelmakers’ margins.
Announcing its decision to axe 1,200 jobs, Tata Steel said it was:
“[A] response to a shift in market conditions caused by a flood of cheap imports, particularly from China, a strong pound and high electricity costs.”
Expensive electricity
The last of these reasons, high electricity costs, has caught the imagination of several newspaper articles and commentators. The Times says UK industry is being “crippled” by electricity costs twice those in Germany. The Telegraph says UK energy policy is putting the steel industry at risk.
For industry, it makes sense to focus on energy costs, since the government has some (limited) control over them. Industry is much less likely to achieve change in world steel prices or the value of the pound. The current crisis also makes government more receptive to industry’s pleading.
For Leo McKinstry in the Express and Dominic Lawson in the Mail, the real problem is the “green agenda” and our “idiotic leaders” who are “obsessed with being green”. For them, it is the UK’s climate change agenda that is driving up energy prices and putting the steel industry at risk.
Several of the articles compare UK prices to those in France and Germany, which they say are half those in the UK. One of the articles even claims the UK has the world’s highest energy costs.
The Department for Energy and Climate Change (DECC) regularly publishes data on electricity costs faced by different industrial sectors. For “extra large” industry, which probably includes the steel sector, the UK does have relatively high electricity costs, though not the highest in the EU.
The data is somewhat at odds with the claim that UK costs are “twice” those in Germany, though this appears to be true for France. It’s possible that particular sectors or individual companies are able to secure more favourable terms.
DECC also publishes data looking more broadly at electricity costs for industry as a whole, in a range of countries beyond the EU.
Regardless of the relative prices in different countries, however, there’s a major problem with the argument that expensive electricity is at the heart of the UK steel industry’s problems. This is that electricity makes up a tiny share of steel production costs.
The share of electricity in steel production costs is around 6%, according to one estimate for blast-furnace steel production, used at most major steelworks. The Committee on Climate Change (CCC) says energy makes up 5.2% of costs for “basic metals”, which includes steel.
EEF’s Warren tells Carbon Brief that electricity accounts for around 6-8% of UK steel production costs. Of this, he says that about a third — £30 per megawatt hour (MWh) — is due to policy costs. Wholesale costs, transmission and distribution costs and power company profits make up the remaining two thirds.
Policy costs
So, perhaps 2-3% of UK steel production costs might be down to government policy. In fact, the steel industry does not have to pay the full costs of government policy. It receives compensation that offsets 60-70% of the market price of CO2 emissions, says Warren.
This compensation takes down policy costs to a quarter of final electricity prices paid by the UK steel industry, Warren says, or £22/MWh. This means policy costs for many in the steel industry amount to perhaps 1% to 2% of production costs.
What’s more, additional compensation is in the pipeline, due to be brought in from April 2016. This could bring policy costs down by up to £18/MWh, leaving policy costs of just £4/MWh. This would leave policy costs at 0.3% of production costs.
The government is rumoured to be considering bringing these measures in early. However, the European Commission must first approve the compensation package under state aid rules. Jeremy Nicholson, director of the Energy Intensive Users Group, tells Carbon Brief this approval is unlikely to arrive much before the end of the year.
German heavy industry — cited by several of the articles mentioned above — is already exempted from the majority of policy costs. Instead, it is German households that bear the burden. Once the new UK compensation package is in place, the UK’s homes and other businesses will likewise be cross-subsidising policy cost exemptions for heavy industry.
The steel industry has also historically received generous free CO2 allowances to cover emissions governed by the EU’s Emission Trading System (EU ETS). For instance, Tata Steel received 31m allowances over and above what it needed to cover actual emissions during 2008-2011, according to campaign group Sandbag. It says these surplus allowances were worth £389m.
Conclusion
Can policy costs, making up maybe 1-2% of steel production costs, really be responsible for the current crisis in the industry? In a blog written earlier this year, EEF’s Warren says that even tiny percentages like this can make the difference between profit and loss, given “razor thin margins”.
Yet, as we’ve seen, Warren agrees that the industry’s biggest problem is falling steel prices.
Source: http://www.carbonbrief.org/