When the Teesside steelworks in north-east England reopened in 2012, two years after being mothballed, many hoped it would herald a new era in a region with a long heritage of steel and ironmaking.
Those dreams were shattered on Monday when Sahaviriya Steel Industries, the plant’s Thai owner, said it would mothball the complex and send redundancy notices to 1,700 workers.
The closure sent out a stark warning about the state of health of the UK’s steelmakers.
The three companies with the largest UK operations are India’s Tata Steel, SSI and the family-owned Spanish group, Celsa.
All have been hit by falling prices, weak demand and a flood of cheap imports as the slowdown in China stifles the appetite of the world’s biggest steel consumer. These have combined with high operating costs to weigh heavily on their finances, raising questions about the sustainability of the UK’s domestic industry.
While such factors have squeezed the steelmakers across Europe, their British counterparts say they face additional burdens of higher business rates and energy costs, as well as the impact of a strong pound.
“In the UK our sector is facing its most difficult situation since it was privatised 27 years ago,” said Jon Bolton, chair of the UK Steel lobby group and outgoing director at Tata Steel.
SSI’s problems are perhaps the most acute. Despite pouring at least $600m of investment into the Redcar works, which houses Europe’s second-largest blast furnace, the business has struggled financially. It racked up a net loss of 5,118m baht (£92.5m) in the first half of 2015, against a 4,396m baht loss in the whole of last year.
The company’s lenders say it has defaulted on loans of $790m, some of which came from SSI’s $684m takeover of the UK plant in 2011, and a crunch repayment deadline falls on Wednesday.
Persistent losses at the Redcar plant are the primary cause of SSI’s parlous finances, says Surachai Pramualcharoenkit, an analyst at Maybank. “I do not think [SSI] can continue to support the UK business. The cost of production is higher than [steel] prices,” he adds.
Some say the slab steel produced at Redcar — a so-called “semi-finished” product that is then sent for rolling — cannot compete with low-cost countries, such as China. Slab prices have fallen from more than $500 a tonne to about $330 over the past year.
“How can you do [slab] with European wages? I cannot see the economic rationale,” says one analyst who asked not to be named.
Other UK steelmakers have been moving towards more advanced, “differentiated” steel products that sell at higher margins, often to customers in sectors such as automotive and engineering.
This was why Tata Steel, the UK’s biggest steel company, mothballed its Llanwern mill in South Wales in August, in a move unions claimed put 250 jobs at risk.
However, other companies have by no means been insulated from the headwinds buffeting the industry.
Like SSI, Tata Steel UK’s assets are now worth less than its liabilities. Pre-tax losses more than doubled to £768m in the year to the end of March. This was partly due to restructuring and impairment costs of £314m, and the company could book more this year after cutting 1,000 workers since July.
Despite bringing down its wage bill through 8,000 job cuts over seven years, the UK business has failed to reduce the high fixed costs it inherited upon acquiring Anglo-Dutch steelmaker Corus in 2007, says Ritesh Shah, an analyst at Investec.
With average annual capital expenditure of $327m in Europe over the past five years, “it’s going to be difficult to bring down fixed costs except by cutting down on capacity”, he says.
However, even that doesn’t solve the pension issue, he adds — an issue that saw unions agree to changes to the retirement scheme this summer to help plug a deficit of about £2bn.
Tata Steel’s European and UK businesses have been propped up financially by their Indian parent group, according to Mr Shah. Yet he questions how long this arrangement can last.
There is also scepticism in the sector about the ability to make future investments and efficiency improvements — some required by EU air quality targets — because of eroding margins.
“We find it very difficult to justify [continuing] investing in our UK business because there are no returns on that investment,” says Luís Sanz, the managing director of Celsa Manufacturing. The Spanish group is Britain’s third-biggest steelmaker and scraped into the black in 2013, the latest available year of accounts.
Despite running one of Europe’s most efficient electric arc furnaces, which recycles scrap steel, high electricity prices during peak demand periods mean Celsa’s Cardiff plant is likely to have to shut down for several hours each day in winter, as in previous years.
In the short term, SSI has said its options for a $1.4bn debt restructuring include an equity issuance and a sale of its British assets. But finding a buyer is far from certain. Tata Steel failed to offload its Scunthorpe-based long products business, which makes rails and plates, when a suitor pulled out this summer, citing high electricity costs and “massive dumping of Chinese steel”.
Meanwhile, unions have claimed that the cost of mothballing Redcar — to keep it in a state capable of restarting if prices pick up — could cost “hundreds of millions” of pounds.
UK Steel is calling on ministers to press Brussels to approve an extra energy compensation package of about £56m, as well as mount higher defences against unfairly traded Chinese steel.
But such measures do not address the structural forces at play. Analysts say that for Britain’s steelmakers to rediscover competitiveness on the global market, the key issue that must addressed is the glut in overall supply.
Source: www.ft.com/intl/
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