Having discussed the underlying policies and solutions provided to British Industry in Part 1, through the public and private sector, I will now discuss the market trends and specific characteristics of the UK Steel industry.
In order to understand the situation within the UK at home I cannot discount the situation outside the UK, especially in a highly globalized world. Thus, I will first begin with the global picture.
The Global Markets & Commodities:
In the years after the Financial Crisis, global commodities have not recovered from their peak. This is quite easily demonstrated by taking a look at the Bloomberg Commodities Index. The Bloomberg Commody Index is a weighted average index and the components of the index can be found here. This index does not include steel, but it evidences the broader macroeconomic trend in commodities. Other industrial metals are a component of the index.
Steel, of course, looks similar, with the price of steel rebars, used predominantly in construction below. (Both charts courtesy of Zero Hedge).
In short, global demand for commodities simply have not recovered (yet) from their 2008 highs. Which suggests that industrial demand in real terms, has not yet recovered, though that is the subject for another post.
A second issue which generally has depressed commodity prices is the oversupply of commodities coming out of places like China, and other commodity exporting nations. Many commodities are priced in US Dollars on international markets, and indeed, commodities are highly negatively correlated with the US Dollar in general (see the chart below, courtesy of Kitco.
A strengthening US Dollar creates a perverse incentive for commodity producing companies who will, in the face of shrinking profit margins, try to boost profitability through increased production and increased sales.
The UK Steel Industry:
According to the Financial Times the three largest steel producers (SSI, Tata Steel, and 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.”
Which supports the general hypothesis above that global markets trends will transmit to the UK in a highly-complex, globalized economy.
On the global front, China’s portion of global steel production has risen from 15% of global production in 2000 to approximately 50% of global production by 2014. The EU region produced the second largest quantity of steel relative to China in 2013 relative to other regions of the world. In the same year, the UK produced approximately 7% of the overall EU production in raw tonnage terms.
Looking regionally, the UK has been losing market share for some time (a slow decline since the 1960s), while other European countries such as France and Germany have been gaining market share. A divergence can be seen between British output and these competitor nations. A trend which is discussed by the British House of Commons paper on the steel industry here.
Generally the UK seems to run a marginally small trade surplus on steel exports. Unsurprisingly, two thirds of Steel imports came from the EU, and half of steel exports were to the EU.
The Industry Structure:
The UK Steel industry is predominantly privately owned and based upon the high barriers to market entry very few firms globally seem to have the necessary size to take advantage of the economies of scale. A handful of large firms like TATA Steel, SSI and Celsa control most of the operations.
Policy options are discussed in Part 3…