Contents
What is steel used for?
Steel is an alloy of iron and carbon. Steel is not only strong under pressure but is also relatively cheap.
As a result, steel is a key input in buildings, infrastructure, trains, cars, ships, appliances and more.
For instance in cars, steel is used for building the body frame of the car, as well as for more intricate engine components.
A brief history of steel in the UK
Iron was important to the industrial revolution. By 1850, Britain was making half of global high quality iron.
Steel was stronger and more malleable compared to iron. Yet steel was expensive to produce and could only be made in small quantities.
This was until the Bessemer process, created by the British engineer Henry Bessemer.
The Bessemer converter removed impurities from pig iron (iron with carbon and other impurities). By removing the impurities, the strong molten steel remained.
Before the Bessemer converter, in one working day about 5 tons of steel could be produced. With the Bessemer converter, 5 tons of steel could be produced in 5 minutes or less.
Because of this, steel then took over from iron in building bridges, tunnels and rail tracks.
For example, Sheffield became a well-known centre for producing steel, especially for cutlery. While there were only five steel plants in the ‘steel city’ in 1770, there were over 135 by 1856.
By the mid-19th century, about 85% of Britain’s steel was being produced in Sheffield.
Sheffield, being the confluence of five rivers and having many fast-flowing streams, enabled steelmakers to use water wheels as a power source.
Steel machinery and rail tracks also became significant exports out of the UK to the US and other countries.
What challenges do steel companies in the UK face?
Since then, the UK’s steel industry has faced challenges.
Globalisation has increased competition among steel producers. Other countries can produce steel at lower cost and at larger scale, including China and India.
At the same time, the UK faces high electricity costs relative to competing economies.
As a result, the steel industry in the UK has declined relative to the size of the whole economy.
This is shown in the diagram below, with the measure of the size of the iron and steel sector shrinking relative to manufacturing and the whole economy.
Nationalisation or privatisation?
Steel companies in the UK have been through various waves of nationalisation and privatisation.
Following WWII, Clement Attlee’s Labour Government sought to nationalise steel, but this was mostly reversed by the following Conservative Government.
Again in 1967, Labour sought to nationalise steel. Subsequently under Thatcher, steel was privatised once again.
More recently the UK Government has taken steps towards nationalising British Steel, when it took control of operations at the plant.
In 2021, the UK Government has nationalised Sheffield Forgemasters. It is now owned by the Ministry of Defence, as Sheffield Forgemasters is a key supplier for the UK’s nuclear programmes.
Privatisation was intended to bring about productivity improvements and more investment.
A nationalised firm may not face the same competitive pressure to survive, knowing the government can always fund the company if it makes a loss. This incentivises the privatised firm to cut costs and respond quickly to changes in market conditions.
There were concerns about nationalised firms being slow to respond to changes in global conditions.
Privatisation also allows the government to make a short term revenue gain from selling the business to the private sector.
Yet, even after privatisation, government support for the steel sector never really ended. Steel companies operating in the UK ask for and receive large subsidies to maintain their international competitiveness.
A nationalised firm can safeguard jobs. Privatisation in the UK was associated with job losses, including in the steel industry. Private steel companies such as Tata Steel in South Wales have announced job cuts of several thousand workers in recent years.
Yet, given the challenges UK steel companies face, the companies would argue that the job losses would be inevitable whether nationalised or privatised.
In the case of steel, nationalisation may prevent the shut down of steel companies that are involved in producing steel for national defence or other critical purposes.
Should the government intervene in steelmaking?
As mentioned before, steel is a critical input for several uses, including in producing vehicles and infrastructure.
This includes the use of steel for national defence purposes, such as for nuclear programmes. Relying on steel imports from other countries could backfire in the event of a conflict, when steel may be withheld.
Steel will also be important for building wind turbines.
Steel companies pay their workers well, often above average wages for the area. The presence of steel plants generates positive multiplier effects in the surrounding areas.
It can be difficult to retrain steel workers. With steel workers often being paid at rates above median salaries, and with workers’ personal identities often being attached to their jobs, steel workers may not be willing to work lower-wage jobs.
Steel companies can also receive discounts on their electricity bills. But these are funded by passing on the difference to other businesses and households who face marginally higher energy bills as a result.
The production of steel is highly polluting. The two largest industrial polluters in Britain are both steel plants. They use blast furnaces requiring coking coal.
To reduce pollution, steel production could switch to electric arc furnaces (EAFs), which use electricity. If the electricity comes from renewable sources, emissions from steel production could fall significantly.
It is not easy for companies to switch from blast furnaces to EAFs. Switching the Port Talbot, Wales steel plant to EAFs could cost up to £3bn.
The cost of financial support is eye-watering. Direct subsidy packages include an offer for £300m from the UK Government for one plant to switch to an EAF.
But reducing steel production domestically may lead to greater imports of steel. Pushing steel production abroad would not necessarily change global emissions. In fact, pollution could worsen if steel is produced in countries without environmental regulations. Private companies may be unwilling to invest in this environmental transition without government subsidies.
How tariffs can protect steelmakers
An alternative to subsidies is to use tariffs.
The EU is introducing the EU Carbon Border Adjustment Mechanism (CBAM). This is a carbon tariff on imports of steel and other products with carbon-intensive production processes.
When foreign companies use polluting processes to undercut EU companies, for instance in steel, the carbon border tariff can level the playing field once again.
The UK is also planning to introduce its own CBAM in 2027.
The Treasury may prefer an extra tariff, which raises revenue, to more subsidies for domestic firms. But tariffs can contribute to higher inflation and increase costs for companies using steel.
Questions to consider
- Should the UK import steel or produce steel domestically?
- Is a tariff on steel imports preferable to domestic subsidies?
- How does the design of a subsidy influence its effectiveness?
Sources: BBC, history.co.uk, Scaffold Services, The Guardian, The Economist, ONS, miscellaneous others.
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