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UK Steel – how can business operate in a global market?

word cloud on global tradeLast week’s decision by Tata to sell off or close its UK steel operations graphically illustrates the challenges for UK businesses in competing in a global market.
Among the explanations for the decision have been a sluggish world economy, falling commodity prices, and a glut in steel production.
Specifically, there is the huge imbalance created by China’s subsidy of its own steel industry enabling it to corner more than 50% of the world’s steel market and to sell at prices with which other producers cannot hope to compete.
Arguably UK steel’s problems have been compounded by high energy costs and by Government unwillingness to subsidise the industry, or to introduce measures to encourage UK industries to “buy local” or to impose tariffs on imported steel. The other factor is high business rates which for Port Talbot are set by the labour leadership in Wales so this is not a party political issue.
Ironically, skill shortages and the mobility of labour are perhaps the only issues that the industry does not have to face. Instead its skilled workforce may be facing extinction.
While there are signs of potentially interested buyers for parts of the industry the whole saga does illustrate some of the problems businesses face in trying to compete in an increasingly global market.
These are well rehearsed. They include disparate labour and energy costs, high business rates and clean energy tariffs, different conventions in different countries about how business is regulated and conducted, and the volatile behaviour of investors, commodity markets and global demand; all difficult to harmonise and all particularly affecting industries with long lead times between order and fulfilment.
There is no such thing as a level playing field despite the existence of the World Trade Organisation (WTO), which attempts to investigate and regulate complaints of unfair trading via the General Agreement on Trades and Tariffs (GATT).
Resolving disputes is a lengthy process as exemplified by  the time it took for the WTO resolve a complaint raised by the USA, supported by the EU and Japan, in March 2012 about China’s rationing of supplies of Rare Earth Metals by imposing export tariffs and physical export limits. China has the majority of the world’s deposits of Rare Earths that are essential to the manufacture of electronic goods from mobile phones to car batteries. It took until March 2015 before the situation was resolved and China agreed to remove its restrictions.
The process of negotiating inter-state or inter-continental free trade deals is equally lengthy.
What business can wait that long for an inequitable situation to be resolved?

Innovation, agility and collaboration

However, there are ways in which a business can be more innovative and agile. In an article in the Daily Telegraph on April 3, 2016, Chris McDonald argues that steel production does not need to disappear from the UK manufacturing landscape: “Two-thirds of the steels in use today were not even invented 15 years ago……….” he says. “Automotive, aerospace, defence, nuclear and rail constantly require the innovation and manufacture of new steels, which form the core of improving productivity.”
He argues that if domestic producers and end users partner with research and production moves to smaller, more specialised mini operations using electric arc furnaces  the result will be a more responsive, innovative and flexible UK steel industry.
Perhaps there are lessons here for other businesses and industries. Off shoring on cost grounds may not be the only competitive answer to survival if it slows down development and production times.

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Steel industry's problems are benefiting the UK metal fabricators

Ironically, the causes of the woes currently besetting the UK’s steel industry are good news for the country’s metal fabricators.
The recent insolvency putting 1,700 jobs at Caparo at risk and job cuts affecting 1,200 employees announced by Tata Steel and closure of SSI in Redcar with 2,200 job losses are the result of both a slow-down in demand for steel and a reduction in prices worldwide, mainly due to ‘dumping’ from China but also due to the significant rise in energy costs in UK as a result of the government’s obligations on UK manufacturers to use renewable energy.
While yet to hit the insolvency statistics, the steel stock holders and distributors have also been affected. They have had to drop their prices, which is impacting on their own margins, and we are likely to see some significant losses due to writing down the value of their stock.
However the drop in steel prices for customers has benefited the UK metal fabrication industry who can now buy supplies at much lower cost while they have largely been able to maintain their prices.
This wasn’t always the case. The UK metal fabrication industry was significantly cut in the 1990s and 2000s, which led to a decline in apprenticeships and training for welders. Those that survived did so by improving their efficiency and often by investing in plant and machinery to reduce labour costs.
Many of the survivors are SMEs who also had a dire time after the 2008 collapse. More recently demand has returned to improve their order books and as a consequence their profits due to the double benefit of both the reduced steel prices and improved efficiency.
Metal fabricators have, however, been affected by a lack of UK-trained welders and machine operators following the decline of major industrial engineering industries such as ship building. Fortunately the European labour market has helped and they can easily recruit well-trained, highly skilled workers from Eastern Europe.
All this has meant that there are fewer UK fabricators overall but those that remain are becoming increasingly busy and in demand as growth in the economy kicks in.