There is a steelworks at Port Talbot in south Wales owned by the Indian Tata group, which is losing money hand-over-fist. The owners appear to have thrown in the towel after 9 years, and are looking for a buyer, for a works losing a reported £300,000,000 a year. So poor old Tata is consuming its capital to the detriment of its investors, and the benefit, for now, of its staff and contractors.
The reaction to this disappointing news about the works, which will doubtless be devastating for those who work there and rely on it for their own livelihoods, seems to be that ‘something must be done’, but once again the Broken Window Fallacy should be borne in mind.
At present, the UK government appears to be tempering calls for nationalisation of steel works, although one Conservative MP, Mr Tom Pursglove, has come out to call for nationalisation, pointing out that Brexit would make it easier for the UK government to grant state aid to industry.
Conservative MP Tom Pursglove is delivering a letter to the prime minister this afternoon calling on the government to ignore EU rules on state aid and consider nationalising the steel industry. As a prominent campaigner for Britain to leave the EU, it is no surprise that he believes Britain would be in a better position to protect the steel industry if we were not bound by EU rules. Those on the other side of the referendum debate point out that the EU is our most important market for steel, with more than half of our steel exports going to the EU and more than two thirds of our imports coming from it.
As my maths teachers used to say ‘Show your working!‘. Funny how EU rules on State Aid don’t seem to apply to farming.
What is truly depressing is that almost no one, apart from a valiant chap from the IEA I heard on Radio 4 news this afternoon, is suggesting that a steel plant should be profitable, the Zeitgeist seems to be that the plant should simply exist. However, there are reports that the Chinese government is subsidising steel exports by selling it below cost price. The IEA chap on Radio 4 said that China has, in the past 2 years, produced more steel than the UK has produced in its entire history (but there are many different kinds of steel, and they are not fungible).
Is anyone scared that China will up the price of steel once it has caused much capacity in the rest of the world to shut down?
Excellent, so we should buy our steel from the Chinese because they are selling it at below cost for reasons we should give a shit about.
Its a shame that the steelworks in the UK can’t make a profit, but since I can buy as much decent steel as I like from any number of manufacturers across the world as I like then it hardly makes sense to nationalise a business simply because it is unprofitable.
Is having a strategic supply of steel worth £300 million a year over-and-above the costs of the steel? Probably not, ergo sorry Tata Steel looks like you are going into the ash can of history along with buggy whips.
The whole point of capitalism being that by shutting down unprofitable businesses assets (including labour) can be redeployed in more profitable ways. That was the difference between us and the USSR and it was why the west won the Cold War, because assets were used more productively.
Heathite shits like Pursglove are floating back to the surface again, eh?
From what I can see, British steel, and other heavy industry, is being decimated because of the high price of electricity due to the government’s “carbon tax”. In pursuit of the chimera of a carbon free economy, our government seems to think it is a good idea to close down our steel industry and import steel from abroad, where it is most certainly not made in a carbon neutral way.
You can have a low carbon economy, or you can have an industrial economy. You can’t have both.
Not that you’ll hear that side of it mentioned during all the hand-wringing and emoting on the telly, JohnK.
Greenism’s all fun and games until 5,500 people’s livelihoods are at stake. Then we have to pretend it’s still all fun and games and Tata just hate their employees or something.
@ JK and SD- amen.
A dear energy policy does not fit well with heavy industry, or with keeping the poor warm
This site suggests that the UK’s energy prices are not that high in comparative terms.
I’m not au fait with other costs in the UK, e.g. environmental costs, carbon trading etc. But if ee should be self-sufficient in steel, why not also oranges?
A lot of the media reaction here seems to have echoes of the political and media class when they were nerdy 6th Form socialists dreaming of the ‘Triple Alliance‘ of coal, iron and transport workers bringing down the hated ‘Teries’.
Haven’t there been loads of technological changes in the steel-making industry recently, and less demand for blast furnaces? Is that anything to do with this?
According to reports, Tata’s withdrawal will lead to 4500 job losses plus losses to surrounding contractors. Ok, the suppliers are screwed but that’s capitalism. There is a case to be made, however, for the State to pay the salaries of all or a portion of the steelworkers for a finite period, say 2 years, so they can retrain or relocate.
4500 x £35kpa works out shed loads cheaper than nationalising a business that loses £300kpa and there’s always the chance that a buyer could be found or the costs recouped from sale of land and encumbrances.
Militant libertarian though I am, I’d hate to see people suffer like I saw after Ravenscraig closed. Perhaps this is an excellent opportunity to use the foreign aid budget?
Barracoder
It’s in Wales, does that count yet?
But seriously, Tata have blown hundreds of millions of pounds on the plant, losing, by my maths on the data I saw, £300,000,000 on a plant with 3,000 staff or £100,000 per employee in the last year alone. No business could possibly sustain such waste. As to what could be done, but won’t before Hell freezes over, might include reducing energy taxes and regulations that increase costs. As it is, the law requires redundancy pay for employees with 2 years service on top of notice pay, and a 45-day consultation before redundancies take effect.
What we will almost certainly not hear about is any enhanced redundancy terms that the Unions have extracted from the owner or previous owners (which can’t really be got round) which likely have impacted on Tata’s calculations as to the costs to be borne, whether in closing or ‘giving away’ the plant (who would buy it?). It hasn’t escaped my notice that where there is a powerful Union, there is a likelihood of job losses sooner or later.
Tim Worstall’s article on Forbes is very good: http://www.forbes.com/sites/timworstall/2016/03/30/tatas-port-talbot-steel-plant-was-bankrupted-by-the-hippies/#c9de4eb303b6
He is pointing out that as it’s a blast furnace, the only way it would be profitable is if we abandonded all the fancy new tech that lets us recycle steel!
Where does the “comparative advantage” of the U K currently lie in international commerce?
If half the UK steel produced is exported, and has anything like the marginal losses of Tatta Steel, then UK would be “selling” steel for less than the costs incurred in the UK. No “advantage” Au Contraire.
If there are domestic UK industries that benefit particularly from UK grades of steel, let them form a consortium to own and operate a production source (with regs and power tax relief from the Crown for comparative advantage of end products, but none going into the world market). It would likely shake out to something like the “crucible” format (used for U S scrap), with about 35% tops of the current staffings; to be rationalized.
But then, I’m retired now.
It is not “just” the steel industry Mr Ed.
Many industries are being destroyed by high energy costs – and subsidised Chinese competition.
We may not be able to much about the policy of the Chinese government – but what about our own government?
High energy costs do not come by magic – they are the result of government policy, regulations and “Green” taxes.
Why does “do something” always have to mean MORE statism? Why not LESS statism?
And moving production to China does NOT reduce global C02 emissions.
So the government policy is utterly wrong – on all grounds.
Even if there were no additional energy or carbon taxes it would only make a marginal difference as far as Tata Steel is concerned. The difference would still not make the place viable any more.
Losing £300 million a year or £100 million it is still going down the shitter because it is old technology, we can obtain sources of recycled steel much cheaper than we can manufacture new steel.
Two books will help understand why an old-school blast furnace plant is doomed. One is ‘Steel’, by Brooke Stoddard, which describes how mini-mills and recycling have transformed the steel industry in just a decade. The other is ‘Junkyard Planet’, by Adam Minter, which describes the recycling side of that transformation.
We are approaching Peak Iron Ore, as recycling increases and consumption becomes more efficient. As less new steel is made, the day of the old roaring blast furnaces is coming to an end. The huge complexes that Bethlehem and US Steel ran for generations are going away, the steel mills along the shores of Lake Michigan are all cold and dark. Why anyone woukd think that the mill at Port Talbot would be different, is beyond me. But I think there’s a legacy of nationalization in the UK that leads to the idea that jobs in the steel industry are a birthright that the Goverment is mandated to provide.
llater,
llamas
Barracoder- why should I pay the direct employees for two years? I mean, aside from I’d rather keep that money, why just them? Why not the truck drivers who deliver to and from the plant? And their grocers? And their drug dealers, book makers, and prostitutes?
And the thieves who steal their stuff, for that matter?
Mr Ed,
I think the ovoenergy page is considering private consumer prices. The picture on industrial prices is much more bleak for UK manufacturing.
According to DECC’s own figures in the second spreadsheet available here UK industrial electricity prices for extra large customers were, for Jan to June 2015, the highest recorded in the EU*. For comparison, German prices excluding tax were less than half UK prices (4.16p per kwh compared to 9.35p) and including tax they were still a couple of pence per unit lower.(7.41p compared to 9.55p)
* Figures for Malta, Lithuania and Luxembourg were not provided so may be higher.
>the day of the old roaring blast furnaces is coming to an end.<
edgar thomson still going strong after 130 years
link
I thought this was a fun bit :
Those on the other side of the referendum debate point out that the EU is our most important market for steel with more than half of our steel exports going to the EU and more than two thirds of our imports coming from it.
1. What proportion of production is the “more than half of our steel exports going to the EU” ?
2. As to two thirds of our steel imports coming from the EU, are the stayer-inners expecting the EU to slap export taxes on their own steel going to the UK, in the event of Brexit ?
I keep on thinking there must actually be some good reasons for staying in the EU. But the longer this goes on, the feeling mounts…if there really were any good reasons, surely someone would have discovered them and pointed them out by now ?
How hard is it? A lot of economists still don’t know!!!
There’s another aspect to the unemployment equation. State planning laws make it difficult to build the factories and houses of the future. Which means that it is much harder for those made redundant to get new jobs. “Why not build the new factories in Port Talbot?” you might ask “That way you wouldn’t have to buy the new houses.” Dunno but it almost never works.
100 years ago, the job of ‘hairdressing’ didn’t exist! They could all become hairdressers! Or car customisers. Or run robot joints called Andie’s that help hard-working robots to unwind after a hard day catering to the unusual desires of human owners and/or clients.
This kowtowing to China on trade is utterly pathetic. Thank you very much ‘free traders’!
Donald Trump understands trade with China.
If Chicom scum choose to waste the capital and productive efforts of the Chinese people on mass subsidy–let ’em.
As for the Steel Plant. Let us keep at least one for strategic reasons. Turn this one into a nuclear plant as well. Smelt with nuclear heat and produce power to provide two sources of income instead of just one.
In the left wing economic handbook the concept of ‘subsidy’ can have several meanings. So is this Chinese subsidy to their steel producers actual state, (taxpayer), money being handed to steel producers when they export steel, or is it just that the Chinese steelmakers don’t pay a ‘living wage’ or don’t pay carbon taxes on their power or don’t pay massive clean-up costs for their waste and all this is deemed a subsidy?
Oh, and today’s Brexit scare story appears to be pro football. Our clubs will be stymied if they can’t employ lots of Belgians. Don’t look at the fact that they do Employ lots of Africans who, AFAIK, aren’t EU citizens.
From a purely economic point of view, it makes sense for the plant to be closed. But economics doesn’t drive everything, especially if prevailing economics leaves lots of young, fit men permanently unemployed. At the moment, Britain operates a colossal welfare program for the dim middle classes with useless degrees by providing them with government jobs, or private sector jobs in areas such as HR, “sustainability” and “diversity” in order to comply with pointless legislation. Now there may be a sound argument that inventing non-jobs to keep people off the dole is better than having people on the dole, but I’m of the opinion such a policy would need to abide by two criteria:
1) It is openly acknowledged that the jobs are a form of welfare, for the good of society.
2) The jobs produce something of use.
The current situation of employing millions of dim middle classes in government departments fails both of these; the policy of employing people to make steel at least passes one of them, so in a straight race between a local government diversity outreach department and a steel mill, the steel mill wins.
Of course, the problem with the steel mills is you get self-serving unions ignoring the welfare role of the plant and insisting they can keep ratchetting up their own terms and conditions, and the whole exercise becomes unsustainable, which is why criteria no. 1 I stated above is vital. At least the welfare cost can be counted, and voters informed, instead of the costs buried in among that of economically viable industries.
Personally, I have some sympathy for the argument that a nation should provide enough work for young, able-bodied, but not particularly bright young men. If this means steel gets produced more expensively than it is in China, then so be it. This is vastly preferable to today’s situation where strong but dim young men are excluded from the workplace on economic grounds while armies of middle class dimwits flourish on the taxpayer dime – and meddle in every damned aspect of our lives as they do so.
The Wikipedia page on Port Talbot, the town of the works in question, states:
Now it may be that the hospital distorts the stats somewhat by having a large number of state employees clustered in the area but serving a wider area, but with over a third of the workforce being public sector, that’s two-thirds of the workforce paying for one-third, ignoring those of working age outside the labour market but on welfare of some sort, so there’s a subsidy cluster going on there, sucking in money from outside.
And we know that if steel is made and is of no use to anyone, it may end up being left to rust and then be reduced to iron again, to start the whole make-work process again.
I’m told that newer cars are made with lighter, stronger steels, meaning that less steel than before is needed in cars for the same crash protection, and this helps fuel efficiency targets, so steel use is getting smarter.
Mr. Ed asks:
To which Martin replies:
So it appears the answer to Mr. Ed’s question is “understanding profit and loss, supply and demand is very hard indeed”. Martin seems to think the UK or USA would benefit from more expensive steel, and presumably the same logic applies to everything else as well, which is to say it does not matter what it costs or how profitable it is, just as long as it is made in the UK or USA.
There are plenty of jobs that would be suitable for “dim” young men (and women) in agriculture and other industries if we did not pursue uneconomic agricultural policies and insist on paying people more than the work they could possibly do. The fact that we have armies of subsidised middle class make-work does not make a compelling case for doing similar for the working class!
that’s two-thirds of the workforce paying for one-third
Well, it’s actually greater than that at 37.4%. But is this a kind of tipping point? A quick napkin calculation says that average tax and NI is around a third, private sector gives away one third, and public sector gives back one third needing two-thirds, so the ratio of private to public must be 2:1 to maintain balance, higher than that and you get a deficit, this is a simple exercise concerning wages only, but it must hold true to some extent, even with the other taxes and expenditure.
I say tipping point, because once you get beyond 2:1 then you just may as well go 0:1 which is full blown communism, something that many union leaders and comrade Corbyn would probably aim for.
Now it may be that the hospital distorts the stats somewhat by having a large number of state employees clustered in the area but serving a wider area, but with over a third of the workforce being public sector, that’s two-thirds of the workforce paying for one-third, ignoring those of working age outside the labour market but on welfare of some sort, so there’s a subsidy cluster going on there, sucking in money from outside.
Indeed, the whole of Wales is pretty much a giant subsidy area. The problem is, as has been discussed on here before, a lot of these government jobs are only open to the Welsh-speaking minority.
And we know that if steel is made and is of no use to anyone, it may end up being left to rust and then be reduced to iron again, to start the whole make-work process again.
Indeed, the subsidy would come in the form of the steel products being artificially low so as to remain competitive. Otherwise, it is as pointless as employing diversity coordinators.
I’m not necessarily arguing for keeping old steel mills open, just that I’d rather see state welfare go towards industry which provides something useful than a lighter “industry” making our lives more miserable.
Unfortunately Tim such an approach is a bit like tolerating a little bit of septicaemia. All this really does is reorganise the parasite classes’ management structure. Better to offer well paid jobs in a volunteer military to anyone who wants/needs welfare rather than simply taint entire economic sectors by turning them into adult kindergartens with bogus economic rationales.
True. But if we’re going to have state welfare, let’s aim it towards the working classes who – through no fault of their own – have found themselves at the wrong point of the technology curve and globalisation rather than encouraging armies of middle class lefties to chastise us for not being diverse enough.
Quite so Alex.
Indeed: but at least provide something for them to do rather than tell them sorry mate, economics while pretending a thousand people working in the Department of Sport and Culture makes economic sense.
Obviously, my comments here are more directed at government policy and public opinion than directly at Samizdata commenters: I’m sure we can all agree that the middle-class welfare programme is best dealt with using a sturdy brick wall, a heavy machine gun, and several thousand rounds of link ammo.
Shocking, far better to see them have to work for a living in the productive private sector, with its fewer sick days, lower salaries, occasionally robust attitude towards sickness and the need to make –roll of drums, sinister music– a profit.
It would be like making a Pharaoh build a pyramid with his own hands, alone.
@Lee Moore,
Don’t be misled by the way things are stated for effect.
They do NOT state that two thirds of UK STEEL imports come from the EU (unless that is implied elsewhere).
And every time we see “government” in this chat, we are talking about all the rest of everybody else who has to work and pay – government has no money, it’s everybody else’s money.
What did the lady with the handbag say: “There is no society.”
RRS, she said:
and also:
and also:
So you can see why the Left hated her.
I have never understood how there are millions of people on the dole and still potholes and trash in the streets.
On the “Oh no, China will be able to dictate prices” question, we’ve been there before, with rare earths:
http://www.mining-technology.com/features/featurethe-false-monopoly-china-and-the-rare-earths-trade-4646712/
On the keeping blast furnaces for strategic reasons red herring: in the event of a blockade preventing us from importing steel, where would the iron ore to feed the furnaces come from?
On a technical point, there’s a confusion here.
The Port Talbot plant is an integrated steel-making plant, which takes in iron ore at one end and ships steel slab out the other. The blast furnaces make pig iron, which then goes to converters (I don’t know what Port Talbot has, there are several styles) which turn the iron into steel, output as continuous slab. The steel slabs then head out to various converters, who turn it into sheet, bar and structural elements. Some of these converters are co-located with the steel plant, some are remote.
As steel recycling rates continue to rise, and the use of steel in many traditional industries (eg automotive) slows, the need for newly-refined iron to feed steel demand is also slowing, and the need for blast furnace capacity will slow likewise.
There are plenty of steel mills running and making a profit – it’s not hard, steel is a keystone of the Western economy. But the mills are getting smaller (mini-mills) and based more and more on the re-use of existing steel. Hardly surprising – the original smelting of iron costs a hell of a lot of resources and energy, why make more when there’s such a large supply of recyclable steel?
That’s one reason why ore-to-bar integrated plants like Port Talbot are on the way out. They’re dinosaurs from the ’50s and ’60s. The blast furnaces that are a huge part of the plant are becoming less and less useful, and the cost of re-jiggering the whole facility to the modern realities of steel making probably make no sense at all. Add to that that all of the coal and ore to keep the monster running has to be imported, and it’s not hard to see why they lose so much money.
llater,
llamas
Well I heard a terrible April Fool’s trick today on BBC Radio 4, some economist chap talking about a hike in the UK’s minimum wage, saying that raising the minimum wage boosts the economy as there will be more money to spend in retail etc.
Mr Ed, that only works if you promise shovel-ready jobs to go along with the New Improved Minimum Wage.
Indeed, it should be an easy promise to keep, since the opportunities — and demand — for shovelling are practically unlimited if one is within earshot of the Voice of Hope and Change.
I would propose a special fund for all those concerned people, who must be so numerous, to contribute to, and that money either to be used for keeping the plant opened or helping out the workers losing their job.
A “put your money where your mouth is” type of thing.
I don’t expect it to happen because a/other people’s money is much more alluring, and b/ revealed preferences would expose the leftists vacuous ideology.
monoi,
I like your idea, and there is a website devoted to crowd-funding, Go Fund Me. It might seem a bit crass to start a page, even by my low standards, but the vehicles are out there…
Let’s do some math*:
25 million households in the UK.
TATA loses £300,000,000 a year, and has invested £3,000,000,000 in the plant.
So to:
1. Cover ongoing losses, it’s £12 per household per annum, or, just £1 a month can keep the steel works above water (as it were).
2. Return capital. £120 per household, or about 1 month’s council tax, and a one-off.
3. To allow for a return of say, 5% an extra £6 a year from every household might make it look not too bad, or 50 pence per month ongoing.
And of course, that money disappearing from households would have other, unseen consequences spread all over the place.
* ‘Maths ‘is the correct term.
All those people banging on about keeping Port Talbot open for “strategic reasons”? You are aware that the iron ore and coal that feeds the plant is all imported, right?
Mr Ed,
* ‘Maths ‘is the correct term.
Oh yeah? You wanna make somethin’ of it? *Low, ominous voice, hands beginning to curl into fists*
(Signed)
Julie n.C., S.B., M.S. in Math,
…….and native of a country where we use the correct idiom.
(Should have left the /tease tag in?)
Immediately upon reading those words, the song “Making Plans for Nigel” began playing on continuous loop inside my head.
Several days later, it’s still there. Of all the crimes that Nationalisation is guilty of, this is surely the most heinous.
A new term ‘co-invest‘ has appeared, like a turd in a jacuzzi.
Does it mean:
A: Piss other people’s appropriated money away on a deal that someone makes a buck out of an otherwise unprofitable situation?
B: As with ‘A’, but no one makes a return on their ‘investment?
C: A wise, strategic decision proving the foresight of our Great Helmsman, guided by the White Heat of a revolution?
Gosh, Mr Ed, deja vu all over again! Sounds familiar…like…like…ohyeah, GM & Chrysler & them?
Oh, definitely C’, that is, C but without the White Heat … more like the Dishwater-Dullness of Politics as Usual.