A tragedy on an industrial scale

The whole future of the British steel industry hangs in the balance. Belatedly, the flooding of global markets with Chinese steel has been recognised as a development that has been especially significant for Tata Steel in the United Kingdom.

The Conservative Government has struggled to keep up with the rapidly deteriorating situation. The phrase “ headless chickens “ comes to mind. And now chickens –headless and otherwise – are coming home to roost.

The global financial crisis of 2008 triggered enormous damage to the global economy in general and to the European steel sector in particular. The national steel outputs of most major European Union producers fell by around 40 per cent in the following 12 months and the damage to the stability of the sector was lasting and serious.

In October 2014, I was working as a consultant to the Steel Committee, a body made of full time officials of unions with members employed in the UK steel sector. I was uneasy to hear that Tata Steel wished to sell its UK Long Products business to Gary Klesch, an American billionaire with a dubious CV in these disreputable markets.

Discussions fell through but now Marc and Nathaniel Meyohas, two brothers behind Greybull, an investment firm with a similar approach to business matters as that of the Klesch Group, are to buy the Scunthorpe steelworks from Tata.  It is an indictment of Tata senior management that steel workers in Scunthorpe have so lost patience that they are prepared, if not to support, then at least to go along with this.

In my report to the Steel Committee in 2014, I noted that Long Products lost money in the five-month period April to August 2013. The Tata board had understandably expressed concern at the scale of the losses and insisted that Long Products must break even that year or there would be unpalatable consequences.  Tata outlined various initiatives to ensure that the business would be profitable. These were endorsed by the Steel Committee and local trade union officials, and some of the targets set were achieved.

But the Long Products business continued to be aversely affected by confusion over head count requirements – the exact number of employees required to produce the forecast order book.

In my report to the Steel Committee, based on extensive discussions with Scunthorpe managers and local officials I said that I had seen no evidence that the head count review was being conducted in a way that might put at risk the future operation of the business. There were opportunities for further reductions that would not put at risk the future operation of the business. If these were not taken, Long Products would be storing up problems that would sooner or later trigger another crisis.

For at least 10 years, first Corus and latterly Tata argued that the UK steel sector was treated unfairly by competitors in the European Union. Contributing to an uneven playing field were energy costs, arrangements for the EU Emissions Trading Scheme, alleged preferential treatment in Europe of local steel suppliers when placing steel orders for public sector projects in breach of EU rules and the significantly large levels of local taxation in the UK as compared with local taxes in Europe.

Now, if UK steel is to survive, all tenders for UK construction projects will be required to seek to source steel from UK plants.

Tata Steel appointed Kirby Adams as chief executive of its European operations in 2009. His performance was poor in some key areas, especially in his maladroit handling of the closure of the Redcar site. And his brief reign was marked by the precipitate departure of three highly regarded senior managers.

He was succeeded by Karl-Ulrich Köhler, who showed commendable energy, enthusiasm and unfailing courtesy as he struggled to get on top of a formidable catalogue of problems and put the business on a sound financial footing. Unfortunately, these qualities did not deliver the planned improvements and, as failure followed failure, he was increasingly perceived to be unsure as to the root causes of the problems and accordingly prone to adopt inappropriate solutions.

Adams and Kohler were appointed by the main board of Tata Steel and accordingly the board of Tata Steel has to acknowledge its collective responsibility for their respective shortcomings.

Tata should be commended for by investing heavily in Port Talbot and especially in iron-making facilities. So it is all the more regrettable that this commitment was accompanied by some dire outcomes in terms of the management of the investment project. Actual iron outputs were way below planned levels with significant adverse consequences for sales and profits.

Now Tata intends to pull out of the UK and will either sell or close all its British operations. It beggars belief that the commitment shown so recently in Port Talbot should be jettisoned so abruptly. Is Tata really saying that it had no contingency plans to deal with a switch by China to export markets? If yes, what does that say about Tata’s ability to cope with future major changes and shifts?

Ratan Tata recently described the UK steel industry as “overmanned and underinvested”. His comments may be unwise, given that he was chairman of the Tata Group from 1991-2012. It is the responsibility of management to establish the number of employees required to produce the planned order book. Ratan Tata spoke as if all these serious business problems are nothing to do with him. If the top man can make so detached a criticism of his own company, then it is small wonder that this attitude permeates down the management chain. Presumably, Tata Steel did not expect Roy Rickhuss, the chairman of the Steel Committee and general secretary of Community, the union which represents steel workers, to submit a list of job cuts to be implemented by the company.

Sanjeev Gupta has emerged as a possible saviour of UK steel. He has acquired and is now operating the old Alpha Steel Hot Strip Mill in Newport and has said that in the event that matters proceed further, he would see the Port Talbot mills being sourced from arc furnaces rather than via the blast furnace route.

However, the two Port Talbot blast furnaces have just been rebuilt at a very significant cost, and now rank among the most productive (and cleanest) in Europe.

Any issues arising over the Port Talbot head count could be resolved if it were to take the approach adopted in Llanwern whereby the head count is the minimum required to produce and sell the forecast order book.

The level of imports from China has clearly been a major factor in the declining fortunes of UK steel. However, all steel producers in the EU have been adversely affected but only the British sector appears to face the prospect of extinction.

Actions to consider include strong British Government for support EU-wide measures to curb dumping and unions backing a “Remain” vote in the forthcoming EU referendum. Better together than alone in any tariff discussions. to match those levied in Europe.

The closure of one of the best blast furnaces in Europe in Redcar and the very real threat of closure of two others, taken together, represent the most appalling example of irresponsible business vandalism in UK industrial history.

We need to plan on the basis that sooner rather than later the China dumping problem will be solved. Accordingly, everything possible should be done to rebuild a lean UK steel sector capable of competing in global markets. The Government must take action on energy costs, emissions trading costs, local business rates and ensure that UK steel used for UK construction projects. In some ways, restructuring is the trickiest area of all. Tata has, in recent years, used the term as a euphemism for job cutting rather than as an attempt to build business organisations geared to the needs of customers and markets.

Any attempt to repair the wreckage left by Tata should pay special attention to recapturing some of the good features of the previous structure operated by Corus and initially by Tata, such as arrangements for purchasing raw materials and sharing technical expertise.  Governments (of whatever persuasion) do not have a good track record in this area, and nor do regional and local authorities. They failed to detect what was about to happen and prepare effective measures to protect the industry. Efforts to secure the best possible terms for redundant steel workers and efforts to find a buyer for the Redcar plant are not mutually exclusive.

In 1936, King Edward VII visited South Wales and opined that “something must be done” to alleviate the distressed areas. Now is the time for effective, realistic and prompt measures to avoid the creation of a similar barren landscape.

This article was first published in Tribune on April 15, 2016

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Author: holdenforth

50 years in management - mostly as a sharp-end man. Occasional contributor to Tribune.

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