Chronicle of a crisis foretold in the UK steel sector

The tragic situation in Britain’s steel sector deteriorated more quickly than many had anticipated with the very abrupt closure of SSI and the mothballing of the Scunthorpe Plate Mill. At least Bimlendra Jha, chief executive of Tata Steel Long Products, was careful to stress that the Scunthorpe mill was being mothballed rather than closed, thus leaving the way open it to resume production, should there be a realistic prospect of a profitable operation. But hopes among steelworkers, their families and communities are not high.

In my view, the media debate thus far has focused too much on the impact of Chinese impacts and not enough on other failures.

Let me give just one example to illustrate the languid approach of Her Majesty’s Government (under Tony Blair), Corus (later Tata) and, sadly, the trade union-based National Steel Co-ordinating Committee.

I sent the following draft letter to the SCC back in August 2006.

Joint approach to HMG:

(i) The SCC welcomes the recent Corus proposal for a joint approach to HMG about matters of mutual concern, notably escalating energy prices and the implementation of the EUETS. (In fact, all the factors for which HMG was and is responsible were routinely discussed.).

The SCC will give this joint approach its full backing.

(ii) We take this opportunity to stress to Corus the following points.

* The responsibility for a well-prepared case to be presented to HMG is mainly down to Corus.

* The case must cover not only the very real problems imposed on Corus by the policies of HMG. It must also specify realistic measures to be taken by HMG to deal with these problems.

* Corus said in a recent meeting that the UK was the worst place in the developed world to be a steel maker. Corus must back this assertion with all the relevant information prepared and presented in a way ministers and senior civil servants can understand – a tall order.

* This approach to HMG is a welcome breakthrough in terms of constructive cooperation – it cannot be allowed to fail.

(iii) The GS may be prepared to confront the obduracy of the DTI senior officials charged with the job of implementing EUETS. These matters were discussed many times in the following years. Unfortunately the words got in the way of the required actions.

And now SSI has called in the receivers.

Further, the Tata Steel Long Products business continues to experience problems and its financial performance will reflect these problems.

Tata’ Steel attempt to sell off its European LP business to the Swiss-based commodities company the Klesch Group was a serious error of judgement.

Demand problems within Tata Steel UK Strip Products has resulted in some of the Llanwern plant being mothballed and the Port Talbot operation being cut back to the output from just one of its two basic oxygen vessels. Various problems in the Tata Steek bar business sector have resulted in a decision to axe around 700 jobs in Rotherham

Towards the end of 2013, Tata announced its plans to restructure its two technology centres. The plan for the Rotherham centre involved the transfer of 130 scientists and engineers to a new centre in Warwick. The plan for the Teesside technology centre and its 70 technical employees involved the setting up of a new not for profit technology unit that would be independent of Tata.

There was much to be said in favour of both plans but, unfortunately, Tata chose to bully its employees to accept the plans rather than to persuade them and the outcome was a painfully protracted and wholly unnecessary confrontation.

I got involved in Britain’s Steel sector problems in 2003. I had a call from Michael Leahy, then general secretary of the Iron and Steel Trades Confederation, to ask me to work as an advisor to ISTC (later to become the Community union) and to the Steel Committee, a body whose members were all national officers of unions with members in Britain’s steel sector.

My 2003 remit from Michael Leahy was brief and to the point.  I was to study steel industry issues as required, and I was to tell him not what I thought he wanted to hear, but simply what I thought. He and his colleagues would decide what advice to accept and what to reject. The arrangement seemed to work reasonably well for the next decade.

I took the view from the outset that the key priority of Corus – as it then was – and of the steel unions should be at all times the preservation and operation of the assets, and not the preservation of jobs that were not required in order to make and sell the order book. My logic was: no assets, then no jobs.

This view got me into some boisterous encounters from time to time in meetings up and down the country with steel workers and their representatives. I recall on one occasion being referred to as “that Welsh bastard”. I took exception to the description on the grounds that I am not Welsh.

Events in the United Kingdom’s steel sector since 2003 have been difficult, to put it mildly. In my dealings with the steel unions, both with local officials and national officials, I experienced thinking and policies that were responsible and positive.

Both groups worked hard to achieve a UK steel sector that was viable and internationally competitive. And after Margaret Thatcher’s “reforms” of the legal constraints on trade union activities, no management teams in the UK could point to union obduracy as a contributory factor in company difficulties.

The first issue that I was to look at was the plan by Corus, as it was then, to divest itself of its facilities on Teesside. The 2003 plans for Corus, by Sir Brian Moffatt, the company chairman, provide a useful insight into the problems facing Corus at the time, plans which boded ill for Teesside Cast Products, the then name for what is now SSI.

The gist of the Moffatt plan was: Port Talbot output to increase from 3.8mt to 4.7mt; Scunthorpe’s output to increase from 3.8mt to 4.5mt; Llanwern’s output of hot rolled coil to reduce from 2.8mt to 1.8mt. The increased output from Port Talbot and Scunthorpe, coupled with the reduced load on Llanwern, meant that the capacity of TCP (Teesside Cast Products) was not required by Corus

According to the Moffatt plan, the possibilities for TCP were either sale to a third party, or to operate as a merchant slab supplier, or closure. TCP continued to operate on a shaky commercial basis until 2009, at which point, Duferco – one of the members of the consortium which had been purchasing slab – cancelled the supply agreement. This episode triggered the Tata decision to close the plant. Energetic efforts to find a buyer prepared to take over and run the plant ensued, and these met with success when the SSI decision to purchase the assets and restart the plan was announced.

The positive contributions of union officials at local and were key factors in sustaining the plant during this very difficult period. A crucial and commendable part was played by the late Geoff Waterfield in ensuring that the momentum to save the plant was maintained.

The TCP site was restarted in 2012, and was operating until early October of this year when SSI went into liquidation.

The sale was conducted and completed via an unusual auction process. It was argued at the time and since that this process was key in pushing up the price per share paid by Tata ,and that this additional capital outlay has been a significant and unnecessary burden ever since.

Of course, mention must be made of the impact of the global financial crisis in 2008 and the sharp fall in steel output which followed its onset, and it is far from evident that the lessons from this time have been learned. In particular, there is the continuing need to the need to regulate the financial sector tightly to ensure that senior financial professionals give more priority to carrying out their  function of lubricating the national economy and less priority to helping themselves to funds intended for other purposes.

All the main European steelmakers suffered to a very similar extent from the self inflicted global crisis.

It is possible but unlikely that factors other than the collapse of the global economy played a significant part in the startling decline in steel outputs across Europe.

Tata Steel did invest heavily and commendably in Port Talbot, especially in its iron making facilities in order to ensure that the conversion costs of raw materials to as cast slab were internationally competitive. But, for a variety of reasons, the job of rebuilding the two Port Talbot blast furnaces gave rise to technical problems that resulted in significant shortfalls between planned iron outputs and actual iron outputs. These shortages fed their way down the supply chain to Tata downstream businesses and to external customers.

Difficulties with Tata Steel Long Products centred in part on shortfalls between planned performances and actual performances, and in part on the efforts by managers to reduce the employee head count to the number required to make and sell the order book.

Progress was made on the former but the situation with regard to the latter was somewhat confused, mainly because of uncertainty over the number of indirect employees required to support the manufacturing operation.

Management were seeking to move as much of the sales mix as possible up the value-added chain, an objective that proved more difficult to achieve than to set.

The story of the past few years has been one of determined efforts via initiatives such as the Ark project and the Path to Profit plan. Advances were made in some areas, but performance was patchy in others.

My involvement in the various initiatives at TSLP and other sites was terminated in the October of 2014 following the decision of the Tata Steel Europe Business to seek to sell its Long Products Business to the Klesch Group. The Steel Committee decided that greater resources than were available to me were required (I operated as a one-man band) and they brought in the Syndex Group to provide advice.

(I was pleased to note that the Syndex Group gave the Steel Committee broadly the same advice that I had given six months earlier with regard to a takeover by the Klesch organisation.)

In my closing report to the Steel Committee, written a few days after the TSE announcement to seek to sell off its LP assets, I said that, in my view, the Klesch option boded ill for the LP group and its employees, given the prominent role of Gary Klesch in the deregulation of Wall Street in the 1980s. His reputation was as a somewhat piratical figure, even by the relaxed standards of Wall Street. I urged the unions to use all the resources at their disposal to oppose the plan.

I also said that the reasons for the planned sale as set out in the message sent out by Tata Steel Europe chief operating officer Karl-Ulrich Kohler on October 15 were not convincing. He said that TSE had taken the decision to focus primarily on its SP business. It was difficult to reconcile this statement with the frequently asserted TS objective to become a major global steel player.

He argued that  the emergence of an interested third party for the LP businesses “JUST AS MARKET CONDITIONS ARE IMPROVING” (my capitals) makes this the right time for our decision.

I countered that the improving market conditions constitute a very powerful argument to complete the implementation of the various improvement plans (Ark and P2P) within the LP business.

Kohler was right that “the process is likely to last several months and we cannot jump to conclusions about its outcome or implications”. But that did not mean is TSUK employees and their union representatives should not question the logic and soundness of the decision to divest itself of the LP business in the first instance.

Bimlendra Jha, the man now in charge at Tata Steel Long Products, might be advised to jettison some of the baggage he may have inherited from various costly consultants and focus instead on a return to managerial basics, such as consistent manufacturing performance, minimum head count to make and sell the order book, and to ensuring that orders are delivered in full and on time.

The story of the Tata Steel technology centres in Rotherham and is one of a sound concept badly and insensitively implemented. Tata had squandered a good opportunity to raise performance standards.

The concerns of the workforce were NOT assuaged by a Tata Steel comment that a massive and avoidable loss of human capital was “a hit that could be taken” in pursuit of the TS plan.

For a variety of reasons ,the operational performance of TSUK in recent years has been patchy. I can think of few measures more calculated to exacerbate the situation than the acceptance of the loss of significant numbers of the very employees best placed to solve and resolve the formidable catalogue of technical problems.

The efforts by the steel companies, mainly Tata and SSI, and the steel unions to enlist the support of government to implement measures to bring about the elusive level playing field have been ineffective. The scope to do so in areas such as energy costs, implementation of the European Union’s Emissions Trading Scheme arrangements, public procurement and support to retain employees during business downturns, has been there for several years. What has been lacking has been the will to do so.

It is to the discredit of the Labour Government which left office in 2010 that the senior managers from the financial sector were allowed to loot the system in the years before 2008, and, even worse, after 2008 – after the extent of their collective responsibility became apparent.

It is doubtful that David Cameron and his Conservative colleagues will put in hand effective measures to ensure that thieving financial managers are never again allowed to infect and destroy healthy businesses. I would guess that Jeremy Corbyn would be glad of the chance to do so.

For their part, the UK steel companies and steel inions should make it clear that they do not require support over and above that provided to our EU competitors,  but simply the same.

An earlier failure occurred in the Outokumpu Stainless business in Sheffield in 2006 when the Stainless Cold Rolling facilities were closed because the manufacturing operation was not competitive.

This was not surprising, given the failure to complete the plan launched in the 1970s. That plan had provided for a specialist mill to convert stainless slab to hot rolled coil. The mill was never built and stainless slab cast in Sheffield was ferried across the North Sea for rolling to coil, an expensive cost extra.

Management did not always ensure that employee numbers were limited to those required to make and sell steel. It is not reasonable to point the finger at obdurate union officials. It is not their job to approach management with a list of those who might be surplus to requirements, and they would not remain long in post if they di.

A return to the total quality management mission statement of three decades ago would not come amiss: get it right first time. every time. However, one feature of the TS management style that may have been of doubtful value was an abundance of power point presentations garnished with language that may pass as profound in consultancy companies, business schools and  media companies, but is not ideal for the more prosaic requirements of the steel sector.

Despite the unhelpful concerns expressed by Prime Minister, the Teesside operation has a lot going for it in that it is ideally located on the coast, has one of the most productive and cost effective blast furnaces in Europe, and has an experienced and committed workforce.

Given that SSI has simply abdicated its responsibilities a key priority for HMG should be to appoint an effective team charged with the task of carrying out a global search for a suitable owner to re-commission the Redcar site – this task to be launched NOW.

There is a need to be honest about past failures and their causes, and to agree actions designed to reverse the dreadful decline of what ought to be a key element in our national economy.

This article first appeared in Tribune on November 10, 2015

Image courtesy of ibtimes.co.uk

 

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Author: holdenforth

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

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