Lack of foresight blinds British Steel

UK steel maker blames the strong pound for its cost-cutting drive but the problems go deeper

Unions are not alone in being shocked at the scale of potential job losses at British Steel. Last week the company said it would accelerate its cost cutting and efficiency drive to counter the adverse effects of a strong pound and cheap imports.

About 80% of British Steel’s sales are influenced by the deutschmark which has fallen by more than 20% against sterling in the past year, and analysts say profits this year could be as much as £500m down from last year’s £1.1bn. Unions estimate consequent job losses could be as high as 10,000 over five years, bringing back ghosts of the 1980s when the then state-owned company went through a painful restructuring programme involving plant closures the likes of which Krupp, Thyssen and the German unions are now facing.

The bad news comes just as British Steel had been gaining a reputation as one of Europe’s lowest cost producers, with profits rival producers only dreamed of making.

This success has been portrayed as all the more remarkable because of the adverse conditions. Steel is a competitive and cyclical market. Then there have been the injustices of the European Union restructuring plan. During the early 1990s British Steel had to compete on its own commercial merits while other EU producers basked in the comfort of state aid. In Italy, Spain, and now again in Germany with the Krupp/Thyssen merger, the threat of social unrest and economic instability led to political expediency rather than commercial logic.

Coinciding with all this has been the collapse of the former eastern bloc. This opened the floodgates to cheap steel imports, saturating an already overloaded EU market.

So why should another market force – exchange rates – threaten to have an even more devastating impact?

Perhaps the answer lies in British Steel’s failure to exploit its privatised status. It is almost a decade since it was freed from state ties. This should have given it a competitive edge over rivals which are only just coming to terms with the private sector.

Certainly, British Steel has made some sound commercial moves. Its 51% stake in stainless producer Avesta-Sheffield was applauded because it diversified its manufacturing operations and provided access to a traditionally higher value market segment, although last year’s 40% fall in stainless prices would seem to partly undermine this.

Since 1994 it has invested more than £200m in its US iron and steelmaking operations. This includes a joint venture with US steel producer LTV and Sumitomo of Japan.

But in today’s global steel market, greater efforts are needed to be a world leader. The most successful private steel companies are those which have diversified their manufacturing activities so that they can deliver steel to customers anywhere, any time, and in any quantity.

Notable among these are the family-owned Riva and Ispat groups. Riva owns most of Italy’s steelmaking capacity and has bought mills in eastern Germany, while Ispat owns mills from Cork to Kazahkstan. Both have made external forces work for them. When British Steel was busy complaining about overcapacity and subsidies, Riva and Ispat used state aid and a political will to offload ailing steel mills. Ispat has become a greater force by securing ready and cheaper supplies of feedstock and access to competitive shipping rates.

British Steel’s loyalty to the UK is admirable but not without controversy. There have been rewards such as low labour costs and, coinciding with a steel boom in 1992, Britain’s exit from the ERM which boosted its bank balance while producers in France and Germany suffered.

But now the boot is firmly on the other foot and British Steel can only watch as the pounds pour out of its bank balance.

Today British Steel provides jobs for 43,000 British workers. Shareholders too have enjoyed their gains, yet the outlook is distinctly bleak. With greater faith in its commercial abilities and more vision, the rewards for all could be so much greater. Only then will British Steel truly be a world beater.