British Steel Crisis

Having already been bailed out by the taxpayer, British Steel is on the verge of going into administration. As with BHS, which was sold by Philip Green, for £1, there are questions to be asked about the management company, Greybull Capital, that bought the company for £1 from Tata. Its reported that Greybull, for example, have been taking tens of millions of Pounds in management charges from the company, and that they have been charging 9% interest on a loan made to British Steel. Given that bond yields are around 1-2%, and average dividend yields are around 5%, its hard to see any possible justification for charging 9% on any loans. Greybull have apparently just put a large sum of money into a French steel company they also own, and yet they are coming with a begging bowl to the UK taxpayer again. 

The British Steel industry is tiny by global standards, but some of it is relatively efficient, because it is concentrated on the production of specialist steels that can be produced more efficiently in relatively small quantities. But, a number of factors play into the problems of the British steel industry. 

In 1999, when the new global long wave upswing began, the sharp rise in global trade, and output caused the demand for primary products to rise sharply. Prices of primary products such as copper, iron ore, and so on rose sharply, because production still based around existing mines and production facilities could not expand fast enough to meet the sharply rising demand. The rise in iron ore prices, increased the costs of iron and steel producers, because iron ore comprises a significant component of their constant capital. However, the rise in iron ore prices was itself a consequence of sharply rising demand for iron and steel. Iron and steel prices rose both because of the rise in iron ore prices, increasing the cost of production, but also because of the sharply higher demand for iron and steel. 

Higher iron ore prices acted to reduce the rate of profit of steel producers, but the sharply rising price of steel, as iron and steel also could not be expanded quickly enough, led to the rise in iron prices being more than offset, so that profits rose. But,as with every other such long wave in history, the high prices, and surplus profits made in primary production led eventually to a splurge of investment in new mines and quarries. High iron and steel prices and profits also led to new investment in steel production, particularly in China, the new workshop of the world, with its own seemingly insatiable demand for steel and other raw materials. Again, as with every other such long wave, this led to an inevitable rise in the supply of primary products and raw materials, once all of this new investment started to bring increased production on to the market. That typically takes around 12-14 years, and, because this new production is from new mines, quarries and production facilities that use the latest technologies, have greater natural fertility, and so on, as Marx describes in Theories of Surplus Value, Chapter 9, the cost of production, and market value of all this new output is lower. 

The consequence is obvious. As all of this newer, more efficient, lower cost production hits the market, it causes a sharp crash in prices. Firstly, the new production results in a short-term overproduction that sends market prices below prices of production, but even when this oversupply is washed out, the new market value of output is lower than it was on the basis of the old production. Its only necessary to look at the charts of primary products for this period to see the extent of that. By 2014, there were large crashes in the price of oil, iron ore, copper, steel, and virtually every other primary product or raw material. 

The fall in the price of these raw materials, as components of manufacturing, acted to lift the overall rate of profit, but for industries like steel, which are themselves producers of raw material, the fall in steel prices, now more than offset the fall in the value of their constant capital. In those conditions, the biggest producers have the greatest advantage, because the scale of their production simply enables them to dominate the market. There is one producer that now far and away dominates global steel production, and that is China. China produced as much steel in the last two years as Britain has produced in its entire history. Other producers complain about Chinese dumping of steel, but the truth is that the economies of scale enjoyed by Chinese steel producers are so massive that they can produce steel and sell it at a profit, cheaper than other producers can produce it. 

The tiny size of the British steel industry means that it could never compete in terms of bulk steel production against China. China can afford to produce steel on such a massive scale, because of the size of its own domestic market for steel, a domestic market that is growing by the day. This is the in built advantage that all producers have when they are situated in a huge single market. It is an advantage that Britain has decided to throw away, by deciding to leave the world's largest single market – the EU. But, Britain is not a bulk steel producer, and as stated above, it has built a niche in the production of specialist steels. The problem is that when prices of bulk steel falls, that tends to bring down the price of all steel, causing a squeeze on profits. 

Moreover, British Steel is facing other problems. Trump's global trade war has seen him impose 25% tariffs on foreign producers of steel and aluminium, including Britain. Around 20% of British steel is exported. Trump's global trade war has an immediate, detrimental effect on Britain. But, it has had an indirect effect too. The steadily rising tariffs that Trump has imposed on China, has caused a slow down in the Chinese economy. The slow down in the Chinese economy, coupled with the effects of Trump's tariffs on EU producers, alongside the overall dampening effect that Brexit has cast across Europe, means that the EU economy has slowed, at a time when it was starting to pick up speed. That slow down, also affects the foreign market for UK produced specialist steels. 

Finally, Brexit itself has impacted on British Steel, because the growing uncertainty it causes means that customers cannot rely on British suppliers of anything. And, of course, as the Pound has fallen in fear of Brexit – and it is again falling, as May's government stumbles from one Brexit vote to another – the consequence is to push up the cost of imported raw materials, such as iron ore, and energy. 

One Labour spokesperson today came out with the idea that the government should again bail-out the owners of British Steel. There seems no justification for such action. If Labour were to argue for anything it is that the British Steel workers should take over the company, and run it as a worker-owned cooperative. The Labour spokesperson also argued that the British state should ensure that the orders for steel for producing new British warships should go to British Steel. That is just another version of Trump's policy of economic nationalism and protectionism that is part of the cause of the problems resulting in a slowdown in global trade. It is the same kind of ideology of economic nationalism that stands behind the Labour leadership's commitment to Brexit. 

The rationale of that policy would be that every other country would give the orders for steel to their own national steel industry, so that British Steel would lose all of the markets for the 20% of its output that it currently exports! It is the economics of the madhouse, of beggar thy neighbour. 

What the British Steel crisis really shows is that the days of the small nation state like Britain are gone. British Steel can really only survive, in the long-term, as part of a large, integrated and coordinated EU wide steel industry. Such a continent wide steel industry can produce on a scale that can compete with large-scale Chinese production. More importantly, as was the case with the social-democratic ideals of the original European Coal and Steel Community, it means that steel production can be planned and regulated over a long investment horizon. It means that the financial resources of the EU can be utilised to ensure the required investments in infrastructure to support a steel or other large-scale manufacturing industry, that it can support the necessary investment in research and development, and education and training of the workforce. 

What, the British Steel crisis shows is that such crises cannot be dealt with by policies of national protectionism, of beggar thy neighbour, of accusations of dumping and so on, but can only come about by creating a more planned and regulated economy at the macro-economic level, so that movements in demand and supply can be smoothed, and the necessary reallocation of capital achieved in a way that does not throw thousands of workers on to the street. But, such a planned and regulated economic environment can only work in the modern world on a large scale, at least the size of the EU. That is why the biggest threat to the jobs of British Steel workers, and workers in every other British industry is Brexit.