U.K. Accused Of Self-Inflicting Its Steel Wounds, U.S. Steel Blames EU Policy

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by: MetalMiner

Original Post

By Stuart Burns

You could be forgiven for asking what all the whining is about in the U.K. over the imminent closure of the last major steel production facility at Port Talbot, South Wales.

Politicians and the media are busy blaming the Chinese for dumping steel at uneconomic levels and depressing the market price to the point where firms like Tata Steel cannot compete at any point other than high-technology aerospace, automotive and oil extraction and refining grades of steel.

What Dumping Hath Wrought

Certainly, the Chinese have played their part. With demand of less than 800,000 tons, but capacity north of 1.1 million, the country can, and does, produce far more steel than it can consume, putting pressure on mills to produce and export just to maintain capacity utilization. But the U.K. (and the rest of Europe) has also played its part in creating this sorry state of affairs.

The British government, in its frenzy to meet foreign aid budget promises, has lavished money on those very steel producers that are now dumping steel back into the market. One report outlines how the government, via it's Department for International Development (DFID), paid £21 million ($30 million) to fund a project aimed at turning around a number of loss-making state-owned businesses in Liaoning and Sichuan between 1999 and 2004. Liaoning is a major producer of pig iron and steel, while Sichuan is one of China's largest producers of coal, energy, iron and steel.

Government Policy

In another report, the British government is criticized for having contributed to soft loans made by the European Investment Bank worth some £80 million ($115 million) as part of its policy to help Chinese firms lower their emissions and their power costs.

The figure includes a loan of £40 million ($65 million) to one of the world's worst "steel dumping" culprits, the Wuhan Iron & Steel Corporation, the article says. State-owned Wuhan, the world's eighth-largest steel producer, is such a prolific steel dumper that it has now been especially targeted by the European Commission, which wants to slap the company with 36.6% tariffs.

Just five years ago, however, EU bankers decided to lend it €50 million (£40 million or $56.9 million ) to put towards a €207 million (£167 million, $237.8 million) Euro-Combined Cycle Plant, yet Tata's Port Talbot and other plants like it in the UK are saddled with the highest power costs in Europe.

U.K. Tax Money Benefits Chinese Producers

State aid is expressly prohibited in the EU, yet another Chinese beneficiary of British tax pounds was the Shaogang Songshan plant in Guangdong, which, in 2008, received €35 million ($43 million) in EIB funding in the interests of "improving energy efficiency," all in the interests of "climate policy."

Not surprisingly, U.S. Steel (NYSE:X) is pretty scathing in its assessment of what it sees across the pond, with Mario Longhi, the head of the Pittsburgh-based steelmaker, accusing the EU and U.K. of being "negligent" in their approach to the dumping of cheap steel on world markets by China, arguing in a recent Financial Times article that the crisis facing the British industry is the result of misguided policies.

One can have some sympathy with U.S. Steel's argument. The company is in a very similar position to Tata's European operations. U.S. Steel, which lost $1.5 billion last year, has been forced to shut down plants and lay off thousands of workers as a result of the slide in global steel prices. It has also been hit hard by the oil price collapse and disappearing demand from what was once a domestic oil production boom. U.S. Steel's production is said to be down 40% from a year ago, Longhi said, with some plants now operating at just 20% of their capacity.

It looks like Tata's Port Talbot, while not the first, may not be the last major plant to close before prospects begin to improve for western steel producers. It could be a long haul.