4 May 2016

Is this the radical plan that might save the British steel industry?


Every year in the UK we throw away enough old cars, bits of aeroplanes, tin cans, washing machines, train tracks and knives and forks to cover 350 acres of Hyde Park and pile it sky high with scrap more than six foot deep.

Most of this scrap metal – about 10 million tonnes a year – is collected for recycling but then sent overseas by ship to countries like Turkey for melting into low-grade steel products because its cheaper than doing so here.

More pertinently, that pile is going to double in size to 20 million tonnes or more over the next 15 years because our steel stock is coming to the end of its 40-year life cycle.

The size of Hyde Park’s steel mountain comes courtesy of Professor Julian Allwood, the Cambridge engineering academic who has been studying the industry for the past six years. He has also worked out that all future demand for steel in the UK could be met if we were able to‘upcycle’ our homegrown scrap metal. Put bluntly, the UK would be self-sufficient in steel making.

What’s more, Professor Allwood warns that unless the current rescue packages for Tata Steel’s Port Talbot blast furnace works – with or without the UK government backing – include proposals for investing in the latest electric arc furnace technology, there will be an even worse crisis in a few years time. It’s also why he claims the industry’s attempts to compete against countries such as China in the mass market for primary steel is a waste of time and money.

In an interview with CapX, Allwood says:

“Even if there is a rescue for Port Talbot – backed by government subsidies paid for by taxpayers – there will be yet another crisis in two years time. The industry is in denial, and maybe even in shock about the changes taking place in steelmaking because of vested interests.

“The truth is that the steel industry is going through a revolution, one as dramatic as the move from analogue to digital. We have more blast furnaces than we need, not just here in the UK but across Europe. So putting more money behind them will waste taxpayers’ money and lose jobs in the long-term.”

Blaming the UK’s high electricity prices – and carbon taxes, as even Tata is now doing, is a red herring. “I’m afraid lower electricity costs won’t help much at all as the steel industry is already energy efficient.”

More pertinently, Allwood wants us to see Tata’s collapse as an opportunity not a catastrophe; an opportunity to modernize the industry and turn the UK into a world-leader in pioneering materials technology. With uncanny timing, Allwood’s provocative new report, ‘A Bright Future for UK Steel,’ was published days before the Port Talbot crisis yet apart from a few headlines, has been ignored by ministers as they scramble to fix the bleeding Welsh plant with sticking plaster.

Yet Allwood’s analysis is visionary. He says the steel industry – together with the government – should work together invest in a new programme, costing between £1bn and £2bn, to build new arc furnaces but also research innovative ‘upcycling’ processes to add to and improve the current technology to create new high-tech steel compositions. At present, most old steel is ‘down-cycled’ and turned into the lowest value steel products like reinforced bars.

“This is a great opportunity for British scientists and industrialists to pioneer new methods of upcycling to create new materials, just as the 19thcentury pioneers like Darby did in the industrial revolution.”

And become a world leader. With the global supply of used steel set to triple over the next few decades – the supply of steel collected from goods at the end of their life lags the supply of new steel by about 40 years- there’s a massive market to be tapped.

So how is this revolution to be achieved? Allwood would start by phasing out the blast furnaces at Port Talbot to create space for three new activities: scrap collection, separation and storage; installing electric arc furnaces which scrub the scrap of impurities and melt it so the metal can reused to make anything from cars to aeroplanes; downstream processing and intelligence to connect the conventional products of steel making to the final users of steel.

At the same time, he wants incentives for companies in the supply chain to draw in downstream sectors, the manufacturers, so that they work together on eliminating inefficiencies; the steel industry is badly fragmented with more than a quarter of all steel wasted in the production process.

Then a new Steel Catapult innovation centre should be set up close to the site bringing together experts from all fields to improve pure hi-tech steel processes; the UK is already a world leader in material innovations such as graphene at Manchester and bainitic steel at Cambridge.

He recommends setting up three new taskforces: a special ministerial hit squad to coordinate such an action plan ( because no one in Westminster has any real nous on the subject ) as well as another drawing on top brains from the consumer industry like John Lewis or Apple to look connecting the steel industry from top to toe, as Henry Ford famously did by owning everything from the mine to the car to the showroom. A third taskforce would come from the present users of arc furnaces – Tata Steel in Rotherham, Sheffield Forgemasters, Spain’s Celsa, Sanjeev Gupta’s Liberty House and equipment suppliers including the US Nucor group – one of the leaders in the field which is already working on these new technologies.

Allwood provides a cost-benefit to the plan too, albeit roughly. Clearing Port Talbot would cost up to £200m, building 4 million tonnes of new electric arc furnace capacity would cost around £600-800m, and establishing a new Catapult would be £100- 200m, adding up to between £1bn to £2bn. There’s also green bonus – the greenhouse gas emissions from making steel from recycled metal are about half those when making steel from ore.

Ironically, this strategy doesn’t cost much more than closing Tata Steel or as much as subsidizing a new buyer with taxpayers money but without a a long-term plan for transforming Port Talbot. By his reckoning, closing Tata could cost as much as between £300m and £800m per year if you add up the lost tax revenue per employee, the cost of redundancies and benefits and other knock-on effects on the community.

One industrialist who backs Allwood’s prognosis of the industry is Gupta of Liberty House, the steel tycoon who recently re-opened a rolling mill in Newport and bought out Caparo’s downstream manufacturing businesses. Indeed, Gupta, who has now put in a firm bid to Tata for Port Talbot, reckons he could transform the profitability of the plant by installing an arc furnace to recycle scrap metal – with government backing in some form or other.

That’s the rub. Any new buyer for Port Talbot is going to need some government help through taxpayers’ money – whether it’s with low-interest loans, an equity stake or by taking on the pension scheme which, incidentally, could invest in a new takeover.
Whether Allwood’s strategy is the right approach, or indeed, the only one to transform British steel is impossible to know. What is astonishing is that his proposals are not – as far as he knows – even being debated at ministerial level although his past work is known to the business department. Sajid Javid, the business secretary, was perhaps unfairly criticized for being in Australia when Tata announced its closure plans. But if Javid were to duck this fascinating proposal to put a new backbone into British steelmaking, he should consider returning down under.

Margareta Pagano is a financial journalist who writes for The Independent.