Use It or Lose It: The UK Must Decide If It Wants a Steel Industry

Little is certain about the dynamics of the steel market during the transition to net zero, but there is broad agreement among stakeholders that the existing investment environment in the UK risks decarbonisation by deindustrialisation. Further loss of industry comes with considerable risks to economic resilience and implications for defence.

The sector is beset by long-term problems which have hampered investment, in particular high domestic energy costs relative to other steel-producing countries. But with Brexit, the coronavirus pandemic and competition from cleaner European and US steel and cheap Asian products, coupled with the need for major capital investments at the UK’s two integrated sites and financial crises at British Steel and Liberty Steel, the industry stands on the brink.

Massive investment is required to secure the industry’s future, and time is limited. Some blast furnaces need relining – an expensive once-every-20-years investment – and coking ovens at both major integrated steel sites are approaching end of life, with some in the industry warning of the potential for sudden failure, which could put the businesses in serious jeopardy. The owners, India’s Tata Steel UK in Port Talbot and Chinese-owned British Steel in Scunthorpe, must make major capital investment decisions soon which will have implications for decades.

The necessity to decarbonise is also shortening the length of road for can-kicking. Without investment in low-emissions technologies and infrastructure as well as government action to create and protect a market for low-emissions steel, much of the remaining UK industry will cease to exist. Despite the UK being a net importer, 43% of finished steel is exported, which means the industry will be exposed to international supply chain emissions regulations and protections. Without a UK response, measures such as the EU’s carbon border adjustment mechanism could flood the UK market with international steel normally exported to the single market.

The extent of the industry’s decline and the scale of the challenge raise the question of whether the government should be concerned about the potential for an even more rapid decline of steel production in the UK. What risks might be associated with further decline, both for the economy and for nationally important steel consumers such as defence and critical infrastructure?

Steel Economy

Steel is an input into many economic activities and products, and in many cases is not easy to substitute. This makes it an important factor in inflation. Metals and non-metallic minerals were the largest contributor to an annual input producer price inflation rate – the change in the prices of goods bought and sold by UK manufacturers – of 20.5% in the year to August 2022, contributing 3.89% and driven by a 37.3% rise in steel prices.

Steel price inflation has been affected by global factors around the coronavirus pandemic, which, while demonstrating that the local supply chain is unable to protect against global inflation drivers, also reveals the limits of import diversification in mitigating risks.

Local supply did improve resilience to supply disruptions in some cases, especially for speciality uses, and may have provided some insulation from serious delays and price rises in international shipping. This continues to be the case during the energy price crisis resulting from Russia’s invasion of Ukraine. Although Liberty Steel has largely shut down production due to energy costs and financial uncertainty, it continues to produce in batches for less price-sensitive customers such as aerospace and defence.

Domestic steel producers are an important source of competition and supply security in some segments. For example, open sections (most of the steel beams used in building frames) – the bulk of the 1.2 million tonnes-a-year market for structural steel – are supplied in the UK roughly equally by British Steel from Scunthorpe and ArcelorMittal from Europe, according to the British Constructional Steelwork Association. If British Steel ceased to operate, ArcelorMittal would attain a virtual monopoly, with customers losing the close service relationship historically built up by British Steel. Loss of competition could result in price rises, and structural steel consumers are reluctant to rely on a sole international supplier.

While UK steel production has declined, it is still present across product segments, meeting around 40% of overall UK demand and at least 25% of demand in all product segments other than seamless tubes used in the oil and gas sector and stainless steel. There is limited overlap in capability between producers, meaning that loss of capacity at one site often cannot be made up for elsewhere. Presence across segments is an important shock absorber when supply chains are disrupted.

Consumers in some product segments would be heavily exposed to further loss of UK capacity. Notably, around 95% of rails are sourced locally, as rails are complex products which are produced to customer design. Despite a slowdown, construction remains the largest user of steel in the UK – accounting for around 60% of demand – and one of the biggest consumers of UK steel.

One of the most significant risks from further loss of steel capability is the potential impact on innovation. The UK has a strong innovation record, including in defence-relevant materials such as ballistics-proof steels. The UK has already lost much of its commercial research and development capability, with all of Corus’s labs shut or relocated abroad other than Teeside, which became the Materials Processing Institute. Entrepreneurs face challenges scaling within the UK – despite government backing – because of a lack of funds at steel producers, pushing them to look abroad both to trial technology and to attract commercial investment.

Steeling Defence

Domestically produced steel is used in defence applications, and offshoring the supply chain may have security implications – for example, in a scenario where multiple allied countries rearm simultaneously at a time of global supply disruption, such as during a major geopolitical confrontation. Steel is a critical component of most defence equipment, although defence represents only a small proportion of UK steel industry end use, meaning civilian sales are required to sustain the industrial base.

While many steel products used by the military are commoditised and available from global markets, specialised steels are required for advanced weaponry and vehicles. The government has not explicitly designated defence-relevant steel capabilities as of strategic importance, but the nationalisation of Sheffield Forgemasters, which has highly specialised capabilities used in nuclear submarines, shows that the Ministry of Defence is concerned about aspects of the supply chain.

The UK has defence-relevant steel capabilities that are not available to ‘systemic competitors’ such as China, but which are not legally protected. This complicates relationships with foreign owners and adds to the risks associated with foreign direct investment in the sector. During Liberty Steel’s current financial crisis, Chinese buyers have looked at buying the company – which produces speciality steels used in aerospace, including missiles and jet engines. An acquisition would provide access not only to new technology but potentially also to commercial data documenting transactions between steel manufacturers and the UK defence industry.

Other than the nationalisation of Forgemasters, the UK has taken a hands-off approach to its military steel supply chain. Steel for Trident submarines has been contracted from French suppliers, while the troubled Ajax armoured vehicles programme uses mainly Swedish steel after UK manufacturers were unable to meet contractor requirements. However, 90% of the steel used in the Queen Elizabeth-class aircraft carriers was produced by Tata Steel in the UK, and small UK-based supplier MTL Advanced will supply steel for the Boxer armoured vehicle. The UK does not have the capability to produce the required grade of steel for all military applications. But conversely, it is not necessarily the case that there will be ready alternatives to UK speciality steels should production capacity be lost. There are already capability gaps. For example, most of the companies capable of building reactor pressure vessels for UK submarines are located in hostile countries.

The Clock is Ticking

Decarbonisation offers opportunities as well as risks. With the major UK sites in need of modernisation in any case, there is limited potential for stranded assets. The UK has a very strong innovation and research capacity, with several major academic research groupings focused on the steel industry and decarbonisation technologies and pathways. The country is also making encouraging progress on carbon capture and storage and decarbonisation of the electricity grid, which is critical for electricity-intensive low-emissions processes.

Conversion of much of the industry to scrap steel and electric arc furnaces and investment in the scrap supply chain could improve UK economic resilience by substantially reducing reliance on imported iron ore and coking coal. Coupled with decarbonisation of the power sector, this might reduce the economic impact of future global disruptions akin to the coronavirus pandemic – which caused logistics, iron ore and coal price spikes – and Russia’s invasion of Ukraine, which increased the price of gas, as most steel production will be reliant on largely domestic resources of scrap and electricity.

However, the country has also fallen behind in key areas. International competitors with operations in Europe have been securing supplies of scrap steel by acquiring scrap merchants, including in the UK. Scrap is currently the quickest and most competitive way to reduce emissions, as steel is 100% recyclable and much of the emissions come from reducing iron in a blast furnace. However, only very pure scrap steel is suitable for high-grade applications, and investment is needed in the supply chain, which cannot take place in the current investment environment.

A lack of government support compared with competitor countries also means pilot projects for lower-emissions technologies are not taking place in the UK. This affects the capacity of the UK workforce and industry to implement investments effectively and, as discussed above, forces UK innovators to look elsewhere to commercialise and scale.

The UK faces a stark choice. It must either tackle the long-term problems hampering its steel industry and commit to making a success of decarbonisation, or face the possibility of losing most of the remainder of its industry. Further loss of steel capability risks the sector’s ability to regenerate, putting at risk the supply and price of a core intermediate good for the economy and for the military. Decarbonisation and aging assets set the clock for concerted action, and the government should decide whether it will commit to resolving problems in the industry or accept the risks associated with ending steel production entirely.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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