Wednesday, March 16, 2011

Steely Scam

During the recession of the 1970s and early 1980s, there became alleged over capacity in steel and to a lesser extent, aluminium. Earlier in the 1970s there had been an energy crisis, which in part precipitated the recession ( citation 1,2 ). At the time of the recession, many steel works around the western world were either in public hands or subsidised and protectionism ( which is still an issue with countries like the USA and japan ( citation needed) ) was frequently used by countries trying to both defend their industry from low cost countries, and also secure enough supply ( and perhaps oversupply) for their key industries like car building.

In a very odd combination of command economics and free marketism, countries more or less conspired to drive out capacity from these industries, with the UK being a major loser in terms of jobs and then later loss of capacity.

So on one side subsidies should be reduced, and companies fully privatised while on the other supply would be "capped" so as to make the price of steel higher and thus more attractive to the stock market investors. As mentioned once again, many countries "cheated" and took legal loop hole clauses and "modernisation" exceptions to their actual plans.

While the UK under the Thatcher administration, went about taking out value adding processes such that smelting plants looked less economic and could be closed on grounds on unviability. So for example, the strip mill at Gartcosh which added value to the raw ingots produced at Ravenscraig, was closed by command.

Ravenscraig enjoyed economies of scale, local energy supplies and a deep water port in economic distance and should have been a prime candidate for privitisation towards a free market with its existing value-adding plants and local customers in especially the Oil industry.
However, the conservative government of the 1980s considered that the stock market would not want to invest in an industry with over capacity and potential for more competition from the far east at that time. Since they had few seats in Scotland, they chose this plant and it was not just Sir Ian McGregor's management board who decided on the action. ( citations needed). The same was also partly true in the UK aluminium industry.( citation).

A decade or so later, and steel was starting to come in short supply, with many of the far eastern smelters increasingly being tied to japanese, korean and latterly chinese customers where geographical cost savings and fortuities could be taken into account. Aluminium started to become an econonic alternative in some industries, and there too some shortfalls in supply drove prices up.( citations).

Dole or Subsidy in Transition to Market Metals?

The key socio-economic question is, was it better to subsidise and protect the industry as the USA did anyway through to the 2000s ( cite) , or to pay the social benefits and soft-capital to try and rebuild these communities' economies which were so dependent on steel and coal?

There is no real yes-no to this question because there may have been an inevitability that with over supply, and emerging low cost nations ( india included) the outcome would have meant that the UK industry was not competitive. On the other side, given a smoother de-subsidisation and privatisation with state as a beneveloent share and stake holder ( the current Chinese and Norwegian model for primary and heavy industries) and the up turn in the demand for steel which did happen anyway, then these plants could have been active in an eventual fully free-market ( in the EU at least).

Couple to this advances in technology both in production, logistics and then in the whole value adding chain, then the steel industry could have survived and thrived as a larger entity in the UK: whether or not the stock market would be particularily interested in the difficult overgangs period is another matter, but instituional investors may have been willing to both take the long term risk AND also contribute to protecting value ( eg savings and pensions, value chain share prices) in the economy as a whole.

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