After the announcement of effectively closing the Port Talbot blast furnaces and replacing them with ARC furnaces to process recycled steel, I went down the rabbit hole of steel production policy and research papers to determine if that decision could be justified.
While I’m not an expert, the question proved difficult to answer. I can answer why the Government has chosen this route, but it’s much harder to justify that this was the right decision in the long term.
The outcome was chosen simply because it was the cheapest option for the Government to maintain some form of steel production at Port Talbot. A full closure of Port Talbot would be very unpalatable to any Government, and this was the cheapest alternative.
Where I struggle is the question of whether switching the plant to ARC furnaces is commercially viable.
Three things need to happen for Port Talbot’s new ARC furnaces to be commercially viable.
1. Investment in the Domestic Market
Currently, the UK throws most of its used steel into boats and ships it to places like India and China. For Port Talbot to be able to produce high-quality recycled steel, a considerable investment in the domestic recycling industry will be needed to ensure we can sort and source the correct steel.
2. Growth in the Domestic Market
Secondly, the domestic market for recycled steel will need to grow significantly; this requires both R&D and industrial investment, so there will be a market for the steel Port Talbot produces.
3. Source Cheap Electricity
Lastly, ARC furnaces require a considerable amount of electricity; for its recycled steel production to be globally competitive, Port Talbot will need to source cheap electricity, something we don’t currently have in the UK. Electricity prices are significantly higher in the UK than for other global recycled steel producers, meaning Port Talbot Steel is unlikely to be competitive or profitable at global prices.
In this context, throwing £500m at Port Talbot simply to maintain the façade of steel production at the site, with no guarantee of a long-term viable commercial future, looks like short-term political expediency. There’s no guarantee we won’t be back discussing the closure of Port Talbot in 10 years.
This exposes the two more significant problems facing businesses in Wales—the lack of a long-term industrial strategy and the political myths and hypocrisy of post-Brexit political debate.
The UK Government maintains an almost pathological belief that Governments have no role in shaping industrial strategy and investment—something rejected by every other country, including the US, the perceived bastion of the free market.
The lack of a post-Brexit industrial strategy is hurting the Welsh economy. Building domestic industrial capacity should have been at the heart of the post-Brexit strategy. Instead, we have the political hypocrisy that Brexit has allowed the UK to pursue its free trade deals – the benefits of which have been very difficult to materialise. The Government will happily sing and dance that free trade is a really good thing when it signs a deal with Singapore (GDP $500 Billion), and yet there is an ideological refusal to countenance any form of free trade negotiation with the UK’s largest trading partner (GDP $15 Trillion).
Port Talbot is undoubtedly a victim of this. Port Talbot has lost its free access to the EU steel market and is yet to maintain whatever restricted access it still has. The UK is now even more tightly bound to EU-imposed subsidy restrictions, preventing the UK Government from developing a long-term plan to decarbonise the plant and removing any UK voice in EU policy.
The technology to decarbonise the existing steel production line at Port Talbot has yet to be quite commercially ready, and this is the other side to the Government’s decision. The German Government is investing £2 billion in decarbonising its own steel production, Spain £1 billion, and Sweden has a £30 billion plan to build its own low carbon steel production capacity. So, while the long-term solution for Port Talbot is not ready today, coming up with a plan to maintain current production until it is shouldn’t have been a complete impossibility.
Paradoxically, given that Brexit was predicated on the UK government having more freedom to support UK industry, being outside the EU has actually reduced the UK’s ability to help a long-term plan for Port Talbot.
On its own, the UK is in a very weak bargaining position when negotiating trade deals.
Being a large net importer of goods, the UK isn’t a vital supply chain for industrial goods or raw materials, a position it could then use to negotiate from a position of strength.
The UK also needs to represent a significant enough market opportunity on its own compared to the EU, US, China, India, etc., which are countries bending over backwards to gain entry. Being a net importer, any threat of trade war would hurt the UK more than whoever was on the other side of the table, and they know this. Therefore, any new trade deals will almost always be to the other side’s advantage, especially when negotiating vital national interests like steel production.
At some point, the UK will have to either eat humble pie and rejoin the EU single market or give up all economic sovereignty and sign a trade deal with the US that would include some politically unpalatable conditions. A trade deal with the US would benefit our long-term economic prosperity. Still, it would ironically bring us full circle from 1786, putting the boot on the other foot where the UK has succeeded in its economic sovereignty to the US without any political representation.
In the immediate term, until someone realises this, the UK Government needs to develop a domestic industrial strategy, starting with a long-term plan to increase industrial energy generation and supply – a topic I will pick up next time. This may all be too late now for Port Talbot.