Difference of the Price of Steel in the UK and China Analysed - Essay Example

Difference of the price of steel in UK and China Name Class Unit Table of Contents Table of Contents 2 Table of figures 3 Introduction 4 Background of UK and World steel 4 PESTEL (Macro analysis-Political/Technological) 6 Political 6 Technological 8 Trade theories 8 Role of UK government 10 Recommendations to UK steel industries 12 References 13 Table of figures Figure 1 employment in UK steel industry 5 Figure 2 declining Steel production in UK 6 Figure 3 Top steel producers globally 10 Introduction Steel is a vital component in most elements of everyday life. This is due to its use in building cars, industrial processes and infrastructure. In UK, the steel industry plays a major role in economy. The industry has been facing a major threat from the global market especially from Chinese steel. China has been producing excess steel and dumping in the UK market (Jie, 2011). There have also been cases of rising importation of steel from China which has hurt the local industries (Rhodes, 2015). This report analysis steel from UK and China based on a global market context. The report starts by looking at the steel industry background in UK and world. It then analyses macro factors and trade theories based on steel industry in UK and China. The role of UK government in the current steel crisis is outlined. Lastly, the report gives recommendations. Background of UK and World steel In UK, steel is one of the foundation industries. This is due to its use in supplying materials to strategic industries in the manufacturing and construction supply chains (Birch, 2013). The industries that use steel have 20% of the employees in the manufacturing sector and has been generated an average of £24.6bn of the Gross Value Added. The steel industry was able to employ 34,500 employees in 465 businesses. The economic output from the industry was £1.7 billion (Rhodes, 2015). This shows that the industry is not only important to the country but also the community. The industry plays a major role in the economy through provision of employment and contributes to the GDP (Birch, 2013). Steel is an important commodity to the UK and like most products; it faces market forces in the global economy. UK steel industry has shrunk both in production and provision of jobs. Despite this, the production of steel in China has been on increase. UK production has been falling far behind the major competitors who are France, Spain and Italy (Rhodes, 2015). Figure 1 employment in UK steel industry Source: http://alertresearch.com/wp-content/uploads/2015/11/Steel-Sector-Table.jpg Figure 2 declining Steel production in UK PESTEL (Macro analysis-Political/Technological) Political China political policies have favoured surplus production of steel despite the economic slowdown. Chinese economy slow growth evidenced from 2014 has led to a decline in steel in their country. This has contributed to the overabundance of steel in the international market. The impact has been reduced prices for the steel globally. The slowdown in UK has been made worse by the impacts of strengthening pound which has increased the pressure on price (Rhodes, 2015). The fall in steel prices was mostly associated with the slowdown in GDP associated with the drop in China demand. This was also evidenced in other economies during the same period. The steel consumption failed to keep pace with the production growth in steel leading to surplus. Most of the surplus steel produced in China has been exported. Statistics shows that since 2009, China steel exports grew by 300% while UK has evidenced a 50% increase in steel imports from China over the same period. There has been a glut in the international market further pushing the prices down (Moggridge, 2015). Chinese government has not been taking any action to address the issue of overproduction and dumping in the UK market. This makes it hard for the UK companies to recover from the drop in steel prices. China dumping of their excess production has had a major impact on the UK steel market contributing to the current crisis (Chandra, and Long, 2013). China has been dumping their excess production into the global market. The dumped steel is sold at low price in UK leading to unfair competition (Moggridge, 2015). The anti-dumping laws in UK have not been effective in deterring China from engaging in the practice. The dumping by Chinese has had a great negative impact on the UK steel industry. The increase in steel imports has led to most of the construction projects relying on Chinese steel due to low price. This has reduced the local market for the steel manufactured in UK. Some of the local firms have been intensely relying on the China steel. Procurement policies in UK government have been leaving out major local steel companies (Birch, 2013). The increase in Chinese steel being imported to UK market is leading to loss of jobs as industries close. Company such as Tata has been closing their operations due to loss. Technological It’s assumed that developed countries have better technology than the developing countries. Despite this, China has been funding research and development in the state owned steel industries unlike UK. The high investment by the Chinese government on the steel industry has given it an upper hand in the market (Sun, Cai and Ye, 2013). This is especially through technology which helps in costs reduction. The UK government has failed to invest in research and development in the steel industry which would have ensured that vital skills are not lost (Rhodes, 2015). Trade theories China has absolute advantage in steel production. This is due to fact that their mills have access to cheap iron ore compared to the competitors. China has been importing iron ore from Australia at very low prices which makes them to produce more than they need. Compared to UK, China costs of producing steel are low. Absolute advantage looks at the productivity of producers or economies (Schumacher, 2012. The producer who requires the least input to produce goods has an absolute advantage (Porter, 2011). Costs comparison coupled with the high costs of business in UK gives China an absolute advantage. The costs of overheads in UK are high compared to the international standards. For example, the industrial electricity prices in UK are almost 50% higher than in the major developed countries. Doing business in UK have higher rates while a strong pound has made the UK exports less attractive. All these issues have made the investors to question the cost effectiveness of the UK steel industry in future (Rhodes, 2015). Compared to China, most of Chinese steel industries are government owned hence benefits from subsidies. This makes them to operate at lower costs as compared to UK firms. China has lower labour costs than UK which also gives them an edge in steel production (Qiong, 2011). Comparative advantage refers to the ability of a country to produce goods or services at lower opportunity costs than the other (Porter, 2011). Even if China has an absolute advantage in the production of steel, it can benefit from comparative advantage by comparing it with UK. China can concentrate on other industries and import steel from Britain who has lower opportunity costs. Chinese steel industries have been making loss and surviving on government subsidies. The main problem is the fact that China government has been engaging in protectionism making it hard for free trade. The government has been giving subsidies and dumping its excess production to the global market (Li-fang, 2012). Research shows that China has 70% of their steel makers state owned. The firms are not profitable and have been making loss of about $34 for every tonne of crude steel produced. Also, in 2015, China was able to produce 441 million tonnes of steel as surplus. Due to the price drop globally, 101 of the biggest firms made a loss of close to $11 billion in the first ten months of 2013. This is nearly twice the profits they made in 2014 (Rhodes, 2015). Despite the massive loss, protectionism policies are used instead of using comparative advantage. Figure 3 Top steel producers globally Source: http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7317 Role of UK government UK exports about 52% of its steel to other countries in Europe and has about 69% of its imports from Europe. This makes it vital for the UK producers to be given a fair competing field. The steel industry are not seeking for a taxpayer bailout but wants policy changes which relates to reduction in business rates, energy prices, emissions and procurement that gives them a level playing ground with other global competitors (UK Steel, 2016). A taxpayer bailout amounts to protectionism which is against the fair trade guidelines. The UK industry is facing global competition as well as poor government policies which add more pressure on the situation (Rhodes, 2015). The government has a role to reduce the costs of energy for the energy intensive industries. Research shows that energy costs for the intensive users have been rising over the century with the highest costs in 2014 (Rhodes, 2015). The electricity costs in UK are high for industrial users which have to be addressed by the government. It is important for the government to note that energy costs represent a significant portion of the costs in the industry. This is especially at the current situation where margins are small (UK Steel, 2016). It is important for the government to change polices that leads to high costs of electricity in the industry. This is especially policies aimed at combating climate change. These policies have added about 18% rise in electricity costs for the industries. This is a policy mistake that the government has to correct. The steel manufacturers are added costs which destroys their global competitiveness. The government should have a compensation package for the energy intensive industries to help the industry (UK Steel, 2016). The business rates have to be reduced by the government to make steel industry competitiveness. This can be lobbied by the trade unions. There is need for a review on the business rates to make the industry competitive. With comparison with china which has state owned steel industries, the UK industry is put on a bad position. The business rates must be able to support the industries through rebalancing economy towards the steel and manufacturing sector (UK Steel, 2016). The government has a role to make procurement policy helpful to UK producers. This can help them in competing for major contracts. The steel providers in UK must be allowed to play on a level ground with international firms. The government is expected to increase transparency when sourcing for steel in major projects. This should be carried out while at the same time ensuring that it does not lead to non-competitive practices (UK Steel, 2016). The government has a role to take steps against China dumping practices. The UK steel faces a major threat from dumping by China (Qiong, 2011). The massive surge in China steel production leads to price drop in steel. For example, the price of steel dropped by 45% in a period of 12 months in 2015. Chinese producers are state owned and in most cases operate at a loss through government subsidies. This leads to dumping practice through selling below the current market price in UK and other Europe markets (Chandra, and Long, 2013). The UK government has to address their venerability to these practices by China. UK has the capability to take action against dumping firms in China and has already made various measures to China. The UK government can pressure China to reduce cases of dumping of steel (Qiong, 2011). This is an action that does not advocate for protectionism but tackles unfair trade practices which goes against the international trade standards (Li-fang, 2012). Recommendations to UK steel industries From the analysis and discussion, it is clear that the UK industries have a role to play. First, the industries have to adjust themselves to the changing economic climate. This may involve investing in research and development which will give them a competitive edge in the industry. UK steel industries must be ready to meet the future challenges that the global market will bring. Second, the industries should not expect to get hand-outs from their governments since this amount to protectionism. Despite this, they should push for domestic legislation that protects them from unfair competition globally. The industries should ensure that the government take action on dumping by China which is hurting the industry. The evidence of dumping in the UK is worrying and the industry must force the government to take action (Rhodes, 2015). References Birch, A., 2013. Economic History of the British Iron and Steel Industry. Routledge. Chandra, P. and Long, C., 2013. Anti-dumping duties and their impact on exporters: Firm level evidence from China. World Development, 51, pp.169-186. Jie, L.Z.L.C., 2011. Trade Diversion Effects of EU-to-China Antidumping: An Empirical Analysis Based on Product Classification [J]. Journal of International Trade, 7, p.009. Li-fang, S.O.N.G., 2012. Antidumping Frictions against China and China's Countermeasures [J]. China Soft Science, 2, p.003. MacLean, R.M., 2012. Adored and Despised in Equal Measure: An Assessment of the EU’s Principle of Market Economy Treatment in Anti-Dumping Investigations Against China. In European Yearbook of International Economic Law 2012 (pp. 189-239). Springer Berlin Heidelberg. Moggridge, M., 2015. China-is Europe a soft touch?. Steel Times International, 39(2), p.14. Porter, M.E., 2011. Competitive advantage of nations: creating and sustaining superior performance. Simon and Schuster. Qiong, Q.T.Y., 2011. The Dispute of Individual Duty: on the Case of European Communities- Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China [J]. Wuhan University International Law Review, 2, p.026. Rhodes, C., 2015, UK steel industry: statistics and policy, Retrieved 28th February 2016 from,https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0a hUKEwipt7f9653LAhWJ6RQKHTM9AncQFggdMAA&url=http%3A%2F%2Fresearch briefings.files.parliament.uk%2Fdocuments%2FCBP-7317%2FCBP- 7317.pdf&usg=AFQjCNGjpb8aREi2Sn0FAyZZMeaAkp3RIg&sig2=- 57LJ4dDoIFx039NtVmacA&cad=rja Schumacher, R., 2012. Free trade and absolute and comparative advantage: a critical comparison of two major theories of international trade (Vol. 16). Universitätsverlag Potsdam. Sun, W., Cai, J. and Ye, Z., 2013. Advances in energy conservation of China steel industry. The Scientific World Journal, 2013. UK Steel, 2016, The future of UK steel, Retrieved 28th February 2016 from, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact =8&ved=0ahUKEwipt7f9653LAhWJ6RQKHTM9AncQFggjMAE&url=https%3A%2F %2Fwww.eef.org.uk%2F~%2Fmedia%2F7b62f510b24a47c0869dfe90a0c7932f.pdf&usg =AFQjCNFAgPQmjlnet_aalydAE0rsNPNg2g&sig2=l3uShrMdY7C1TgTAzvA0eA Read More