Climate change was the inconvenient truth that finally led to Tata Steel’s UK pullout

On March 30, a number of employees of Tata Steel’s British base gathered at their company’s sports club in Port Talbot to discuss the ongoing crisis in the steel industry with a visiting politician. The next day, several British news outlets carried photographs from the gathering. A prominent one featured four workers standing in an asymmetric formation: chin up, arms folded, one wearing a soot-covered safety helmet. They were in their work uniform of blue and yellow overalls with the company logo stitched on it.

Also present at the meeting was Christian Reed, who works as a Process Control Engineer at Port Talbot, the largest production facility owned by Tata Steel in the United Kingdom. I met with him a few days later near his workplace – not the best description, considering the steel plant sprawls over 2,000 acres in the heart of the town. Like his colleagues, Reed too was in his work wear. But his was a black T-shirt with a different logo on it: “Corus”.

It’s a brand consigned to history books and web archives. In 2007, Tata Steel signed a landmark deal worth Rs 36,650 crore and acquired UK steel giant Corus. The rebranding exercises in subsequent years established Tata as the name and face of British steel. But the exercise hadn’t yet finished, Reed explained. Only recently, they were informed that they would receive a complete set of the company uniform. “I have even been measured,” he chuckled.

But Reed knows he won’t be getting it anymore. Not after Tata Steel announced that they will be withdrawing from the country after making losses of nearly £1 million (Rs 9.3 crore) a day. Around 15,000 people dependent on its manufacturing facilities across the country stand to be affected by the exit.

To observers, the announcement of Tata’s exit from the country was only a matter of time. Over the last 12 months, the demand for locally manufactured steel was going down. Tata Steel’s UK division was under pressure to cut down its costs. At first, it announced a series of job cuts. But when that didn’t ease matters, they had to let go of their UK operations. Earlier, in a press release from October 2015, they had listed the causes that had plagued them for several months: flood of cheap imports from China, a strong pound and high electricity costs in the UK.

With China being the largest steel producer and a global player, its impact on Tata’s market didn’t come as a surprise. However, the acknowledgement about energy prices reopened an old wound that the energy-intensive industries had been nursing for close to a decade.

Global warming

At the time the Tatas took over Corus, steel prices were on the rise. “It was a fantastic deal for Tata,” said Peter Brannen, metals editor at Platts, a London-based organisation that covers the steel industry. “The year 2007 was when the markets boomed. But then you had the crash [of 2008].”

The financial crisis of 2008 severely affected the fortunes of the Indian conglomerate. With many European countries going bankrupt, demand for steel nosedived.

The same year, British lawmakers passed the Climate Change Actwhich resolved to reduce carbon emissions drastically. One of the key provisions of the Act was paving way for renewable energy projects like windmills to take over electricity production. A so-called “green tax” was levied on energy intensive industries to fund such projects. It was mandatory for these industries to pay a certain amount for each unit of carbon emissions.

The United Kingdom was praised across the world for becoming the first country to put in place a legally binding act to counter the climate change, although an attempt to replicate the same at the Copenhagen Climate Summit in 2009 failed. At its home turf, however, it was facing resistance from industrialists who saw the act as a threat to their profits and in some cases, economic sustainability.

“What started off as a minor inconvenience has become a major problem for the industries,” said Jeremy Nicholson, the director of energy intensive users group. “The government put in place annually escalating targets for electricity and signed the UK for a target by [the year] 2020 that was extraordinarily expensive.”

According to World Steel Association, electricity accounts for between 20% and 40% of the manufacturing costs. EUIG suggests that the UK steelmakers pay £80-90/MWh (between Rs 7,500 to 8,500/MWh). About £34/MWh (an equivalent of Rs 3,200/MWh) is owing to the “green taxes”. To make matters worse, the UK doesn’t have a nationalised energy sector and its industries pay among the highest of costs for electricity compared to its European and Chinese counterparts.

The China factor

After the Tata announcement, there was a slew of articles andcommentary on the feasibility of having green taxes on businesses. Industrialists, lobbyists and climate change sceptics united to make a case for the sustainability for home-grown industries and scrapping the green laws. They called it an issue of having a “level playing field”.

Chinese steel is born out of an industry that was, until recently, notoriously unregulated. According to a report made for the German government by the Ecofys, a renewable energy consultancy, 77% of the electricity generated in China came from coal in 2013, one of the highest polluters, compared to 36% in the UK.

“Chinese manufacturers don’t have to worry about carbon pricing or purchasing emissions,” said Nicholson. Coupled with cheap labour costs, the Chinese steel exported was significantly cheaper. In recent years, China has resorted to dumping its steel in the global markets owing to a slowdown in its economic growth. Chinese exports found currency in European markets and accounted for close to a third of British steel consumption, a development that spelt doom for Tata.

“All the measures in place in Europe today are expressed in terms of emissions for productions not emissions associated with consumption,” he added. “This is utter failure [of the government’s green measures].”

On April 1, the government caved in to the pressure and launched a public consultation on introducing renewables’ exemptions for high energy-consuming industries like steel. Just when it seemed like a battle between a well-intentioned government vs influential lobbyists halting the efforts to counter global warming, the European Steel Association came out with a startling revelation. The UK, the body claimed, was blocking attempts to raise tariffs on steel exported by China. In doing so, it was not only acting against its own steel sector, it was also defeating the very idea behind the Climate Change Act – reducing global emissions.

“Tata Steel has certainly not had an active or supportive partner in the British government,” said Stephen Kinnock, a Member of Parliament from Port Talbot. Towards the end of March, Kinnock had visited Mumbai to persuade Tata to stay on in his country. The talks, however, weren’t fruitful and a day later, Tata made the official announcement of withdrawing from the UK.

“This is primarily due to of our government’s what I call ‘China First’ policy. They have done a number of deals with the Chinese government for investments to come in to various large scale projects,” he said. “As a quid pro quo, the British government is looking the other way – or actively supporting China – in its strategy for trading in global markets. In this case, it is steel.”

Culprit or contributor?

The hullabaloo about energy prices in the UK notwithstanding, there is a consensus on the primary cause of Tata Steel’s failure in the UK.

“I certainly wouldn’t blame them [Tata] for anything going wrong,” said Brannen. “[The main reason] is overcapacity in the entire world. Steel is a hugely competitive industry and that puts pressure on prices. Supply has outstripped demand. What naturally happens in an economic cycle is the weakest fail and the strongest survive. And unfortunately, it looks like the UK steel is struggling at the moment.”

Meanwhile, as a fallout of Tata’s exit, the British industries might just emerge victorious in the bid to claim exemptions from green taxes. But how desirable is short term economic sustainability when global warming raises questions of long term survival? If the government grants exemptions to industries that fund its renewable energy projects, where will the money for these projects come from?

“I have no idea,” said Nicholson. “My personal view is we cannot afford what is driven by political ego, the desire to be saving the world while actually proposing things that won’t solve the problem at all.”