Many people are upset about the announced closure of two blast furnaces at Port Talbot, and their replacement with electric arc furnaces. But is this really an unexpected tragedy? The high point in the UK steel industry was in 1971 when it employed 320,000 people and produced about 28 million tonnes of steel. By 2019 employment in the industry had fallen to 23,000 people and production to about 7 million tonnes. The UK steel industry doesn’t have a divine right to exist.
Certainly, steel is part of the UK’s industrial heritage. The iron and steel producers on Teesside were titans of the industry and developed the first iron and steel mass production methods. However, the UK’s iron ore reserves have been depleted so it must import all of its iron ore, and despite the approval of a new coking coal mine in Cumbria two years ago, the UK still imports most of its coking coal.
A tonne of steel requires 1.7 tonnes of iron ore and 0.77 tonnes of coking coal. Coking coal has 60% to 90% carbon, low sulphur and phosphorous content, and can be baked in an anaerobic furnace at over 1000C to produce coke. That means about 2.5 tonnes of iron ore, coke, and limestone are transported across the world, to be fed into a blast furnace in the UK, to make one tonne of ‘virgin’ steel.
Britain once had all of these ingredients in plentiful supply as well as a large demand for steel to build its railways, bridges, Navy, merchant ships, machinery etc. Now we don’t need as much steel and we have no real comparative advantages in this industry. The UK only produced about 6 million tonnes of steel in 2022 according to World Steel Association and imported another 5 million tonnes of iron or steel according to COMTrade.
The lack of raw materials is not just a UK phenomenon. Most of Europe seems to have run out of iron ore and coking coal, as well. This is slightly surprising as the EU started life as the European Coal and Steel Community, but like Britain, they have been making steel for a long time. Now only Sweden produces any quantity of iron ore, about 29 million tonnes a year, while Austria produces about 3 million tonnes. Neither are significant producers when compared to Russia’s annual production of around 200 million tonnes, Brazil’s 400 million tonnes or Australia’s 900 million tonnes. Coking coal exports are also dominated by Australia, the US, Canada, Russia and Mongolia who together supply about 90% of world exports. Europe just isn’t in this game anymore and re-joining the EU will not save the UK steel industry.
Twenty years ago, the UK exported 14 million tonnes of iron and steel and 54% was scrap for recycling, in 2022 we exported only 11 million tonnes but 73% of it was scrap for recycling. This recycling will be done in Turkey, Egypt or India using electric arc furnaces of the type that are proposed for Port Talbot. This is a very sensible idea. One of the key properties of a metal is its malleability. Metals are infinitely recyclable. And according to Professor Simon Michaux, there are not enough metals to fulfil the demands of replacing everything in the developed world to meet green demands let alone satisfy the growing requirements of the developing world, all metals should be recycled.
However, there is one major problem with using electricity to recycle metal in the UK – the high price of the UK’s industrial electricity. The International Energy Agency (IEA) calculated that the UK has the third most expensive industrial electricity of the 26 developed economies they monitor. That isn’t conducive to producing anything in the UK using electricity.
Electric arc furnaces are not new technology. Interestingly, the first successful electric furnace was built and patented in Edinburgh in 1888. And although the first electric arc furnace for steel production was built in New York in 1907, they didn’t really catch on until after WWII. Now 70% of the 80 million tonnes of steel made in the US in 2022 was made in an electric arc furnace. This shouldn’t be a surprise as according to the IEA, the US has the cheapest industrial electricity in the developed world – about a third of the cost of UK industrial electricity. (see chart above)
Europe’s largest steel producer, Germany, produced 37 million tonnes of steel in 2022, 30% of which was made using electric arc furnaces, while the EU’s second largest steel producer, Italy, produced 22 million tonnes, of which 84% was made using electricity. Some of the smaller EU producers use 100% electric arc furnaces for their steel production. France, like Germany, is 70% BOS, 30% electric. Only the Netherlands is still 100% Basic Oxygen Steel (BOS) production.
So the key question should not be, does it make sense to convert the UK’s blast furnaces to electric arc furnaces for recycling steel rather than importing iron and coking coal to produce ‘virgin’ steel, but rather is UK industrial electricity too expensive to do this?
UK Electricity cost.
Why is UK electricity so much more expensive than not only the US but also Germany and France? NetZero Watch calculates that UK energy prices for UK steel producers are £46.60/MWh, of this about 40% are policy costs such as carbon emission charges and about 20% are network costs. France’s wholesale electricity costs are higher than the UK’s but when the network and policy costs are added, the UK’s prices are 62% higher than France’s. French steel producers pay £28.74/MWh for electricity and German steel producers pay £25.00/MWh, both have negligible network costs, and their policy costs are about half of the UK’s. (see chart below)
Policy costs include carbon prices and other policies to cover renewable subsidies. While Network Costs as the cost of balancing the system, such as paying electricity generators to turn on and off to maintain the grid’s frequency at 50hz. As the UK has the highest proportion of intermittent renewables in its grid, these network costs are also higher, and we need backup gas and coal-fired generation for when the wind drops. So effectively the UK is running two electricity systems at once. According to the Global Warming Policy Foundation, the UK Network balancing cost (BSUoS), has increased from £ 300 million a year in the early 2000s to £2 billion a year now. As the UK government is planning to increase the number of wind turbines in the system, so we should expect this balancing network cost to also increase.
Even the pro-Green agenda Carbon Brief admits that UK had the second highest ‘extra large’ industry electricity costs in the EU in 2014, it was beaten only by Cyprus, which is not exactly an industrial powerhouse. Sweden’s electricity was the cheapest at just over a third of the UK’s price. France was less than half, but they calculate Germany’s cost at only about 10% less than the UK’s. However, these are 2014 prices, and the UK has added a lot of wind turbines to the grid since then and plans to add another 400 wind turbines.
That said, the manufacture of iron, steel and ferro-alloys is one of the UK’s eligible sectors for compensation for the indirect costs of the UK’s Emission Trading Scheme and the Carbon Price Support mechanism. Electric arc steel production is likely to also meet the government’s 5% test, where indirect carbon costs are greater than 5% of a company’s Gross Value Added. However, this compensation may not be passed on to customers if the compensation is paid to the steel producers after they have paid their electricity bill. We should also question why only some UK industries are subsidised in this way. If we want to revive UK industry, removing the additional costs upfront for all industrial users would be more effective than compensating some users after the fact.
However, although it may still be cheaper to export scrap steel to Turkey, Egypt or India, there is another potential issue with offshore metal recycling. We presently send steel to be recycled with the expectation that it will be sent back to us in a usable form. But as developing countries develop, they may keep these metals for their own use. We can’t expect them to continue to sell the metal back to us.
The international centre of gravity for steel production moved to Asia in the 1980s. First Japan dominated the industry, now China does and soon India will. The country with the newest blast furnaces, access to raw materials and the greatest demand for steel, has always dominated the steel industry. This was true of England in the late 1800s and of the US in the first three-quarters of the 1900s. Similarly for Japan in the 1970s and 80s, who imported iron ore and coal from Australia to make steel for its booming economy – building car factories, highways and high-rise buildings. Japan even had a small amount of this steel left over to export back to Australia undercutting Australia’s domestic production. Although Australia had the raw materials, its blast furnace technology was out-of-date and its steel demand was relatively small, not unlike the UK today.
Now China and India are following Japan and that shouldn’t surprise us. China produced more than a billion tonnes of steel in 2022. India was the world’s second largest producer with only 125 million tonnes. Unlike Europe, both China and India have domestic supplies of iron ore, producing 166 million tonnes and 150 million tonnes respectively in 2022. China also has coking coal although India imports most of its coking coal. More importantly, they both have booming domestic markets for steel.
So, despite producing over a billion tonnes of steel, China only exported about 58 million tonnes of iron and steel in 2022 and about 40 million tonnes of goods made with iron and steel, this category includes pipes, bridge sections, screws, bolts etc. China’s 2022 steel exports were less than 10% of their steel production. The rest of their steel was used to build factories, cargo ships, a navy, tanks, highways, massive dams, and lots of high-rise apartment blocks. Twenty years ago China’s main export markets for iron and steel were South Korea, Japan, Hong Kong and Taiwan, now its main export markets are the Philippines, South Korea, Viet Nam and Thailand. The UK was only China’s 56th largest steel export market, even the US was only 17th.
India is much the same, they exported only 14.3 million tonnes of iron and steel in 2022 and 3.4 million tonnes of articles made with iron and steel. So less than 15% of their total production was exported. India’s biggest export market for iron and steel in 2022 was Italy, then the UAE then the USA. The UK was its 17th largest customer and bought less than 2% of India’s exports of iron and steel.
So Chinese and Indian steel producers are not targeting Western markets. Probably because these markets don’t need as much iron and steel as they once did. Instead, China has focused its exports on the developing Southeast Asian countries that are following China’s lead and reconstructing their cities, building highways and airports and high-rise apartment buildings.
China sells more products made with iron and steel to the developed world, with the US, Japan and Australia among its top five export markets, the UK is only 14th. China’s total exports of steel products have increased from only 8.8 million tonnes in 2003 to 40 million tonnes in 2022. While India’s have increased from about 1 million tonnes to 3.5 million tonnes during the same period. The US was India’s largest customer for products made with iron and steel, then Germany and the UAE. The UK was 4th but still bought less than 4% of India’s exports in this sector by value.
However, while the UK doesn’t matter to China, China matters to us. China is the UK’s largest supplier of products made with iron and steel (bridge sections, pipes, screws and bolts etc) China supplied 27% of UK imports in 2022, almost 3 times as much as Germany. These products are used in almost all other industries, so putting tariffs or quotas on steel and steel products to protect local producers can hurt many more industries than it helps. That is why the UK usually has zero tariffs on both iron and steel and products made with iron and steel. However, as a member of the EU, the UK placed a 25% safeguarding tariff on imported steel and steel products above a certain quota. The EU’s 25% tariff rate quota was imposed as a response to the US’s tariffs on Chinese steel. The EU feared that Chinese steel, no longer welcome in the US, would be rerouted to Europe. After Brexit the UK continued to apply these tariffs which are due to expire in June 2024.
International steel export prices
Reviewing the average export prices of the most commonly exported steel, Flat rolled iron or non-alloyed steel of greater than 600mm width, while China and India are cheaper than North America’s and Europe’s major exporting countries, they are more expensive than Japanese, Taiwanese and Russian export prices. (see graph below) China’s comparative advantage comes from its massive economies of scale due to its domestic demand, its free use of coal-fired blast furnaces (90% of China’s steel is made using BOS) and its large domestic supplies of the required raw materials coupled with massive imports of additional raw materials from Australia.
Security of Supply
The only valid reason for the UK to continue to make virgin steel may be to ensure security of supply. With Houthi rebels presently preventing cargo ships passing through the Suez Canal, and Russia unlikely to rest on its laurels if it defeats Ukraine, this is not a hypothetical threat. But closing the Suez Canal effects the supply of iron ore and coking coal coming from Australia as well as finished steel coming from China and India. A permanent blockage of the Suez canal would push up the cost of supplies coming from North America and Brazil as all European buyers would divert their purchases to the Americas. The only thing that really avoids this is choke point is either recycling UK scrap steel in the UK or reopening the UK’s coking coal mines.
Recycling steel in the UK is not viable while UK industrial electricity is so expensive. This will be made worse by adding more wind turbines to the grid. Their massive installation costs must be covered by high generation fees. (The UK had to increase the maximum strike price for offshore wind projects by 66% after there were no bids for their most recent allocation round.) While their intermittent electricity production requires more Network costs and backup power in the grid.
Swapping cheap coal for expensive electricity, will not end well for UK steelmaking. We have to do something about the price of our electricity. Adding more gas-fired power stations will help, while we add more conventional nuclear production or Small Modular Reactors or Thorium Molten Salt Reactors. But these will take time to build so we should be starting this process now. If there is a silver lining to the closure of the blast furnaces at Port Talbot, it must be the wake-up call to lower the price of UK electricity.
Catherine McBride OBE, is an economist and member of the Trade and Agriculture Commission, tasked with scrutinising the UK’s new trade deals for the Government.
She writes here in a personal capacity.