Community: The Union for Life

British Manufacturing Amid Global Financial Uncertainty

January 23rd 2008

Members of Community employed in manufacturing sectors may be deeply concerned about the impact on their jobs of the present international financial crisis which in Britain has cast a dark shadow over Northern Rock and is likely to continue to discourage bank lending even if interest rates are cut. The large and erratic fluctuations in share values of recent days are adding to the gloom and uncertainty in some circles. All of us are likely to be affected in some way and there is now a major element of uncertainty about global economic development which was completely absent at the beginning of 2007 but Community members should take heart from the positive outlook for British manufacturing and for the steel industry in particular at present.

Steel prices in the US and Europe are expected to increase substantially and high levels of production are likely to be maintained by steel companies in the next few months. The main reason for the increases are rising raw material costs but the increases anticipated in the prices for strip and long products are not only the result of these cost rises: they stem from tight market conditions.

A stock build up for many finished steel goods in 2007 has been run down in recent months so that stock levels are normal or below normal for most products. The supply of steel is reduced too because of the success of the measures taken by the Chinese Government in response to the pressure which the US and the EU have exerted in recent months to slow markedly the expansion of imports from China.

Huge increases in sea freight rates have made it much less profitable for exporters to attack US and EU markets. Demand for steel remains high in China and India and for the next few years at least India will need to import about five million tonnes of steel goods per annum to satisfy domestic demand. High levels of activity in the construction sector prevail in the large EU countries.

Britain

The prospects for the British steel industry are particularly good because of two factors. All British manufactured goods have been given a massive competitive advantage as a result of the sharp fall in the value of Sterling against the Euro. A year ago – January 2007 - the exchange rate was £1 = €1.50 and in September it was €1.45. Since then it has declined steadily and this year went below €1.32. At present the rate is £1 = €1.34, ten per cent down on January 2007 and seven per cent below September. This means that all imports on existing Euro prices are that much more expensive and our products are by an equal extent cheaper.

The second factor favouring particularly British long products but also benefiting strip is the soaring cost of scrap which makes the blast furnace route by which most British steel is made more competitive against steel from other EU countries produced through electric arc furnaces. In the UK there is a relative abundance of scrap so even in this respect we gain an advantage against the competition in other EU countries.

The events of recent months have taken governments and financial experts completely by surprise. No one expected that there would ever again be a run on a major British bank – the last one was in 1866 - until Northern Rock’s problems became clear in September. No one can know what the rest of 2008 will bring in economic terms. But no one should assume that all is doom and gloom for British manufacturing: on the contrary the prospects for output and jobs are the best for many years.