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British Steel Dies, But Carmaking Thrives

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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In 2007, the Indian conglomerate Tata paid $12 billion for Corus, Europe's second-biggest steelmaker. Britain's Telegraph newspaper hailed "an amazing turnaround" in Corus's fortunes. A year later, Tata paid $2.5 billion for Jaguar Land Rover, an iconic British car brand that had limped through the credit crisis in the hands of Ford. The Financial Times said the deal lacked logic: "Jaguar and Land Rover will be millstones around the neck of Tata Motors."

What a difference a (near) decade makes. The British auto industry is in rude health; the Society of Motor Manufacturers and Traders reckons domestic car production will reach a record by the end of the century. By contrast, U.K. steel production slumped to just 579,000 tonnes last month, its fourth monthly decline, driving  output down to about half of what it was at the start of 2014.

Tata Steel, currently the biggest U.K. steel producer, said this week it will slash 1,200 jobs. That's just after Caparo Industries tumbled into the U.K. equivalent of Chapter 11 bankruptcy, putting 1,700 steelmaking jobs at risk. Here's a chart showing how one benchmark measure of steel prices has more than halved in the past five years:

In steel, as in so many other commodities, China is the key to both prices and production. Blaming China for flooding the world market, however, misses the recent trend in that nation's steel production:

China's impact on the steel industry has been growing for years. In his 2006 book "China Shakes the World," former Financial Times bureau chief James Kynge told the tale of a Chinese company called Shagang Group Co. buying a Dusseldorf steel mill from ThyssenKrupp AG, Germany's biggest steelmaker. In 2002, Shagang moved the entire factory to the town of Jinfeng to sell automobile-grade steel to Volkswagen -- which used to buy from the very same factory when it was in Germany.

Blaming China for the industry's woes, though, is misguided. The more dismaying truth is that steel prices and output mirror the outlook for global growth. That's reflected in the World Steel Association's capacity utilization figures, which show that more than 30 percent of the industry is idle:

Source: World Steel Association

So it's understandable that Tata is shrinking its U.K. steelworks. What's possibly more surprising is how much of a success it has made of Jaguar. The prestige brand now accounts for 83 percent of its revenue, up from 63 percent three years ago; the low-end Tata Vehicles models, by contrast, now provide less than 17 percent of revenue, down from 36 percent in 2012.

The U.K. car industry is enjoying a renaissance; the Society of Motor Manufacturers and Traders sees annual production reaching 2 million vehicles in 2020, beating the 1972 record of 1.92 million cars. In March, Jaguar announced plans to double the size of its U.K. headquarters in Coventry, where the company's Advanced Engineering and Design Centre is based.

And therein lies another part of the auto tale. With automated robots doing much of the metal bashing on the production lines, workers in the British car industry are much more likely to be engaged in sophisticated engineering or computer-assisted design than riveting or welding bits of metal together. Ford, for example, doesn't assemble cars in the U.K. these days. But half of all its diesel engines are made here while all of its global diesel engineering knowhow is based in Britain.

It's never pretty when an industry is in its death throes, with families and communities devastated by the accompanying job losses. But over time it should mean that jobs sweltering at a blast furnace or digging for lumps of carbon underground will be replaced by those in the knowledge economy. 

(Ford corrects numbers in ninth paragraph of article published Oct. 23 to show that half of all of its diesel engines are made in U.K.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net