UK Steel Lives On, New Agreement Keeps Port Talbot Open

by Stuart Burns on DECEMBER 13, 2016

Well, Tata Steel works operations across the U.K. are safe, at least for now, following an agreement between the company and its unions last week.

According to the BBC, almost 7,000 people are employed by Tata Steel across Wales, including more than 4,000 in Port Talbot. In a significant turnaround, the company has committed to keep both blast furnaces at Port Talbot operating for a minimum of five years. In addition, they have promised to invest $1.27 billion (£1 billion) over a 10-year period to support steelmaking at the site. Included in this investment, will be refurbishment of the number two blast furnace.

Apparently, Tata has committed to a policy of avoiding compulsory redundancies for five years both at Port Talbot and across smaller steel plants the company operates in Wales. Needless to say, the announcement was met with enthusiasm by steelworkers and those in a supply chain estimated to be worth some $4.18 billion (£3.3) billion a year to Wales.

Why Reinvest?

So, what secured this remarkable turnaround? Was it a slashing of energy costs? A cut in fiercely criticized business rates? Barriers on the import of foreign steel or a government subsidy? No, apparently all it took was an agreement to replace the current final salary pension scheme with a defined contribution plan involving maximum contributions of 10% from the company and 6% from employees.

It is fair to say that from the date of Tata’s announcement that it would close or sell the plant eight months ago the pension scheme has always been an issue but it came as a surprise to many after all this talk of British steelmaking being crushed by Chinese competition — of energy costs being twice what they are in Europe and the onerous business rates — now appear to be minority issues compared to the pension scheme.

Pension Problems

It seems that pension schemes don’t attract headlines quite like the threat of unfair foreign competition. Still, when steelworkers go to vote in the new year, the union has promised that no decision will be made without their vote, they can at least console themselves that in the loss of their final salary payment scheme and replacement by a defined contribution plan, they are in exactly the same boat as the vast majority of other employees in the U.K. where final salary schemes have been on the way out for years.

The British Steel pension scheme has been the ancient mariner’s albatross hanging around Tata Steel’s neck ever since they bought the corporation in Jan––uary 2007. IUt has liabilities of $19.01 billion (£15 billion) and some 130,000 members. If Tata walked away from the U.K. market, the plan would be at risk of entering the pension protection fund which would result in at least a 10% cut to member benefits anyway.

Needless to say, Tata is stressing that a lot of work still needs to be done to improve the U.K. operation’s competitiveness and the company isn’t missing the opportunity to call on the British government to look at energy costs, those business rates and, of course, foreign competition.

Currency Values

Maybe the sharp fall in the pound since Brexit has also played its part. Although Tata imports much of its iron ore and coking coal, the lower pound will have helped reduce foreign competition, at least for a while. Meanwhile, reports suggest that Chinese exports may finally be reacting to the barrage of trade measures by countries around the world suffering cheap steel imports. Export of steel products fell 16% in November compared with the last year to 8.12 million metric tons according to data released this week, bringing the January to November period to 100.68 mmt or a 1% fall on the year before.

Resolution of the British Steel pension-fund problem may clear the decks for Tata to resume its talks with ThyssenKrupp AG over a potential European steel merger. Discussions have been going on for much of this year, but the major stumbling block was undoubtedly the burden of the vast, underfunded scheme. Whether the U.K. government will be able to hold a merged Thyssen-Tata Group to its commitments regarding Port Talbot and associated steel plants remains to be seen, but, for now at least, British Steel lives on.