British Steel plc

British Steel plc

9 Albert Embankment London SE1 7SN United Kingdom (071) 735-7654 Fax: (071)587-1142

Public Company
Incorporated: 1967 as the British Steel Corporation
Employees: 53,300
Sales: £5.11 billion (US$9.86 billion)
Stock Exchanges: London New York Toronto

British Steel plc is the fourth-largest steel producer in the world. Its five integrated plants, at Port Talbot and Llanwern, Wales; Ravenscraig, Scotland; and Scunthorpe and Teesside, England, account for 75% of the liquid steel produced in the United Kingdom. The company also produces stainless steels, tubes, and pipes. Two-thirds of its sales are to customers in the United Kingdom; it supplies over 60% of the U.K. market for steel, while nearly one-fifth of its output goes to the rest of the European Community. The company is the sixth-largest non-oil exporter in Britain.

The company is the successor, by way of the state-owned British Steel Corporation (BSC), to the leading private steel companies that had survived the Depression of the 1920s and 1930s and World War II. Under the Labour government of 1945-1951 these companies first profited from the large compensation payments they received for giving up their coalmining interests to the state and then were nationalized themselves, on the grounds that they formed an oligopoly with the power to restrict output, raise prices, and prevent technical progress. The Iron and Steel Corporation of Great Britain was established in 1950 as a state holding company for their shares, but the steelmasters retained the initiative, mainly through a boycott organized by the British Iron and Steel Federation (BISF), the industry’s trade association, which they controlled.

In autumn 1951 a new Conservative government suspended the corporation’s activities after eight months of largely ineffective existence. Between 1953 and 1963 an Iron and Steel Holding and Realisation Agency sold off 16 of the 17 nationalized firms, mostly to the former shareholders. At the same time an Iron Steel Board was given the negative powers of fixing maximum prices for products sold in the United Kingdom and approving or rejecting any investment of over £100,000. Price control was nothing new, having begun on a more modest scale in 1932, with the result by the 1950s that losses during low points of the economic cycle could not be offset by higher profits in more prosperous times. The companies’ reluctance to invest intensified, and the Iron and Steel Board—or rather the taxpayers who financed it—became the major source of new investment funds.

During the 1950s and 1960s the British steel industry lost its historic advantages of cheap coal and plentiful iron ore, the industry’s basic raw materials. Coal prices rose by 134% between 1950 and 1967, and the domestic iron ore industry was neglected in favor of ore from new fields overseas. Rearmament, from 1950 onwards, caused the company to retain old plant, instead of investing in costly new plant, the attempt to keep up with demand. Between 1945 and 1960 total crude steel production in the United Kingdom doubled in volume, an increase largely attributable to such technical innovations as oxygen-based production and continuous casting. The claim that the industry had now been taken out of politics was belied by the events of 1958-1959, when the Conservative prime minister, Harold Macmillan, sanctioned not the single extra strip mill the industry wanted, but two, one at Llanwern in Wales and another at Ravenscraig in Scotland, both subsidized from public funds and neither able to operate at full capacity.

However, the British steel industry’s problems were not all due to the government or the companies. It faced new rivals, especially in Japan, as well as old ones, in France, West Germany, Belgium, and Luxembourg, which were now protected by the European Coal and Steel Community and some of which were blessed with deep-water harbors taking in high-grade ores. In addition there was a general fall in the rate of growth of world demand for steel from around 1960, leading to declining prices and profits for the steel industry worldwide, a scramble to dispose of surplus output at the lowest sustainable prices, and a worldwide steel glut which lasted until 1969. The British industry in particular continued to be marked by a cautious attitude learned in the 1920s and never shaken off, and by the refusal of the individual firms to cooperate with one another in anything that might threaten their own identities. The steel industry faced the 1960s with a fragmented structure based on investment decisions which, apart from the establishment of the Ravenscraig mill, had been taken in the 1930s.

In 1964 the Labour Party returned to office with a commitment to renationalize steel. The BISF’s response was the Benson report, which concluded that the industry needed to go over entirely to the basic oxygen process, to build extra capacity in much larger plants, to site them near the coasts (for raw materials supplies), and to shed 65% of existing plant and 100,000 workers. These proposals gave the government new ammunition, since in spite of the companies’ claims that they could provide most of the necessary capital from their falling profits, it was clear that the industry alone could not hope to finance these developments. The nationalized British Steel Corporation (BSC) began operations on July 28, 1967, just when new orders were at their lowest level in five years, and in a period of mergers among companies in France, Germany, and Japan. At its inception BSC was the second largest steel company in the noncommunist world, endowed with the assets of the 14 crude steel companies, whose output exceeded 475,000 tons. They employed 268,500 people, and included Richard Thomas & Baldwins, a company that had remained in state ownership since 1951.

BSC faced some formidable problems. Firstly, since compensation to the former owners was based on stock market values, and not—as in private mergers and acquisitions—on net assets or future profitability, the shareholders received about £350 million more than the assets were worth. A later Conservative government recognized the loss to BSC and wrote off that amount of its debt in 1972. Secondly, the 14 companies’ return on capital had fallen from 15% in 1956 to 3.7%, making them unable to carry out the Benson plan they had commissioned, and the sorry state of their assets was bound to damage BSC’s profitability for some time to come. Thirdly, 10% of crude steel production and about 30% of finished steel production remained in the private sector, leaving BSC with the generally less profitable bulk steel and lower-quality finished steel business. As the private firms were effectively subsidized through the controls on BSC’s pricing of crude steel sold to them, they could concentrate resources on technical advances which allowed higher productivity, giving them about a third of the market for finished steel, with only a quarter of total capacity, by the late 1970s. In this respect BSC was unlike its major rivals abroad, which were diversified within steel and across other sectors. Fourthly, BSC’s capital consisted of £834 million, to be repaid to the Treasury at a fixed rate of interest, regardless of its profit cycle. Between 1967 and 1980 BSC’s interest payments were equivalent to 73% of its losses. A private-sector company in the same situation would not have been burdened with interest payments.

Unlike other public corporations BSC had been given the freedom to decide organizational questions for itself. Its structure was regionally based until 1970, divided into six product divisions until 1976, put onto a different geographical basis until 1980, and then re-divided into different product divisions, with numerous profit centers within them, linked to a new system of mostly self-financing local bonus schemes for the workers.

One unique aspect of BSC’s organization was the presence of worker-directors, first on the boards of the regional groups, then on the boards of the product divisions, and lastly, after 1976, on the main board. The steel industry had long enjoyed a relatively good record in industrial relations. The relatively few strikes in the industry’s history had usually been over demarcation among the trade unions, of which there were 17 in the industry in 1967, and among which the Iron and Steel Trades Confederation was dominant, containing half of the 80% of the work force which belonged to unions. It was the ISTC that felt most threatened by change, since it would tend to cut into the union’s base among the less skilled blue collar workers. The part-time worker-directors were appointed after consultations with these unions and with the Trades Union Congress, the national labor federation. Since the management retained its monopoly of information and authority, the influence of these unelected representatives was minimal, ceasing altogether with their abolition in 1983, three years after the defeat of the national steelworkers’ strike had signaled the end of the trade unions’ influence in the company. In 1970-1971 the new Conservative government at first considered various ways of breaking up or partially privatizing BSC, then decided to continue with the status quo while raising the corporation’s borrowing limits and giving some flexibility on pricing. BSC later announced that with British steel prices held below European Community levels from 1967 to 1975 the losses amounted to about £780 million, representing another indirect subsidy to the private sector, in this case to steel consumers.

The corporation initiated its “heritage program” in 1971-1972 to develop the strengths and overcome the weaknesses of the assets inherited from the private companies, in particular the low productivity of blast furnaces, which was due to inefficient cooling and the use of low-grade material such as coking coal with a high sulfur content. By 1973 BSC had invested £764 million in this program and in new projects such as Anchor III, the construction of a new plant at the Appleby-Frodingham complex in Scunthorpe, Lincolnshire, on the site of abandoned ironstone workings. At the nearby port of Immingham, a terminal was built where 100,000-ton vessels could bring foreign ore for the furnaces. The opening of the plant only three years after the scheme was authorized seemed to bode well for BSC’s increased efficiency, and helped accelerate the trend whereby imported ores rose from 55% of the total used in the United Kingdom in 1967 to 85% in 1974.

By 1973 British steel consumption had exceeded 18 million tons a year. The ten-year development strategy started in 1973 envisaged concentration of resources on five inherited sites, and on a new sixth complex on Teesside. Some £3 billion-half from BSC, half from the taxpayers—were to be spent on raising capacity and on shutting down older plants, with the loss of at least 50,000 jobs—in other words, a slightly revised version of the BISF’s Benson report. BSC also did something that the steelmasters had never done; it created a subsidiary, BSC (Industry) Ltd. in 1975, to invest in new non-steel ventures in areas where its closure program would hit hardest.

The development strategy committed the government, BSC, and the country to the largest capital investment program in British history. Also in 1973, the United Kingdom joined the European Community, where excess capacity in steel was already at the highest level in the world and where BSC could no longer rely on an 8% tariff to keep European imports out. Then came a worldwide slump, caused by the oil crisis. The collapse of demand for steel during 1975 caused BSC to accelerate its closure program, after a public fight over the issue with the Labour government and, in 1977, to give up the ten-year strategy in favor of aiming for 30 million tons by 1982.

The Conservative government elected in 1979 at first announced that no more money would be available for BSC. Then in 1980, when BSC’s losses rose to £545 million, the government increased its borrowing limit once again, while the board announced that 60,000 jobs would be cut within 12 months. The 13-week national strike which followed, the first in the steel industry since 1926, cut deeper into BSC’s profits as imports rose to fill the gap it caused.

In 1980-1981 the Conservative government abolished the BSC’s statutory duties to promote the supply of iron and steel and to further the public interest, took new powers to direct BSC’s use of its assets, and wrote off a total of £5 billion of debts. In the next few years BSC regained some lost ground, and beat European records for closing plants and making cuts in the work force, but by 1982 British customers’ demand for steel was down to just over 12 million tons and BSC’s share of this market went below 50% for the first time. The majority of the private steelmakers also sought state aid, and received about £50 million in 1982 and more in later years. They also benefited from the “Phoenix” series of joint ventures with BSC, starting in 1981, since they were financed mainly out of public funds.

Having failed to persuade the government to allow the closure of the integrated plant at Ravenscraig, Ian MacGregor left BSC in 1983 to run the coal industry. BSC had made 105,000 workers redundant during his three years there, compared with 82,500 between 1967 and 1979 and 28,000 between 1983 and 1990. The mineworkers’ strike of 1984-1985 which MacGregor then helped to precipitate and to defeat, dealt BSC another unexpected blow, causing £180 million of losses in that financial year and helping to turn an operating profit of £40 million into a loss of £409 million.

In 1986 the chairmanship of BSC passed to Robert Scholey, who had spent his entire career in the industry, and whose father was a director of one of the pre-1967 private steel firms. In 1987, with Scholey’s full support, the government announced its intention to privatize BSC, and the company became British Steel plc in 1988, just before demand for steel began to fall. The new company undertook to keep all five of its main plants open until the end of 1994, subject to market conditions.

British Steel plc’s first 18 months were certainly eventful. The company carried out the fourth overhaul of its production structure since 1967, ending up with five divisions—general steels, strip products, stainless steels, distribution, and diversified activities. The company then won the contract to supply rails for the Channel Tunnel, was fined by the European Commission—along with five other steel companies—for participating in an illegal cartel to fix stainless steel prices, acquired the Mannstadt division of the German steel firm Klockner-Werke, and announced that the hot strip mill at Ravenscraig would be shut down in 1991. It replaced national pay bargaining with divisional and local talks to reinforce the emphasis on productivity and increased total payments to the directors of the company by 78%.

It is important not to allow the issue of state versus private ownership in the United Kingdom to obscure crucial facts. The state sector has not been a drain on the private sector’s resources. On the contrary, many private firms have benefited from the artificially low prices of BSC’s and other public corporations’ products, or from subsidies and other assistance given by successive governments, including those committed to the free market. The public corporations have been run by the same kinds of executives as in the private sector.

The act of nationalizing the company made little difference to its operations. Even BSC’s huge investment program might have been carried out by a public board aiding private firms, as in the 1960s, although BSC’s second chairman, Sir Monty Finniston, told the House of Commons Select Committee on Nationalised Industries, in 1977 that “we would have done nothing if we were in the private sector, absolutely nothing.” At the same time the company’s history shows that the act of privatizing a company does not automatically improve its efficiency or contribute to economic growth.

It is misleading to treat the British steel industry as a special case within the world steel industry, as both supporters and opponents of state ownership have done. Steel production is deeply affected by changes beyond the steelmakers’ control. Supplies of coal and iron ore are subject to enormous fluctuations in price and volume. The industry has fixed capital costs. Steel is a raw material, with construction accounting for 18.5% of British Steel’s sales in 1989-1990; the motor industry accounting for 14.6% of sales; and other manufacturers providing further sales. Fluctuations in the steel industry’s economic conditions depend on the demand for its customers’ products, not for steel itself. Government intervention, to control prices, protect jobs, promote regional development, and secure self-sufficiency, has been pervasive but inconsistent. Steel production has displayed long-term tendencies toward alternating crises of under-and over-production, in what has generally been a four-yearly cycle. The postwar history of the British steel industry has displayed all of these features, and would have done so whoever had owned most of its assets.

The company’s improved results in the late 1980s, both in and out of state ownership, were due—at least in part—to the growth of the British economy, to the global fall in the prices of raw materials—often creating a benefit to the British steel industry at the cost of Third World producers—and to favorable movements on the foreign exchange markets since 1985. Post-tax profit, declared in June 1990 after BSC’s first full year in the private sector, was £565 million.

It is open to question whether the company’s profits can continue at a high level in the 1990s. In the year up to November 1990 iron ore and coal prices moved upwards again, while sales of steel in the United Kingdom fell by 10%, and the company’s own pre-tax profits fell by 27%. The company decided to shut down the Clydesdale seamless tube works, and the chairman stated that running five big integrated plants put the company at a competitive disadvantage.

After passing into and out of the public sector, twice over in 40 years, the company’s chances of success or failure still depend not on its changing ownership but on the enduring features indicated by its name. British Steel plc is very much part of the British economy, and it is part of the world steel industry.

Principal Subsidiaries

Bore Steel Group Ltd.; British Steel Service Centres Ltd.; British Tubes Stockholding Ltd.; Cold Drawn Tubes Ltd.; H.E. Samson Ltd.; Seamless Tubes Ltd. Whitehead (Narrow Strip) Ltd.; British Steel Exports Ltd. British Steel Tubes Exports Ltd.; British Steel (Industry) Ltd; C. Walker & Sons (Holdings) Ltd.; British Steel Consultants Ltd.

Further Reading

Heal, David W., The Steel Industry in Post War Britain, London, David & Charles, 1974; Vaizey, John, The History of British Steel, London, Weidenfeld & Nicolson, 1974; Ovenden, Keith, The Politics of Steel, London, Macmillan, 1978; Bryer, R.A., et al., Accounting for British Steel, Aldershot, Gower Publishing, 1982; Abromeit, Heidrun, British Steel, Leamington Spa, Berg Publishers, 1986.

—Patrick Heenan