The UK Steel Industry – back to basics

The steel industry is an example of an industry characterised by a small number of large producers. There are heavy start-up capital costs and this means that the product can take a long time to come on stream. In that time international supply and demand conditions may change, and so might the market price. This crucially impacts on the profitability of the business. For this reason it is important to take a long term view of the viability of the business.

21135398-rolls-of-steel-sheet.jpgWhen the initial start-up costs are high and the number of businesses within the industry are few competitive behaviour does not follow the expectations laid down in textbook models of ‘perfect competition’.  Large players in the market  can undercut market prices and drive competitors out of business. They then command an even stronger monopolistic position than before. The biggest players assume ever-greater market strength and they earn ever higher levels of super-normal profits. ‘Super-normal profits’ is a technical term for a level of profits higher than necessary simply to compensate producers for the level of risk taken on in starting up the business.  These high profits give these monopolistic businesses ever-greater market power to expand into new areas, buy up smaller businesses and become ever-larger super-national conglomerates. It is an effective market strategy to suffer losses for a period of time in order to command super-normal profits at some time in the future.

There was, at one time,  the view that increasing globalisation  would make the business model more like a competitive model in some very capital intensive businesses, but the returns to anti-competitive practices are so huge that, in addition to adopting anti-competitive behaviour, large players with market power are in a position to negotiate with governments to protect their interests.  So with globalisation markets have become less competitive not more competitive.

There is little point in using theoretical models that rely on ‘perfect competition’ in such conditions. How often must this be pointed out before politicians and the public get the point? We still speak as if competition is good. Well it may be so in theory, but that is not the way the economy works! We have to deal with the world as it is, not as we have erroneously modelled it to be!

stock-photo-metal-details-127087430.jpgThose at the top know this very well. They know that what we face in the business world today is not competition among small producers, paying fair wages , charging fair prices, ‘responding to’ rather than ‘dictating’ market conditions, investing and innovating in everyone’s best interest. What we in fact encounter is a situation in which the biggest producers command monopolistic power in the market. They can manipulate prices to drive other businesses out of the market.  People lose jobs as a result of this non-competitive climate of international market manipulation. The worldwide pattern of subsidies, and ‘dumping’ at below market prices to drive out competition  can cause short term losses in otherwise profitable businesses.  These are the conditions that may justify nationalisation of some industries to attempt to sustain investment and production in the medium to long term, rather than simply allowing short term changes to drive an industry out of business.

Big businesses are typically big employers in specific geographic regions. The resulting depression in the region when they go into decline forces other smaller and medium sized businesses to close down as well. Because of this there is a cumulative downward effect locally. The entire region goes into decline for no reason other than the decline of a perfectly efficiently functioning large business driven out by ‘unfair’ competition.

stock-photo-heavy-industry-worker-cutting-steel-pipe-with-angle-grinder-in-workshop-78769561.jpgGovernments of the newly industrialised nations seem to have understood this strong link between growth and the importance of having of a long term industrial development strategy. While the world total level of steel output has flat-lined Chinese steel production continues to expand. This means that the Chinese will be well-placed to take advantage of any future upturn in the international market. On the basis of government support there has been extraordinarily rapid growth in the entire Chinese economy. Lack of environmental protection in China gives Chinese steel production a competitive edge in the world market.

We would do well to see the huge benefits to the nation of having a sound business strategy for long term growth. Financial markets tend to be more interested in the short term, focussing on cost reduction, takeovers and asset stripping to make quick returns for stake-holders. Governments are better placed to take a longer term point of view that also takes into consideration the impact on jobs , wages and demand in the regional economy.  Far from being inefficient government backed research, development and production has yielded phenomenal returns on average.

There are, therefore, sound economic reasons for governments to give support not necessarily to all but to some strategic businesses as part of an overall development strategy. The form of that support makes a difference, of course. Simply subsidising those already operating in monopolistic rather than competitive businesses simply feeds the problem of inequality and inequity in a world characterised by monopolistic competition. Providing access to long term financial capital, a supportive well-funded, well-functioning infrastructure and a well-trained labour force might be a more equitable means of fulfilling the overall growth and development goals we have as a nation. Environmental considerations should be given due consideration. There are no simple answers, but it is wise to question the short term market response, and to give careful consideration to long-term industrial and regional strategic arguments for government intervention.

stock-photo-sparks-while-welder-uses-torch-to-welding-124968521.jpg

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s