Economic Factors Affecting British Steel Industry

The British Steel Industry (BSI) is facing a crisis due to various factors such as high competition from China, high production costs, less contribution to the UK economy, flat steel exports since 1997, economic crisis and job cuts. The government plays an important role in addressing this crisis by implementing policies such as reducing energy costs, favourable tariff rates, and industrial policies. The expected future of BSI is dark with a decline in steel production and profit due to high production costs.

International Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Critical evaluation of the current situation facing British Steel Industry (BSI)..........................1
Factors affecting UK steel manufacturers...................................................................................5
Expected future of British steel Industry.....................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

TABLE OF FIGURES
Figure 1: International competition of British steel Industry with other countries.........................2
Figure 2: Contribution of BSI in UK economy...............................................................................3
Figure 3: Profit of UK steel exports................................................................................................3
Figure 4: Workers employed in the UK steel industry....................................................................5

INTRODUCTION
International business includes all commercial, private and governmental transactions
such as sales, investment, logistics and transportations that take place between two or more
regions, countries and nations beyond their political boundaries, etc. There are number of factors
that affect these businesses in positive and negative manner (Ball and McCulloch 2012). The
current research project is based on international business and regarding this, study will focus on
British Steel Industry (BSI). There are number of organisations of this industry which are
operating their business in number of countries. Study will evaluate the different issues and
current situations of BSI. Along with this, it also focuses on different factors affecting the UK
steel manufacturers. Expected future and recommendations for British steel industry are also
describing in the following paragraphs of the present report.
Critical evaluation of the current situation facing British Steel Industry (BSI)
British Steel Industry is one of the major parts of the UK economy but currently, it is in
crisis. Steel industry is facing crucial problems at global level (Forrester and Maute, 2013). This
industry is facing this issue since 2011 and major reason behind it is general rout in the price of
commodities. Along with this, due to the recession in 2009, value of steel products and services
has decreased. According to the evaluation of the current business scenario, most of the British
steel multinationals has occurred financial loss. Due to this reason, in 2015 Tata steel became
announced its UK job cuts. Similarly, South Korean giant Posco (the world's fifth largest steel
producer) reported its biggest quarterly loss in the five years (Stahl and Tung, 2014). Including
this, state-owned Chinese steel trader Sinosteel faced the issue of interest payment due to its high
debts. The World Steel Association (WSA) has forecasted that in future, demand of steel will be
declined by 1.7%. Major issues of the BSI are described as under:
High competition with China:
As per the current business scenario, total world steel production has increased by 96%
between 2000 and 2014. Here, most of the steel were produced by China (Wild, Wild and Han,
2014). Therefore, steel production of China is increasing year by year which lead high
competition for steel manufacturer of other countries. Therefore, it is one of the major
contemporary issues for steel manufacturers. According to the statistical figures, in 2013, BSI
produced 12 million tonnes of steel and on the other hand; promotion of China was 779 million
tonnes. It has reflected that 48% of world’s total steel was produced by China. Due to the high
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competition, Chinese companies are selling steel in international market at low price as compare
to the other companies. Therefore, in the UK, BSI is also facing the same issue where Chinese
companies are selling their steel in abroad due to the less demand in China which reduces the
market scope for local companies of the UK (Driffield, Jones and Crotty, 2013). Therefore, the
UK steel manufacturers are not capable enough to compete with the Chinese steel manufacturers.
Figure 1: International competition of British steel Industry with other countries
(Source: Sheffield, 2016)
High cost of production:
British Steel Industry is facing issue regarding the expenses in production and operation.
As per the international standards and employment laws, BSI needs to invest huge amount of
money in production (Sheffield, 2016). Along with this, Industrial electricity prices in the UK
are high as compared to other major EU countries. In addition, due to high business rates, it is
very expensive to produce steel in the UK. Moreover, value of pound is very high as compared
to other currency so, export of the UK steel is less attractive. Therefore, all these are considered
as major reason behind the high cost of production (Dunning, 2012).
Less contribution in the UK economy:
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Figure 2: Contribution of BSI in UK economy
(Source: Sheffield, 2016)
Over the last 25 years, contribution of steel industry of the UK is less in development of
the nation. Recession of 2008 was the major reason behind it. Therefore, importance of British
Steel Industry has declined in front of whole economy. Above graph has reflected that there is no
contribution of BSI in total manufacturing of the UK’s economy. So, it is also one of the
contemporary issues for BSI (Cavusgil and et.al, 2014).
Profit from UK steel exports has been flat since 1997:
Figure 3: Profit of UK steel exports
(Source: Sheffield, 2016)
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British Steel Industry is generating very small profit from production of steel. In the year
2014, worth of the UK steel exports were £6.0 billion and value of imports was £5.9 billion.
Therefore, there is a very small profit in exports as compare to the import trades. But, cost of
exports is high as compare to import. Therefore, profit from the UK steel exports has been flat
since 1997 so, it is also considered as the major issue for the entire industry (Folsom and et.al,
2012).
Economic crisis:
Economic crisis of 2008 and 2009 have negative impact on overall production cost and
labour cost of BSI. At present, most of the steel organisations of BSI are thinking to close their
plant because of the low profitability and sales. In September 2015, Sahaviriya Steel Industries
(SSI) announced that they would be suspending their major plants of steel in Redcar on Teesside
in the North East of England (Cano-Kollmann and et.al, 2016). Along with this, British Steel
manufacturers have believed that their production capacity has decreased as compared to other
international manufacturers. For example, Tata Steel and Caparo industries are highly affected
by the steel crisis. In March 2016, Tata Steel announced that selling of the UK steel plant is one
of the best options to recover the loss of steel production in the UK. Overall, economic crisis are
also considered as major issue for the steel industry of the nation (Ball and McCulloch 2012).
Job cuts:
Due to the low production and high cost, most of the steel Manufacturing organisations
of the UK are seeking the option of winding up their plant. This option will affect the
employment of the UK economy. Overall, BSI has employed 34,500 people but at the time of
steel crisis, job cuts are also one of the major contemporary issues for the entire industry. In
January 2016, Tata has announced a plan of 1,050 job cuts, mainly at Tata’s Port Talbot plant in
South Wales (Santacreu-Vasut, Shenkar and Shoham, 2014).
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Figure 4: Workers employed in the UK steel industry
(Source: Blower, 2016)
Critical evaluation has reflected that, British Steel industry is facing different issues
which are affecting the entire economy of the UK as-well-as international manufacturers of this
industry.
Factors affecting UK steel manufacturers
International trade theories are considered as the important tool for determining different
macro factors which can affect the UK steel manufacturer. For example, Global strategic Rivalry
theory and Porter’s National Competitive Advantage Theory are important trade theories which
play important role in identifying factors (Blower, 2016).
Global strategic Rivalry theory:
It focuses on multinationals steel manufacturers of the UK and their efforts to gain a
competitive advantage against other international organisations of the same industry. As per this
theory, competitive advantage can be gained by developing barriers for new entrant. Along with
this, theory has also stated that there are number of barriers which can prove as the obstacles for
new firms such as research and development, economies of scale, ownership of intellectual
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property rights, unique business process, extensive experience in steel industry, control of
resources and positive access to raw materials for production purpose (Dunning, 2013).
Porter’s National Competitive Advantage Theory:
This trade theory of international business focuses on reason behind why some nations
are more competitive in certain industries. Porter’s theory has introduced some specific
determinants. According to this theory, local market resources and capabilities (factor
conditions), local market demand conditions, local suppliers and complementary industries and
firm characteristics are known as important causes because of them some countries are more
competitive in certain industries. As per the above evaluation, China is very competitive in steel
industry as compare to BSI (Killing, 2012). These can be considered as major factors which can
affect the competitiveness of the country in particular industry.
Critical evaluation of the above discussed theories has reflected that there are number of
factors which affecting steel industry of the UK. These factors are described as under:
 Economies of scale: Economics stability of every nation has direct impact on the cost of
operation and production of steel manufacturing firm. So, economic position of the UK
is also one of the major factors which affect the international business.
 Resource availability: It is also important factor which can affect the import and export
transaction of steel manufacturers of BSI. Including this, availability of raw materials
can influence the organisation’s capacity also (The UK steel industry: Government
response to the crisis, 2016).
 Suppliers and complimentary industry: In the UK, supplier of raw materials for steel
production is low as compare to China. It increases the cost of production.
 Political factors: Political stability of the nation has direct impact on organisation’s
policy.
 Legal factors: Government of every nation introduces different rules and regulations
which can affect the operations of steel manufacturers of the UK.
 Environmental factors: Environmental conditions and natural hazards are also important
factors which can affect the sustainability of the organisation (Steel industry, 2016).
 Technological factors: As per the current business scenario, technologies are changing
day-by-day and it leads increment in total cost of the production for steel manufacturers
of BSI.
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As per the critical evaluation of the steel industry of the UK, government can take
number of appropriate actions to handle the current crisis of BSI. High energy cost was one of
the major reasons so; government should develop appropriate policy for reducing energy cost of
the UK steel manufacturer. Along with this, the government plays important role in procurement,
favourable tariff rates, and industrial policies, etc (Beamish, 2013).
Expected future of British steel Industry
As per the current situation of the BSI, it can be state that future of this industry will be
very dark because most of the companies have announced that they are planning to close their
steel manufacturing plant of the UK. It has reflected very low production of steel in the nation.
Along with this, as per the economic crisis, cost of the steel production in the UK will be very
high which will reduce the total sales of steel in United Kingdome. Including this, high cost will
decline the total demand of steel and diminishing the total profit (Blower, 2016). For improving
the future of country’s industry, government should develop appropriate rules and industrial
policy as-well-as needs to reduce tariff rates and energy cost also.
CONCLUSION
The current research project has concluded that British Steel Industry is in crisis. As per
the current situation, contemporary issue of this industry are high competition with China, high
cost of production, less contribution in the UK economy, profit from nation’s steel exports that
has been flat since 1997, economic crisis and job cuts. Along with this, Global strategic Rivalry
theory and Porter’s National Competitive Advantage Theory have helped in determining the
different macro factors which affect the business operations of steel industry of the UK such as
economies of scale, resource availability, suppliers and complimentary industry, political, legal,
environmental and technological factors. As per the current report, the UK government plays
important role in steel crisis by taking appropriate actions in terms of procurement, favourable
tariff rates, and industrial policies. In addition, expected future of BSI will be very dark.
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REFERENCES
Books and Journals
Ball, D. A. and McCulloch W. H., 2012. International business. Routlage.
Beamish, P., 2013. Multinational Joint Ventures in Developing Countries (RLE International
Business). Routledge.
Cano-Kollmann, M. and et.al, 2016. Knowledge connectivity: An agenda for innovation research
in international business. Journal of International Business Studies. 47(3). pp.255-262.
Cavusgil, S. T. and et.al, 2014. International business. Pearson Australia.
Driffield, N., Jones, C. and Crotty, J., 2013. International business research and risky
investments, an analysis of FDI in conflict zones. International Business Review. 22(1).
pp.140-155.
Dunning, J. H., 2012. International Production and the Multinational Enterprise (RLE
International Business) (Vol. 12). Routledge.
Dunning, J. H., 2013. Multinationals, Technology & Competitiveness (RLE International
Business) (Vol. 13). Routledge.
Folsom, R. H. and et.al, 2012. International business transactions. A problem-oriented
coursebook.
Forrester, W. R. and Maute, M. F., 2013. The impact of relationship satisfaction on attributions,
emotions, and behaviors following service failure. Journal of Applied Business Research
(JABR). 17(1).
Killing, P., 2012. Strategies for Joint Venture Success (RLE International Business). Routledge.
Santacreu-Vasut, E., Shenkar, O. and Shoham, A., 2014. Linguistic gender marking and its
international business ramifications. Journal of International Business Studies. 45(9).
pp.1170-1178.
Stahl, G. K. and Tung, R. L., 2014. Towards a more balanced treatment of culture in
international business studies: The need for positive cross-cultural scholarship. Journal of
International Business Studies. 46(4). pp.391-414.
Wild, J., Wild, K. L. and Han, J. C., 2014. International business. Pearson Education Limited.
Online
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http://www.bbc.com/news/business-34581945>. [Accessed on 2nd April, 2016].
Sheffield, H., 2016. Tata Steel: 4 charts that show why the UK steel industry is in crisis.
[Online]. Available through: < http://www.independent.co.uk/news/business/news/steel-
redcar-tata-four-chart-that-shows-why-the-uk-steel-industry-is-in-crisis-and-why-the-
a6701111.html>. [Accessed on 2nd April, 2016].
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Steel industry. 2016. [Online]. Available through: <
http://www.theguardian.com/business/2016/mar/30/who-is-to-blame-for-the-steel-crisis-
tata-port-talbot>. [Accessed on 2nd April, 2016].
The UK steel industry: Government response to the crisis. 2016. [PDF]. Available through: <
http://www.publications.parliament.uk/pa/cm201516/cmselect/cmbis/546/546.pdf>.
[Accessed on 2nd April, 2016].
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