The British Steel Industry: Key Macro-environmental Factors (Research Paper Sample)

The British Steel Industry
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The British Steel Industry
The economic crisis in the UK is a concern not only to the steel industry but also in other sectors of the national economy. Since the onset of the 2007 global financial crisis, the situation in the European Union and other parts of the world has caused economic shocks in all sectors of the economy. The effects of the crisis haveincluded a reduced level of employment, declining competitiveness in global markets, and competition between domestic and international firms. In Europe, the steel industry is incrisis following fluctuation in prices and dumping of cheap products in the market, which has contributed to unemployment in UK firms (Steel Industry Profiles: Europe,2015). The British steel industry has been adversely affected by international trade, causing a decline in the sector in terms of demand and revenues. Competition from other manufacturers has rendered businesses in the steel industry uncompetitive, leading to downsizing and closures of steel manufacturing firms. The global crisis and trade liberalization has opened the UK steel industry to the dumping of cheap Chinese steel(Loughran, 2015;Stace, 2016; Steel Industry Profiles: Europe, 2015). This paper presents a discussion on the UK steel crisis, and the macro environmental factors that have led to the current situation. The dumping of cheap Chinese steel has contributed to the current situation in the British steel industry.
Background Information
The steel industry in Britain has been politicized in history, and up to today, the government plays a leading role in influencing operations in the industry. The first steel industry, the then British Steel Corporation, was an ethical industry, and by 1968, industrial policy was in place to safeguard workers’ rights. The industry experienced steel strikes in the 1970s, which led to rapture of several labor policies in the UK. The steel strike in 1980 brought to public attention the need to privatize the steel industry, although the political parties at the time continued to play a great role in the industry.The privatization of the corporation saw the selling out of the BSC’s manufactured, finished and ancillary operations to private firms. Most of the corporation’s workers were transferred to the new firms to continue operations there. The structure of the BSC was maintained in the private ownership, and national collective bargaining was withdrawn. Since privatization, the productivity and profitability of the British steel increased, rescuing the economy from recession. However, mismanagement of the new firms led to an inevitable decline afterwards (Upham, 2001).
The British steel industry is considered the core of the country's economy, given the importance of steel products in water, energy, and security matters. The steel industry is considered as the cornerstone of the UK’s automotive, aerospace, defense, construction sectors, and other supply chains. The industry contributes a great proportion of the country’s GDP and without it, most of the other sectors will crumble (Stace, 2016).
The UK steel industry faces growth challengesas a result of international competition. In 2014, the country registered the lowest market values in relation to other countries in Europe, indicating a looming crisis in the UK. The industry has faced various challenges over the years that have rendered the economic situation vulnerable to shifts. According to the article ‘Steel Industry Profiles: Europe’ (2015), the persistent volatility of prices, shifting demand, the complexity of supply chains, cost efficiency, and productivity are the causes of the current situationin the steel industry. While an increase in the market value as compared to the previous years is evident, the UK steel experiences problems underpinning manufacturing costs. Between 2010 and 2014, the country registered a growth of 4.3% to register revenue of $ 8.5B. However, cost efficiency remains the major problem in Britain. The fluctuating energy costs,enforcement of green taxes, industry structures make it difficult for UK steel manufacturers to reduce market prices. As a result, the steel industry stands challenged by imported steel, particularly from China (Steel Industry Profiles: the United Kingdom, 2015). Based on the economic theory of supply and demand, the increasing number of players in the market is shrinking UK’s demand for crude steel. The rise of cheap steel imports causes shifts in consumer behavior who expect prices to go down as a result of declining energy prices. As such, the availability of substitutes in the market has resulted in shifting demand to cheap imports(Steel Industry Profiles: the United Kingdom, 2015).
The steel crisis has seen a loss of more than 5,000 jobs in the UK, causing major concernsabout the far-reaching implications in other sectors. The closure and downsizing of British manufacturing industries may imply that UK steelmakers will not be able to access the material required for manufacturing steel products. The industry players call upon the government to intervene and aid the British stricken industries(Stace, 2016).
Key Macro-environmental Factors Playing Out in the Crisis
The dumping of cheap steel products from China has rendered the British steel industry uncompetitive in the markets. Being a global leader, UK has always focused on quality manufacturing to ensure sustainability of the industry and provision of quality products to end-users of steel. The operational and supply chain costs do not allow for reduction of prices of the manufactured goods. Therefore, the domestic manufacturers in the UK face unfavorable trade competition from international rivals (Yu &Abrami, 2011). China, in particular, has brought about unfavorable trade conditions in the UK by dumping steel products in the market, which has impacted on UK competitiveness. The demand for steel from the UK has declined; hence, making the crisis inevitable (Yu &Abrami, 2011).
Moreover, the downsizing of firms and closure of many plants has led to the UK crisis. The availability of low-priced products in the markets has discouraged investors in the UK steel industry who see the venture as non-lucrative(Stace, 2016). The increased demand for Chinese steel has led to the British manufacturers losing market for crude steel, with end users getting low-quality steel products. The closure and downsizing of British Mills have affected sectors such as the automobile and aerospace sectors. The extensive dumping of Chinese steel has resultedin insufficient internal demand, which has prompted firms to close down or reduce the level of production (Stace, 2016).
Fluctuation of energy pricesis viewed as a root cause of plant closures in the UK. The declining energy pricing implies that the pricing of crude steel is expected to go down. However, the industry structures in the UKdo not allow for fluctuation of prices given the high operational and fixed costs that manufacturers incur inproduction and the supply chains. According to Hibbert (2015), the UK steel industry is energy-intensive, and relies mostly on energy to manufacture steel. The recent fluctuations in energy prices have thus contributed to unfavorable conditions in the market for UK industries. While countries like China manufacture steel at a below-cost manufacturing level to dump the excess into world markets, the UK industry structures and production standards do not allow for changes in the manufacturing process.Therefore, the energy pricing shifts has made the British steel industry unfavorable to compete with cheaper priced steel products in the world market. The conditions of free trade make the market unfair for UK steel manufacturersas steel prices in the world market go down and challenges demand for UK manufactured steel products (Hibbert, 2015).
Theoretical Framework
Economic Theory
In theory, equilibrium is reached when demand is matched with the supply of goods. Firms are able to make optimal profits when production is matched with demand for manufactured goods. As such, production with effective demand will result in operational costs that are sustainable. In the case of the UK crisis, the economic condition in the global markets is a result of increased competition between the domestic firms and foreign firms. The substitutability of UK steel products by cheap steel from low-cost regions challenges the UK steel, which is produced at high-energy costs. The reduced demand for UK expensive steel leads to low profitability. Based on the economic theory, the conditions in the world markets influence the competitiveness of firms, as well as the effective demand in the market. As such, the Chinese cheap steel is taking up the world markets owing to substitutability of the steel products. The low switching costs in the steel industry make it difficult for UK firms to produce steel at low costs, explaining the reason for downsizing and plant closures (Hibbert, 2015; Gareth, 2015).
Laissez Faire Capitalism
This is a theoretical view in which free trade and market forces are left to operate in economic activities. The internationalization of businesses requires that states liberalize their markets for free trade and competition between domestic and foreign firms. The concept requires the separation of the state from the economy; a condition in which capitalism and free trade operates on the world economy (Etro, 2015). However, the UK seems to reject the Laissez Faire theory of trade, by putting in place industrial policies to restrain Chinese imports into the market. According to Hibbert (2015), the decline of the British steel is because they cannot compete; for that reason, they should be left to decline and let the competitor alone. But the UK cannot accept the Laissez Faire; the govern...