The changing face of UK steel production

Steel has been an industry of highs and lows and is entering a new era of modernisation as it switches to a more carbon-friendly industry. In the late 1960s, we were the world's fifth largest steel producer. But we’ve gone from producing 25 million tonnes in 1971 to just under 6 million tons in 2022. This is set against huge production increases in other countries, particularly China, and more recently crippling energy costs and weak demand in the UK. 

Now, steel makers are closing all four of the country’s remaining blast furnaces, and instead planning government-subsidised greener electric arc furnaces. This represents a huge shift for the UK steel industry.  

Of the two blast furnace operators in the UK, Indian-owned Tata Steel UK will decommission both its furnaces in Port Talbot, with plans to replace them with an electric arc furnace in around 2027.

And British Steel, the Chinese-owned group, has been granted planning permission to build two new electric arc furnaces, also replacing its blast furnaces. Chief executive Xijun Cao said the firm was not able to keep running the blast furnaces while also meeting its environmental commitments. 

Greener steel 

For the UK government, decarbonisation of the steel industry is a major part of its plan to reach its target to achieve net-zero greenhouse gas emissions by 2050. 

Traditional steel production, in blast furnaces, emits significant amounts of carbon dioxide: for every tonne of steel made, around two tonnes of carbon dioxide are released into the atmosphere. In total, the steel industry is responsible for 14.2% of greenhouse gas emissions from manufacturing and 2.4% of total UK greenhouse gas emissions. Tata's Port Talbot plant is the UK's biggest single emitter of carbon dioxide. 

By comparison, production of steel through recycling, as happens in electric arc furnaces, requires about ten times less energy. The UK already has four such plants, one in Cardiff, one in Rotherham, and two in Sheffield. They use scrap steel – such as old car parts or girders from buildings – as their raw material, which can be turned back repeatedly into new steel. The UK generates 10 million tonnes of scrap steel each year which can be used to feed these furnaces. 

Their use of recycled steel means arc furnaces are less carbon intensive and more efficient. But arc furnaces require fewer workers, so significant job losses accompany the shift to greener production, which is devastating to local communities. 

As well as the impact on jobs, there are also concerns that the greater adoption of arc furnaces and loss of the UK’s capability to make virgin steel would leave the UK as the only G20 country that cannot make steel from raw materials. This has raised concerns for the UK’s self-sufficiency, particularly when it comes to defence and the production of warships. 

In addition, while the move towards production in electric arc furnaces is likely to make production at UK mills more flexible, and more environmentally sustainable in the long term, the transition phase will take several years. In the meantime, a lot of domestic capacity will be stripped out, which threatens to cause further supply chain disruption and forces greater reliance on Tariff Rate Quota (TRQ) restricted imports in the mid-term.  These quotas allow for a certain volume of imports of steel subject to be imported into the UK tariff-free, with a 25% tariff applied after this limit is reached. 

A reliance on imports might see companies breaching these quotas, which are designed to protect the domestic industry. So, the government is conducting a review to see if the TRQ system should be changed.  

Insolvencies in the sector 

The end of traditional blast furnace steelmaking in the UK is a huge shift for the industry that will play out over several years.  

But what of the more immediate challenges and outlook?   

The UK steel sector saw a tail off in demand from early Summer 2023 when prices dropped sharply. This led to losses and payment strains for many stockholders and processors in the second half of last year. 

After a brief uptick at the start of 2024, prices have come back down and are likely to remain stagnant, tracking weak demand from sectors including construction. Firms trading into automotive and aerospace are faring better, as there is stronger demand. 

Alongside poor demand, high input costs continue to hurt the sector too. The result has been a rise in insolvencies: in the UK metals sector more broadly, insolvencies rose by 18% in 2023, with structural steel fabrication accounting for 29% of these. 

Key insolvencies over recent months include structural steel firm, James Killelea & Co; steel traders and distributors, D.N.T. Co; steel infrastructure specialist, S H Structures; and most recently, Atlantic Steel, the company specialising in hot rolled steel and reversing mill plate processing. 

Across the sector, insolvency expectations for 2024 match the UK domestic forecast for a further 7% increase, settling slightly on the severe hikes seen in the previous two years.  

But anticipated cuts in UK interest rates should eventually encourage demand and provide a boost for the sector. 

Protecting your business 

Metal producers have adapted as best they can over recent years, to protect themselves. Timely refinancing and building a more resilient supply chain are among strategies we have seen. 

More than ever, credit insurance is very important for the metal sector, helping firms amid some of the recent large scale recent failures.  

In addition, companies must monitor their supply chain relationships carefully and ensure they conduct thorough credit checks, vetting the liquidity position of end buyers, and monitoring late payments.  

Leniency for late payments, even where firms have long-established relationships, should be discouraged given that even long-established businesses have failed in recent months. Vigilance on any change in payment terms is still needed.  

It’s also worth considering the price mechanisms that are built into contracts. For example, with structural steel, with lead times of potentially 6 months or more, if you've not got an ability to factor cost increases through to your end customer, it leaves your margins very volatile. 

Steel’s role in the UK’s economic future

Returning to the long-term outlook, it’s not all doom and gloom. There are hopes that the changes we’re seeing now could make the UK a world leader in clean green steel.  

The UK’s broad decarbonisation plan is steel intensive. It has been estimated that 10 million tonnes of steel will be needed over the coming years for renewable energy production, across wind, solar, nuclear and more.  

Steel production will still play a crucial role in the UK economy of the future.