UK Steelmakers Hit Hardest By Electricity Costs: Green To Blame?

Back in April, we reported on the effects of plant/smelter closures and what they say about the state of metal production in the global economy, “green taxes” and overall energy policy, specifically through the lens of the aluminum industry.

Indeed, low aluminum prices and perceived excess supply in the aluminum market played a not-small part in these closures.

But Rio Tinto Alcan decided to close its Northumberland plant in the UK after a debate between parliament members and company officials on that very topic. MPs made the case that weak demand and overcapacity drove the closure, while an Alcan spokesperson claimed that the government’s green taxes had more to do with it.

Lisa Reisman, MetalMiner’s editor, wrote of the issue at the time: “We’d [side with] Rio Tinto Alcan, in terms of the reason behind the closure…the economic outlook looked far grimmer back in 2008-09, yet the plant didn’t shut down operations then. Instead, the decision likely came as a result of a carbon tax scheduled to go into effect in the UK in 2013, which will ‘add tens of millions to its costs, when it is already running at marginal profit.”

Now, this carbon tax looms more heavily than ever, with recent news reported by the FT that UK steelmakers are being hit hard, harder than their mainland European, Asian and US counterparts.

Obviously, US steelmakers hold a contentious relationship with the US Environmental Protection Agency (EPA) and its recent clampdown on emissions targets during the current presidential administration.

But in Britain it’s different. Although the UK steel industry only represents a fraction of the global industry — dominated by China, mainland Europe, Korea, India and the US — the severe environmental restrictions and their effect on profitability could have major implications for the Western steel industry moving forward.

The FT article reports that UK power-intensive companies pay more in base electricity costs than those operating in the US, Germany and France, and about the same as those in China and India — with the most vociferous party being Tata Steel’s UK operation. The main sting, however, is two-pronged.

“UK policies” already in place “such as the carbon price floor, a plan to make companies pay more for their carbon emissions if the market price falls below certain levels,” cut into the profit margins of steel producers, as well as considerable “renewable energy costs,” according to the article.

Numbers in a report by the Department for Business Innovation and Skills cited by the FT show that the renewable energy costs “amounted to £14.20 per megawatt hour of electricity in the UK in 2011, for instance, compared with £6.30 per MWh for Germany and £2.50 for France.”

The UK’s — and US’ — steel industries would be better served to have a situation like in Germany, which has a policy limiting renewable power energy costs for energy-intensive users such as steel and aluminum producers.

Although steelmakers in the UK appear to be hamstrung at the moment, proposals have been made to preserve the competitiveness of the country’s steel companies and other high-energy users by reforming electricity market policies.

The US steel industry, however, with Congress deadlocked and presidential election campaigns in full swing, may not see much definitive change in a while.

By Taras Berezowsky