THE CASE FOR NATIONALISATION

rrHE Labour Party has declared its intention to renationalise. steel, and many arguments have been put to us in support of this policy. It is stated, in the first place, that steel today cannot rightly be regarded as a private-enterprise in- dustry. There are still a number of companies owned by the State through the Iron and Steel Holding and Realisation Agency, which also has substantial holdings of prior-charge securities in the denationalised concerns. The Federation exercises its extensive powers in a way more akin to monopoly than competitive free enterprise. Moreover, the very existence of the Iron and Steel Board proves that steel does not operate, and is not expected to operate, as a private-enter- prise industry. If it were otherwise, the Board would not be charged with 'promoting the efficient, economic and adequate supply under competitive conditions of iron and steel products.'

For the rest, there are three main arguments in the case for nationalisation. First, the in- dustry's post-war perfOrmance, though outwardly impressive, has not measured up to the nation's need for more and better steel. In particular, it demonstrates that the industry is strongly reluc- tant to expand capacity ahead of requirements, although this is a condition of economic growth for a highly industrialised country. Secondly, since such criticisms can be levelled at the in- dustry when it has been subject to public control, control and supervision are clearly not enough. Thirdly, the present system of divided control and responsibility must be ended in favour of a measure of nationalisation which alone can en- sure the financing of the necessary scale of development and the reorganisation and rationali- sation of production on more economic lines.

Production at Herne and Abroad The expansion of steel production since the war is acclaimed by the industry as a complete refutation of charges that it is restrictronist in i15 outlook. The industry's critics, on the other hand, are not convinced. But while they may be Open to different interpretations, the facts are Clear.

Output of both pig-iron and crude steel has risen almost year, by year since the war, as is shown by the chart on page. 362. The only years in which this progress was interrupted were 1951, when steel output fell by 650,000 tons, and 1958, When it fell by .2 million tons. But in 1957, the post-war peak, pig-iron output was 84 per cent. above 1946 and steel output 70 per cent. higher. Output per man-year in steel has also increased luring the same period by about 47 per cent., while the average output of both blast furnaces and open-hearth furnaces rose by over 75 per cent.

The critics of the industry say that these output and productivity increases are not so impressive when compared with the growth of steel produc- tion in other countries. British steel output in 1957 was 110 per cent. higher than 1938, but this was smaller than the increase in the same period for France (125 per cent.), Belgium- Luxembourg (160 per cent.), the USSR (183 per cent.), Italy (190 per cent.) and the USA (255 per cent.)—all countries with sizeable industries before the war. Moreover, since Western Ger- many re-emerged as a major steel producer in 1950 it has overtaken 'Britain and is now the third largest steel-producing country in the world.

Steel production in Britain, the critics also point out, has risen more slowly than both total manufacturing output and the output of the steel- consuming trades. Between 1948 and 1955 steel output rose by 33 per cent., but manufacturing output increased by 42 per cent, and the steel- consuming trades' output by 56 per cent. In fact, the increase in steel output exceeded the increase in manufacturing output for the first time in 1957, and in the recession of 1958 it has fallen off more than manufacturing generally.

The Pace of Development The industry's critics, including some who do not advocate nationalisation, assert that the growth of steel capacity tends to lag behind the nation's need for steel because of the steel- makers' fear of surplus capacity. They admit that there are historical grounds for such fears, and that in a highly capitalised industry it is very costly for the individual company to carry surplus capacity.

Evidence that the industry is prone to err on the side of too little rather than too much capacity is to be found, the critics state, in the Develop- ment Plans formulated since the war: the first in 1945, the second in 1955 and the third and current plan in 1957. The 1945 Development Plan prepared by the Federation estimated that some 151 million tons of steel (including 3 million tons for export) would be required during the early 1950s, of which 15 millions tons would be pro- duced at home. After an official examination of future demands by the Labour Government the Federation agreed in 1948 to increase capacity to 18 million tons during the 1950s.

Steel production reached 18 million tons in 1953, but the demand for steel at home was then so great that direct exports of steel had to be re- stricted to 21 million tons (instead of 3 million tons, as envisaged in the plan) and over 1 million tons (instead of half a million tons) had to be imported. Even so, steel consumers complained that shortages of particular products were re- stricting their output, and by 1955 the demand for steel was so great that, despite an output of 19i million tons and imports of more than three- quarters of a million tons, the Board reported 'heavy pressure on steel supplies at most points' and 'acute shortages in the case of some products.'

Faced with this upward trend in demand, the 1955 Development Plan provided initially for 22 million tons, and subsequently for 23f million tons, capacity by 1958. This amount of capacity was, in fact, installed by 1958.

The third Development Plan, published in 1957, was based on the view that the demand for steel by 1962 was likely to be around 24 million tons for home consumption and 5 million tons for direct export—or 29 million tons in all. These estimates assumed that production throughout British industry as a whole would increase by 31 per cent, a year from 1954 onwards. But because industrial production has increased by only a little more than 1 per cent, a year since 1954, the steel industry in 1958 (like many other industries) was running considerably below capacity.

Under the impact of falling demand at home and recession abroad, the Federation has recently declared (Steel Review, January, 1959) that 'the present under-employment of capacity in the steel industry cannot leave the industry's long-term development unaffected.' The Board, on the other hand, stated in July, 1958, when the changed economic conditions were already apparent, thaf 'the objectives of the development plan should remain unaltered and should be pursued as far as practicable.' Even so, the start of several new projects has been delayed and others modified. Present indications are that capacity will be be- tween 27 and 28 million tons by 1962, and that the 29 million tons planned for 1962 will not materialise until 1965.

The Cost of Steel Shortages According to the critics, the steel shortages of the post-war period, which they say have ended only because of industrial stagnation, are the price which the country has had to pay for the industry's shortcomings in development. The cost to the nation of these shortages in terms of in- dustrial output foregone is not easily calculable. But the TUC estimated in 1953 that a shortage of 1 million tons of steel was roughly equivalent to a loss of .f.250 million of engineering products.

Since a domestic shortage is partly resolved by reducing exports and increasing imports, there is also the effect on the balance of pay- ments to be considered. The Fabian Society, in a special memorandum prepared for us, put the deterioration in the balance of payments attribut- able to the decline in net exports of iron and steel during 1955 at £70 million (out of a total of £280 million). Moreover, during the four years 1954-57, imports of steel products exceeded ex- ports by £13 million. If, on the other hand, the industry had had sufficient capacity to sustain even the 1954 level of net exports, they maintain it would have been able to contribute £150 million to our balance of payments during this period.

The Fabians also draw attention to the Board's statement in the 1957 Special Development Report (paragraph 77) that 'in most post-war years exports have intentionally been restricted because of scarcity at home.' If there had been more steel, they claim, the industry could have made a greater positive contribution to our balance-of-payments problem. Moreover, al- though the current Development Plan envisages increasing direct steel exports, to 5 million tons by 1962, the retiming of this Plan makes it unlikely that this will be achieved.

Both the Conservative and Labour Parties have declared that industrial expansion is their aim. But what, ask the critics, would be the effect of a return to the 4 per cent, annual increase in industrial production maintained between 1948 and 1954? They estimate that the increase in steel consumption required to maintain this in- crease in industrial production would be such that by 1963 more than 23 million tons of steel would be required at home, leaving 4 million tons available for export. Similarly, by 1905 home re- quirements would be more than 25+ million tons, leaving only 3i million tons for export. Thus, the critics predict that steel shortages would again emerge, and that a deterioration in the balance of payments would again result.

The Conflict of interests

The supporters of nationalisation argue that when it comes to determining the rate at which steel capacity should expand, the interests of the industry and the nation tend to conflict. Since steel is such a vital ingredient in the production of capital goods, important both to home invest- ment and to exports, too little steel can set a limit to the growth of the whole economy. It is no accident, the critics claim, that the countries where steel production and consumption have increased most between 1950 and 1956 have also had the largest increase in national income. It is also significant that Britain is well down the list on both counts.

Since the rate of economic growth depends so much on the available steel, it follows from a national viewpoint that steel capacity should be planned, on balance, to run ahead of require-- ments. The critics quote in their support the Board's Special Development Report, 1959, where it was stated that `it would be desirable to have a margin of productive capacity in excess of that needed to meet the estimated demand at any par- ticular time,' and that it would be 'advantageous to have capacity available a little too early rather than too late' (paragraph 12).

The critics recognise that it is exceedingly diffi- cult for the industry to accept the need for a margin of capacity above requirements. Indeed, they would say it is impossible as long as it remains in private ownership, since it is costly to work steel plant below capacity (though not so costly to the nation as a steel shortage). It is natural for the steelmakers, therefore, to want capacity to keep step with demand rather than to run ahead of it. So long as there is no built-in margin of spare capacity, when demand is high all will be operated at full capacity (including obsolete plant already written off), customers will queue up for steel and there will be no need to venture into risky and competitive export markets. The easing of managerial problems in conditions of shortage, as well as the costs of carrying surplus capacity if demand falls away, combine to per- suade the steelmakers that it is better to have too little than too much capacity at any particular time.

Fear of surplus capacity, the critics argue, makes each company cautious in drawing up its own development proposals. When their plans are aggregated the total increase in capacity then tends to be wholly inadequate. That is why there were such serious deficiencies in the original 1945 Development Plan. Now that the Board forms a judgment about the level of future demand, and reviews the individual projects submitted by the companies in relation to those requirements, the situation is somewhat changed. But the critics contend that the Board has failed to persuade the industry that capacity should be available 'a little too early rather than too late.' Indeed, the system of public supervision is proving ineffective, with the Board engaged in asserting its views against an industry reluctant to accept them.

The critics offer two recent pieces of evidence in support of this contention : the question of a fourth strip mill and the development of home ore resources.

The Fourth Strip Mill The critics say that the Board and the industry have openly disagreed over the need—or, as the industry prefers, the timing of the fourth strip mill.* The fourth strip mill was already being dis- cussed in 1955 in view of the growing demand for sheet and tinplate, and in the 1957 Development Plan the Board reported 'a divergence of view as to when this development should be undertaken.' The industry argued that `the necessary load for a new plant would not be available for some years after 1962,' and that `construction should be post- poned until the position is clearer than it is now in relation to the level and character of demand.' The Board, on the other hand, desired that 'the necessary additional modern capacity should be included in the current development programme, as apart from any other considera- tion such capacity could not be in full production until after 1962.'

It was not, however, until April, 1958, that the Federation approved in principle the scheme proposed by Richard Thomas and Baldwins for such a strip mill; even then their approval was qualified as to its timing. By then it was already apparent to the Board that `it would hardly be possible to have extensive new capacity con- structed and in operation until a year or two after 1962,' and that there was little doubt that it would be needed by that time.

In other words, say the critics, the industry had its own way over the timing of the new strip * A strip mill produces by a continuous process thin flat-rolled steel, which is used in the form of sheet (by such industries as motor-car manufacture) and for making tinplate. There are three strip mills already in production : at Ebbw Vale (Richard Thomas and Baldwins), Shotton (John Summers) and Port Talbot (Steel Company of Wales). capacity. The Board, despite its strongly held views that such capacity would be required by 1962, was unable to persuade the industry to act in time. It is contended that the resulting lack of sheet capacity (and the plate capacity that the wide-strip mill would secure) will limit the pace of development of consuming trades and lose the country exports in the early 1960s. This is made more likely and more serious by the closure of hand mills in recent months.

The critics do not accept that the delay over the strip mill development has been mainly due to `political' considerations governing its location. Six months, it is true, did elapse between the Federation's approval of RTB's scheme and the Government's announcement of November, 1958, that the strip mill developments will take place at two points : by RTB at Newport and by Col- villes at Ravenscraig. But this delay was only a fraction of the time taken by the protracted negotiations between the industry and the Board that lasted from 1956 to early 1958.

It is also pointed out that one of the two companies undertaking these projects, namely RTB, is still State-owned and that the Govern- ment has undertaken to advance the necessary finance to both companies. It has been announced recently that Colvilles will receive a Treasury loan of £50 million; interest payments will accumulate and repayment will only become due when production begins, and the loan will not have to be fully repaid until 1978. These terms, say the critics, are very generous and certainly far more favourable than would have been obtained by going to the capital market. More- over, they claim that although the private share- holders will not contribute to this development, it will benefit them in time, since Colvilles' profits are bound to increase in due course.

Home Ore Development The rate at which home ore resources should be developed has been another source of con- flict between the Board and the industry. It has been argued not only that greater use of home ore will reduce our need for imported supplies, but that development of the home orefields offers the opportunity of production at the lowest attain- able costs.

As long ago as the 1945 Development Plan, it was envisaged that a new integrated steel plant should be built, on a greenfield site based on Northants ore reserves, as a joint venture by United Steel Companies and Stewarts and Lloyds. But the whole project was shelved.

In 1955, the Board brought home ore develop- ment again to the industry's attention. The Board declared it to be 'one of the crucial matters in the future of the iron and steel industry,' stressing • that greater exploitation of home resources would benefit the balance of payments. Consultants ad- vised the Board that output of ore could be increased above the level of 17i million tons originally planned for 1958 'without an excessive increase in costs,' and that 'the Proved and prob- able resources of ore were sufficient to warrant further exploitation without endangering the effective lives of the existing plants dependent on them even allowing for further expansion at those plants.' While the ore-producing companies agreed the estimates of reserves, the Board reported in 1957 that 'until recently they took the view that an increase in production above 20 million tons a year could not be recommended.' Moreover, it was not until they were 'pressed by the Board to consider whether iron ore production could not be greater than 20 million tons,' that the com- panies agreed to plan for 22 million tons by 1962.

The plain reluctance of the industry to under- take a higher rate of working of home ore re- sources is attributed by the critics partly to its conservative attitude generally and partly to the vested interests of the principal concerns. They believe that the Board's desire to raise ore pro- duction 'substantially above the 22 million tons rate' will also be resisted by the industry, and quote in their support the Board's report that 'progress has been slow in the initial stages' of surveying the orefield north of the River Welland.

The situation is complicated by the fact that two companies, United Steel Companies and Stewarts and Lloyds, are already responsible for at least 70 per cent, of total home ore production. They have undertaken that, if the results and conditions are satisfactory, they will develop the North of the Welland field to support additional steelmaking capacity to be built by themselves or by others. But the critics say that all this seems to be moving further into the future, even though the Board has stressed that the 'exploitation of this orefield should be in the forefront of de- velopments as near to 1962 as possible.'

The Problem of Finance The cost of a modern steel works is very great : in 1957 the Board put it at more than £100 an annual ton of finished product, so that a large- scale integrated plant may cost from £100 million to £200 million to build. Most of the current de- velopments take place at existing works, but even so their annual cost to the industry is put at £120 million, compared with an expenditure of £75 million in 1956.

The ability of the concerns comprising the in- dustry to raise the necessary finance for their admittedly varying needs must differ considerably. But, in general, the Federation contends that the industry can shoulder the financial burden of de- velopment by self-financing, on the one hand, and, once the threat of nationalisation is removed, by recourse to the capital market.

The critics do not dispute that the Labour Party's intention to nationalise the industry, even with its pledge to pay compensation, has inhibited use of the capital market. But the Fabian Society has also pointed out that the industry has bene- fited from several sources in recent years.

In the first place, steel prices have been raised substantially since denationalisation. The in- creases between 1955 and 1957 alone added 25 per cent, to steel prices, equivalent to an addi- tional £200 million to £250 millitm on industrial costs. Since the responsibility for these increases rests with the Board, it is interesting to examine the reasons which the critics claim underlay their decision to increase them. They suggest that the Board thought that if the industry was able to increase its degree of self--financing, it might be willing to develop at the rate desired by the Board. They also contend that the higher prices were agreed because the Iron and Steel Holding and Realisation Agency wished to be able to attract private investors by promising higher profits and larger dividend distributions in the future.

The Fabian Society also claimed that the in- dustry has benefited financially from the actual process of 'de-vesting' employed by ISHRA. One of the striking features of denationalisation has been that the proceeds from selling back the com- panies to private investors have been only slightly more than the original book values of securities taken over from the Corporation, despite the self- financed investment undertaken in the interim and the greater earning capacity of these in- creased capital assets as a result of the increases in steel prices. The Treasury has so far only re- ceived (with five-sixths of the companies returned to private control) less than £90 million on capital account. ISHRA, on the other hand, holds £126 million (at book value) of prior-charge securities in denationalised companies, as well as having made loans of £40 million to denationalised companies (as at end-September, 1958). These holdings are equivalent to two-fifths of the total nominal capital of the denationalised com- panies.

Thus, it is argued that the task of financing development has been made relatively easy for the industry by the pricing policy allowed by the Board and the availability of, public money. In the circumstances, it is not surprising that the resources of the capital market have hardly been explored. At the same time, the critics be- lieve that public money may be needed, as in the case of the strip mills, to a considerable extent in the future. The amount of capital required to finance the major projects could easily be larger than any one company can handle, while the smaller concerns may be unable to undertake more than minor extensions for lack of finance. What is more, there is no guarantee that con- ditions on the market will be favourable for raising new money when it is needed, with the result that important projects will be delayed. For these reasons, they hold that nationalisation is a desirable, if not an essential, prerequisite for the adequate development of the industry.

Rationalisation The relation between the industry's company structure and the high capital costs of new pro- jects also explains, in the critics' view, why de- velopment takes the form of patchwork growth instead of rationalised plant location and product concentration. Long hauls of materials between plants belonging to the same company co-exist with lack of connections between neighbouring plants, although considerable economies would be achieved through local integration.

The critics claim that there is still a large amount of inefficient plant in the industry; one- half of the plate capacity, one-third of heavy steel sections and one-fifth of pig-iron and crude steel capacity in 1955 was classified by the Board as either `obsolete' or 'well below the average, but capable of some years of useful life in con- ditions of high demand.' The existence of so much allegedly inefficient plant in the industry is attributed by the critics to the system of fixed minimum prices main- tained over many years by the Federation's product conferences, as well as by the operations of the Industry Fund. Although the pricing system has now been changed, they are still un- certain whether enough has been done to allow rationalisation to proceed. Thus, they assert that although the 1945 Development Plan envisaged some measure of rationalisation, in the event it was completely abandoned. Indeed, they argue that rationalisation will never proceed sufficiently rapidly as long as the financial responsibility for development lies with individual producers who have a vested interest in maintaining their separate existence.

Research Concern at the faster technical progress being made in other countries has also been expressed from time to time. The progress with the develop- ment of continuous casting has been described by the Board as 'disappointingly slow.' The com- bination of sintering and pressure operation of blast furnaces also lags behind in this country. There has also been criticism of the comparative neglect of Bessemer production in this country, which is linked with the failure to develop home ores faster.

Some part of the explanation, say the critics, may be that individual steel companies pursue their own lines of research and do not share their developments. But even more important are the delays that occur between laboratory or pilot- plant stage and full-scale commercial application. A co-ordination of research effort, full informa- tion about developments and rapid application after the pilot-plant stage require that the research developments of the major companies, as well as the British Iron and Steel Research Association, work under the same public authority.

The Argument Summarised It is now possible to draw together the several strands of argument that comprise the case fqi. steel nationalisation.

It is essential that steel should be available in quantities to maintain the growth of the whole economy. What that rate of growth should be can only be decided by the Government, but there must then be sufficient steel to maintain it. That means that steel capacity must run ahead of requirements and not lag behind it.

The steel industry under private ownership. has proved unwilling or unable to shoulder this responsibility to the nation. So much is clear from its own past estimates of requirements, its attitude towards the fourth strip mill and home ore develo-pment, and its declared policy that any shortfall in production should be met by increased imports and reduced exports. Its attitude is understandable in the context of the private firm's obligations to its shareholders : it is costly and unprofitable to carry surplus capacity at any moment of time.

From the national viewpoint, however, the cost ief carrying surplus capacity for a period is small compared with the loss of engineering production and strain on the balance of payments occasioned by steel shortages.

A nationalised steel industry would be charged with ensuring that steel capacity keeps ahead of 'requirements. If the 'planned' rate of economic growth falters, and surplus capacity emerged on an appreciable scale, the Government could then protect the industry from the financial conse- quences. In effect the Government would guaran- tee the demand for steel and should be prepared to finance stock-building at times of surplus capacity.

In principle, such a guarantee might be given to a privately-owned industry, but, since it would mean that effectively all the major risks would „have been taken over by the State, the existence /and still more the capital gains) of the private equity holders would be unjustified.

The burden of financing development on the major projects would be considerably eased by nationalisation. Liquid resources could be pooled and inter-company loans arranged by the holding company. Without the need for larger transfers of eurrent profits to shareholders, the possibilities of self-financing would increase. In addition, joint ventures—such as the possible .development of the North of the Welland ore- field by United Steel Companies and Stevvarts tuad Lloyds—would be more easily arranged. Finally, the limitations on rationalisation and research developments imposed by the vested in- terests of privately-owned concerns would be removed.

It is part of the case for nationalisation that the present system of control and supervision by the Board is ineffective. Indeed, the fact that the Ministry of Power, the Board, ISHRA, the Federation and the individual steel companies are all involved in the running of the steel industry makes for ineffective planning and delays in reaching urgent decisions.

The eVents of recent years have pro,ved that the Board is not an effective instrument for con- trolling the industry. It has not found it possible to do more than influence the situation over de- velopment. It has powers to put a brake on development, but no power to accelerate it.

The critics assert that it is highly unlikely that the Board will ever recommend that additional capacity should be provided by Ministerial action. They feel that this power of the Board has little or no practical force. In the last analysis, the critics maintain, the more powerful sanction of the Board is the threat of nationalisation, and if that were removed the industry would probably increasingly go its own way with less regard for the national interest than it shows at present. The need is to ensure that the steel industry serves the nation at all times, and for this reason public ownership is essential.