Why Manufacturing Costs HAVE to rise

Energy prices are having a huge toll on Manufacturing in the UK, as the Guardian reports industry leaders warning government that factories could soon stop production due to rising Energy bills (Guardian, 2021). Should Energy prices continue to spiral out of control, the fallout on supply chains would pose a significant risk to the survival of many businesses throughout the UK. Any further delays would also see prices for goods and services continue to rise.

British Steel also warned that high energy costs cannot be absorbed and is putting the UK steel industry at an increasing disadvantage to some of its European counterparts (Kinch and Varriale, 2021). A spokesperson from British Steel informed S&P Globall Platts that unprecedented rises is making “it impossible to profitably make steel at certain times of the day” (Kinch and Varriale, 2021). British Steel also highlighted that in April 2021, energy costs were £50/MWh and in September has risen by as much as £2500/MWh (Kinch and Varriale, 2021).

Kinch and Varriale (2021) explained that Kwasi Kwarteng had made it clear that government were monitoring the situation and were confident that security of supply was not a concern for the steel industry. He is quoted “We are determined to secure a competitive future for the UK steel industry and in recent years have provided it with extensive support, including over GBP 600 million to help with the costs of energy and to protect jobs” (Kinch and Varriale, 2021).

The British Constructional Steelwork Association (BCSA) have offered a somewhat positive outlook. In a statement, they highlight that steel prices have only risen in line with other materials with the supply chain performing strongly (Barrett, 2022).

The BCSA have encouraged early engagement to secure steel supply and has highlighted that last minute ordering is no longer a viable option (Barrett, 2022). There has also been a collaborative response from property developers, healthcare and education sectors of why price rises are needed. British Steel have explained that prices rises are essential after being unsustainably low, with a return to profit allowing the Steel Industry to invest in the transition to net zero (Barrett, 2022).

The BCSA have also urged government to heed industry calls for support. CEO David Moore highlights the strategic benefits of UK-based steel manufacturing and argues that prices will be higher without it (Barrett, 2022).

In October 2021, Kwasi Kwarteng was reported to have made a formal request for Treasury support for industries hit by the energy price hikes (McGuinness and Culbertson, 2021). A row had broken out between the business department and the Treasury as industries call for a price cap amidst the Energy crisis (McGuinness and Culbertson, 2021).

In recent weeks government announced measures to support British households worth a combined £350 to ease the pain of rocketing bills (Sommerlad, 2022). However, there is yet to be announcement for businesses, especially energy intensive industries such as steel-making as Ofgem announced a revision of its energy price cap (Chapman and Sommerlad, 2022). Businesses in the UK are currently paying 20% VAT on their energy bills with government offering a 5% rate for firms using a limited amount of electricity.

However, Rishi Sunak dismissed calls to cut tax on energy in October’s budget. Energy UK have rightly pointed out that other countries’ governments have provided direct support, including the Italian government which has provided loan facilities to suppliers (Chapman and Sommerlad, 2022).

Gas imports to Europe have been significantly lower causing increased demand in Asia. And with the UK reliant on imports for half its gas, the continued delay in supply and the need to refill storage sites has driven costs higher than ever (Chapman and Sommerlad, 2022). Political tensions with Russia who have been accused of limiting its supplies of gas to Europe, is also taking its toll on gas prices (Chapman and Sommerlad, 2022).