THE BRITISH STEEL CORPORATION (BSC) IN 1998

Model Case Analysis

In July 1998, Sir Robert Scholey, chairman of the British Steel

Corporation (BSC) announced profits of £410m for 1997, more than double
the £186m for 1996. This was a dramatic turnaround for the state-owned
corporation which nearly went under red in the early 1990s. Following
nationalization in 1977, the initial period of reorganization, rationalization,
and expansion was taken place till 1984. This step was followed by ten years
of huge losses between 1985 and 1994 amounting to some 7 bn pounds. In
common with many other integrated steel producers in Europe and North
America, this period following the oil crises of 1973 and 1988 saw BSC
suffering from the combined effects of a worldwide slump in demand, the
advent of low-cost producers in developing countries (e.g., South Korea) and
the fierce international price competition. The European Economic
Community (EEC) producers were forced to take drastic measures to reduce
overproduction and introduced production quotas in the early 1990s which
were not removed until 1998 – and even then somewhat unexpectedly.
However, by 1995 BSC was operating profitably again, world demand for
steel is recovering strongly, and the corporation’s cost-structure is
dramatically improved. Indeed the 1997 results presented a return on
capital in excess of 12% making BSC the world’s most profitable integrated
steel company.

The announcement of the results in July 1998 increased speculation

as to whether the planned £2bn privatization of BSC would be brought
forward to November 1998. Although the conservative government’s
privatization programme had initially proceeded relatively smoothly
(including British Telecom, British Gas and British Airways) the sale of the
government’s share in British petroleum has gone badly wrong when it
coincided with the stock Market crash of 1997. There were other doubts
expressed too. Despite the remarkable turnaround of BSC, steel was not
seen as a colourful stock to sell and the conditions in which steel companies
operated were still full of uncertainties. The market for steel had always
been subject to cyclical fluctuations in demand and there was no reason to
believe that this would not continue.

It was against this background of imminent privatization that the

Financial Times (7 July 1998) reviewed the ingredients of BSC’s turnaround
and reflected on future prospects. Statistics demonstrating the extent of the
changing fortunes of BSC had been oft-quoted in the previous two years.
For example, labour costs had fallen from 31% to 20% of total costs since
1990 as the workforce was reduced from 140,000 to 51,000. In terms of
productivity by 1997, the UK steel industry produced around 280 tons
when Germany led the UK by 227 tonnes to 167 in 1991. These
improvements in performance were dependent on a number of important
changes and management decisions made during the period following 1991.

 First, an investment programme of £985m for modernization and re-equipping was

undertaken. For example, by early 1999, the Corporation was expected to produce
 about 80% of its output by the efficient continuous casting method rather than the
ingot method. This represented savings of about £14-18 per tonne. However, the
French, Italian and West German Industries were all nearly 90% committed to
continuous casting by 1998.
 Second, the corporation had completely revamped its management structure,
reducing central overheads considerably, and developing responsibility for
operations and profit to a substantial degree.
 Third, a move towards more value-added steel products (such as coated steels) to
avoid some of the worst aspects of being a commodity supplier. This was coupled
with a profit-oriented approach to marketing.
 Last, there was a revolution in working practices. Up to 18% of pay became bonus-
related giving BSC room to curb its wage bill during fluctuating demand.

Despite the impressive results which these changes achieved there were
also grounds for caution. Many observers felt that operating five integrated
steel plants was over-complicated and costly; annual operating costs were
between £80m and £100m per plant. There was continuing speculation as
to whether one or two plants might need to close in the 1990s with
Ravenscraig in Scotland the first candidate for closure. The continuation of
steelmaking in Scotland had been a prominent political issue throughout
BSC’s existence. Although Ravenscraig was 100% continuous casting, its
equipment was small and rail charges were high making its liquid steel
perhaps £17 per tonne more expensive than Llanwern in South Wales.
Moreover, there were elements of cost where BSC compared poorly against
international competition. The corporation itself had been telling analysts
that its use of energy was perhaps 20% more than it should be – other
sources regarded this an underestimate. It also had some way to go on
process control and continuous production monitoring to reduce defects.
With long term cash requirements for re-investment projected to run at
around £250m a year, just how repeatable between 1986 and 1998 had
favoured BSC: about 38% of their purchases were traded in dollars including
coal, iron ore and ferrous alloys. The sterling costs of coal reduced from £46
to £30 over the two years.

Other factors, largely outside their control, would also affect their
performance. The speed at which other European producers were
reorganizing and improving efficiency, and the movement of the more
aggressive producers such as South Korea, into higher value-added products
and Europe were factors. Moreover, labour costs in Japan were moving
down to about 16% of total costs. Now, BSC achieved an impressive
turnaround, and was probably better placed than most European producers
to take advantage of a genuinely open market in Europe after 1992. It was
in these circumstances in June 1998, that Sir Robert Scholey, chairman of
British steel claimed that the Corporation was in the forefront of the UK’s
industrial rejuvenation and stated, “If this isn’t the movement for
privatization, God help us”.

This case study was prepared from published sources with some refinements. It is intended
as a basis for class discussion and not as an illustration of either good or bad management.