29 Sep 2015

Redcar: not the only canary in the coal mine

Redcar steelworks has been, once again, mothballed. Thousands of local jobs rely on it so thousands of people on Teesside know what happens next. There’ll be a search for yet another private sector buyer – it’s been passed from the Dutch Corus group to the Thai-owned SSI already.


Men with specialist skills will be told to go and look for non-skilled work – leaving the close-knit world of the blast furnace for the atmosphere of Iain Duncan Smith’s jobcentres.

But beyond the local crisis, Redcar could be – yet again – the canary in the coalmine for a global problem. For what 2008-9 told us is: every time there’s a major credit event, the steelworks on Teesside shuts.

There are other canaries dropping off their perches as I write. Glencore, the controversial mining and commodities trading company, lost a quarter of its value on stock exchanges overnight. Like all mining companies it is exposed to the sudden slowdown of China and other emerging markets – but it is an outlier in terms of the amount of money it has borrowed.

Analysts warned that, if the global downturn continues, Glencore could be digging up zinc, bauxite and lead just to service its debts, not to create a profit.

Meanwhile, even in strong markets like Germany, the cost of insuring yourself against a credit crunch has spiked. Investors are unloading risky assets and buying insurance against somebody, somewhere, going bust.

The underlying worry is twofold: the Chinese slowdown and the total absence of shock absorbers in the global system. China’s problems are solvable: the Chinese CP has the capacity for unlimited stimulus to the economy, because its currency does not fully trade – so it can issue soft loans, order state owned banks to buy shares, build more bridges and motorways to nowhere.

But what worries economists is China’s opacity; the lack of competence among the ageing and closed elite of the Communist Party; the total lack of accountability and scrutiny in a country where journalists reporting on the stock makret can be arrested if they say something that might accentuate instability.

So China won’t crash. But in avoiding the crash, the fear is it exports deflation to the world. China – and the other emerging markets – lifted the world out of depression after 2009 by taking on the burden of driving growth. As a result it has excess capacity – including in steel.

If you look at a price graph for heavy rolled steel bars you see that in most markets it has halved in price as the post-2008 recovery petered out. But in China the price fall has been steepest.

By manipulating its currency downwards, China intends to drive that red line lower.

And the result is – cheaper steel on the global market, and a battle for survival that, according to UK industry sources, will now cause concern for the rest of Britain’s steel industry, which has survived by becoming more specialist and higher quality.

The problem with slowdowns, in a world where most growth is being driven by borrowing cheap money, is they create collateral damage. Last time around it was only by carefully targeted intervention – nationalising half the banks, ordering the rest to avoid foreclosures on mortgages, a generous car-scrappage scheme etc – that the UK government softened the impact of the credit crunch.

And of course it slashed taxes and raised public spending, running the debt and deficit to record levels. And the Bank of England slashed interest rates from 5 per cent to near zero.

This time around the debt and deficit are already high, interest rates close to zero, and we’ve printed £375bn to make money even cheaper.

If a second global credit event happens it will be a challenge for politicians of all stripes: because the Conservative front bench has only ever done austerity, while the architects of the post-2009 recovery – Alistair Darling, Peter Mandelson, Mervyn King and Gordon Brown – are history.

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