STARMER FACES BIG TEST IN STEEL HEARTLAND IF HE WINS POWER

(Bloomberg) -- The valleys of South Wales once produced iron that was shipped around the globe. With plentiful local ore, limestone and coal to fire the blast furnaces, thousands flocked to work in the industry at Merthyr Tydfil, generating vast profits for the ironworks owners from the late-18th century on.

The decline of the town that became known as the “Iron Capital of the World” now offers a lesson for the next UK government on the hard choices needed to nurture the industries of tomorrow.

South Wales is home to the UK’s largest steelworks and its biggest semiconductor plant. With polls showing the opposition Labour Party on the cusp of a landslide election victory on July 4, the region is set to pose an early challenge for would-be Prime Minister Keir Starmer as he tries to forge an industrial policy that can keep up in a world dominated by US-China rivalry.

An indefinite strike is planned from July 8 at the steelworks in the town of Port Talbot. The walkout is against Tata Steel’s decision to close both coal-fired blast furnaces and invest in a cleaner electric-arc furnace, putting some 2,800 jobs at risk. The BBC reported that the company has told workers the plant may have to cease operating because of the action.

The dispute is not simply a test case for Labour’s industrial policy in a long-standing heartland after 14 years of Tory rule. It’s a benchmark for the party’s stance on its relations with the unions and workers that formed the bedrock of its traditional support, and of its ties to business. 

“This will be the first, and probably one of the biggest challenges now for an incoming Labour government,” said Luke Fletcher, a member of the Welsh Senedd, or parliament, who is economy spokesman for the Plaid Cymru party that’s in opposition to Labour and wants Welsh independence. “These demands are going to come on it from day one.”

With friction between Washington and Beijing increasing over everything from artificial intelligence to critical minerals and battery plants, Port Talbot illustrates the scale of the task facing the UK to come up with a viable plan.

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At once an issue of jobs, Port Talbot also has national security implications with the need to maintain a domestic supply of high-quality steel to supply the likes of the defense industry. Climate commitments play a role too, with the UK facing competition from giant producers like India and China that are still building polluting blast furnaces.

The US under President Joe Biden is leading the way on industrial policy, with some $2 trillion in federal spending over a decade focused on chips, clean tech and infrastructure, including domestic steel production.

Washington accuses China of flooding world markets with artificially low-priced exports and for starting the global subsidy war. But the reality is no advanced economy can afford to stay out the race in a climate of tariffs and protectionism.

For Starmer’s government, that means requests for public funding will have to be assessed not simply on merit, or on the basis of the UK’s strapped finances, but also by geo-strategic measures.

Wales, where the census of 1851 showed more people working in industry than agriculture, lays claim to be the world’s first industrial nation. It boasts a UNESCO World Heritage site at Blaenavon, beside the iron town of Merthyr Tydfil, for the area’s past “international importance in iron making and coal mining.”

Reinvention has been tough in what’s now among the UK’s most deprived regions. The Conservative government agreed in September to provide £500 million ($632 million) toward Tata’s £1.25 billion electric-arc plans. Labour has indicated it won’t necessarily agree to the same terms.

The Unite union wants Tata to postpone the planned shutdown of both furnaces by the end of September and allow one to operate until 2030, prolonging employment. 

The closures are “now underway and immutable,” Tata said in June, expressing concern that “political uncertainty on the timing and form of the grant” will put “the long-term future of steelmaking at Port Talbot at significant risk.”

Ian Williams, a senior Unite representative at the steelworks who lives in Merthyr Tydfil, sees the fate of the iron industry as a lesson of the need to modernize to stay relevant, but not at the cost of jobs. Strike action four days after the general election “will put pressure on Keir” to intervene, he said at the town’s beachfront, where the plant dominates the skyline to the south. 

Labour’s platform includes plans for a £2.5 billion fund to decarbonize UK steel, without specifying what that means for Port Talbot. It might not be enough: Germany allocated at least the equivalent sum in grants last year alone.

Chinese-owned British Steel has meanwhile requested a package of taxpayer support worth £600 million, the Sunday Times reported. Such a demand would offer another dilemma for the next government: back British jobs and the green transition even if the company profits go to China, or deny public funding and risk the outcome.

South Wales experienced a similar quandary in 2022, when the UK government nixed the sale of the semiconductor plant at Newport on national security grounds to Nexperia Holding NV, a Dutch chipmaker owned by Wingtech Technology Co. of China. 

Nexperia, which strongly disagreed with the government’s intervention in the form of a divestment order, announced on June 27 it was investing $200 million in Germany to build out production of so-called compound semiconductors. The Newport cluster is focused on the same technology.  

The plant was bought by Pennsylvania-based Vishay Intertechnology Inc., whose expansion plans have been welcomed by the Welsh government, which has responsibility for areas such as health, education and the environment.  

But with subsidies available elsewhere of as much as 50% of the cost of a new cutting-edge fab, officials are aware that the question of public funding could arise, although Vishay has not asked for support.  

For Neil Kinnock, the Welsh former Labour leader, Starmer is being politically adroit by not committing to large sums of public funding during the campaign.

But a Labour government should look to emulate Biden’s model of employing “the enabling state, with all its massive capability for supporting investment and inducing change and advance,” through science, research and development, and infrastructure.

“We need to do at least what the Victorians did in providing a legal framework and some public expenditure to provide the security and dependability that private investment requires,” said Kinnock, whose son Stephen is Labour MP for Aberavon, which includes Port Talbot. 

Kinnock was opposition leader when Margaret Thatcher took on the miners, resulting in the closure of most deep coal mines. He cited steel, chips and biosciences as fields on which the government should now focus.

Jonathan Reynolds, the would-be business secretary in a Starmer government, named financial services, aerospace, automotive and education as key sectors for the UK’s future manufacturing industry. “An explicit industrial strategy is an absolute prerequisite of success,” Reynolds said during Bloomberg’s election debate on June 24. 

Business and Trade Secretary Kemi Badenoch, in the same debate, said the Conservative government has picked champions in areas like cars and creative industries, and slammed Labour for “this belief in central planning, that industrial strategy is going to fix everything.”

Just as the physical landscape of South Wales has been shaped by its industrial heritage, so has its politics.

Where artisan workers were once employed on relatively good pay and housing, by the early 19th century slum conditions prevailed, payment was in credits that could be spent only in company shops, and wages subject to the whims of the ironmasters.

In 1831, violent protests erupted and a worker known locally as Dic Penderyn was arrested and hanged for his part in the Merthyr Rising — “a martyr of the Welsh working class,” as a plaque in the town testifies.

Seventy years later, James Keir Hardie was elected as the member of Parliament for Merthyr Tydfil, becoming the first Welsh Labour MP. Starmer is named after him, but his ambitions for high office come from Ramsay MacDonald, another Scotsman and Labour Party founder who was elected to represent Aberavon in 1922. Two years later, in 1924, he became the first British prime minister of a Labour government.

A century on in Port Talbot, union man Williams — a fitter by training who has worked in steel for 24 years — is looking to Labour to give the steel plant a future. A Labour government that turned away would be “like the Tories with the mines in the valleys,” he said. “They’d never be forgiven.”

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