What happened at Grangemouth?

A seemingly minor labour dispute quickly escalated into a threat to close down one of Scotland’s key industries. What were the real issues? Matthew Partridge reports.

What happened?

The Grangemouth petrochemical plant and refinery in Scotland has been the site of a stand-off between trade union Unite and chemical firm Ineos, which operates and co-owns the complex.

The dispute began over the alleged unfair dismissal of a union representative. But when Unite threatened strike action, Ineos warned that the plant was not viable, and that it would shut it down permanently unless workers agreed to a pay cut and pension-scheme changes.

After talks broke down, Ineos said it would shut down the plant immediately. Instead, the Scottish government stepped in and brokered a last-ditch deal, which largely met Ineos's demands while keeping the plant open.

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Why is Grangemouth so important?

The Grangemouth refinery is one of seven crude-oil refineries in the UK. It supplies most of the fuel used in Scottish filling stations, as well as the steam and power for the Fortis pipeline, which supplies a third of Britain's oil.

A shutdown would have caused petrol shortages as a similar dispute did five years ago as well as disruption to the oil industry.In the longer run, it would also have had a big impact on Scotland's economy.

While only 800 people are directly employed at the plant, experts estimate that knock-on effects could have seen a further 10,000 job losses the complex accounts for one-seventh of Scotland's manufacturing output.

Was this simply a labour dispute?

It's tempting to see this as a simple labour dispute that got out of hand, giving Ineos an excuse to impose tougher conditions. But the company insists there is a genuine threat to the plant's viability, arguing that even after wage cuts, the plant needs substantial investment.

Indeed, one condition for keeping the plant open is that Holyrood will provide a £9m grant, while Westminster will guarantee £125m worth of loans (only slightly less than the £135m of support that Ineos first demanded). This will go towards upgrading the refinery so it can use cheaper gas imported from the US.

What's the problem?

Grangemouth is not the only refinery that's struggling. Last year, Coryton Oil refinery, the only one operating in the southeast, closed after its Swiss parent company, Petroplus, filed for bankruptcy.

As The Guardian's Chris Cragg says, refineries have been "squeezed by rising crude prices on the one hand and government taxation, high competition at the pump and stagnant demand on the other".As a result "it has been virtually impossible to make the necessary investments in upgrading capacity needed to squeeze greater efficiency out of often elderly plants".

Some plants on the continent have also closed. The chemicals industry has fared little better. In the US, the availability of cheap oil and gas (thanks to the shale revolution) has helped American chemical producers undercut their European and British rivals. Other heavy industries in the US are also benefiting from this shift (see below).

What about state ownership?

During the crisis there were calls for Grangemouth to be nationalised, due to its importance to the Scottish economy. Supporters note that the Scottish government already went down this path a few weeks ago, by nationalising struggling Glasgow Prestwick airport.

However, even if you think that it's a sensible idea to force taxpayers to buy a business that private owners no longer consider viable, taking over the Grangemouth complex "would be a far bigger proposition" than buying an airport, as The Scotsman's Tom Eastwick points out.

"Neither the Scottish or UK government" have the expertise to run the plant. Meanwhile, as well as the purchase costs, the taxpayer would be exposed to the plant's mounting losses, which are running at £10m a month.

Anything else the government can do?

Ineos boss Jim Ratcliffe argues that the only solution is to tackle structural problems facing heavy manufacturing in the UK. He recently complained to Chancellor George Osborne that Britain is held back by "energy, pensions, government attitude, unions, infrastructure quality, skills and tax".

Like any lobbyist, Ratcliffe has his own view to push, but the key issue he highlights the cost of energy is hard to argue with. "Electricity prices for big users in Britain [are dwarfing] those of the US, the Gulf, Nordic countries, Germany and France," says Alistair Osborne in The Daily Telegraph, partly due to environmental taxes.

Solutions put forward by Ineos include cutting taxes, pursuing shale gas more aggressively and using more innovative financing such as industry users helping to fund the construction of new nuclear plants in exchange for fixed energy prices.

But it all boils down to making energy cheaper. On that score, the US shale revolution is very tough to compete with (see below).

The US manufacturing boom

The US manufacturing sector has rebounded sharply in recent years. Several large electronics firms, such as Apple, which had previously produced almost exclusively offshore, are now starting to move production back to the US (reshoring'). Overall, half a million new manufacturing jobs have been created in the past three years.

Similarly, the trade deficit in goods (the difference between imports and exports) has finally started to fall. This revival is largely because drillers enabled by new technology can now access vast quantities of shale gas. This has created a glut of cheap gas that is tough to export (although this is changing as more countries invest in gas terminals).

As a result, US energy prices are well below those in the rest of the world, making America far more competitive, particularly for energy-intensive manufacturing.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri