Why is Britain's industrial base crumbling?

Excavator at waste dump at the site of the former Brymbo steel works near Wrexham

(Image credit: Getty Images)

It looks set to be another difficult month for what remains of Britain’s industrial base. On Monday, we learned that the Ineos-owned Olefins and Polymers (O&P) plant at Grangemouth, in Scotland, the largest in the UK, is at risk of closure. Its CEO warned that a mix of rising energy costs and carbon taxes meant the facility was not likely to be viable for much longer, and its parent company couldn’t support it from profits made elsewhere forever. Ineos has already closed one refinery in Grangemouth.

Hull-based Vivergo Fuels, owned by Associated British Foods, and Britain’s largest producer of bioethanol, has also said it may have to close in September. Last month, the Saudi Arabian firm Sabic, one of the world’s largest petrochemical manufacturers, said it would shut its Olefins 6 cracker plant in Wilton, Teesside, after 46 years of production. Nippon Electric Glass closed down the UK’s largest fibreglass factory in June; in March, production came to an end at Vauxhall’s Luton assembly line after 120 years of production. One by one, the UK’s factories are closing down.

The overall figures are shocking. The chemicals industry has witnessed a 40% decline in output since 2021. Cement production has been falling at a rate of 7% a year since the start of the decade. Car manufacturing is now down to levels last seen in the early 1950s, according to figures from the Society of Motor Manufacturers & Traders. Overall output in the “energy intensive industries”, according to the Office for National Statistics (ONS), has fallen by 35% since 2021, and is now at a 35-year low. It is devastating. The UK has not seen the mass closure of industry on this scale since the Thatcher era in the early 1980s.

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What is wrong with the UK's industrial base?

It is not hard to work out what has gone wrong. Industrial energy prices have soared. Electricity has risen in price by 75% since January 2021, says the ONS – a crippling rise for most manufacturing firms, where power often accounts for more than half of the total cost base. Industrial energy in the UK now costs 50% more than it does in France, and double what it costs in the US. It is impossible for manufacturers to compete with that kind of difference in costs, no matter how efficient they are.

On top of that, the UK has imposed a bewildering array of green targets and levies that add even more to the cost of production. There is worse to come. A complex system of carbon border credits will charge them for their emissions, and the UK is about to adopt higher EU carbon levies as part of the government’s “re-set” of relations with the bloc. That might help us to hit net-zero, but it will make industry even less competitive.

The cost of employing people has gone up as well with the steep rise in national-insurance charges imposed by the chancellor in the last Budget. It is a lot easier for factories to switch to robots than it is for shops and restaurants, but they still need some workers, and the cost of everyone on the payroll has been increased at the worst possible time. It is clear that not only is the UK’s industrial base collapsing at an accelerating rate, but it is happening largely because of government policies.

That is a tragedy. Britain has a pretty successful industrial base, made up mostly of speciality chemicals, high-end engineering, defence, aerospace and life sciences, all with generous margins, plenty of expertise, and competing successfully on global markets. It accounted for about 10% of GDP, in line with other developed countries. It created plenty of jobs that were typically better paid and more secure than service-industry work, productivity was rising consistently, and it generated lots of exports. It was a vital part of the economy and should have had a bright future.

The mystery is why the government is not concerned. There is hardly any discussion about how to bring down energy costs; the state of the public finances is too dire to contemplate reversing the rise in NI charges; and no one seems to even mention relaxing the net-zero targets. One point is clear: more and more factories will close over the rest of the year – and no one in government seems minded to do anything about it.

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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.