WHAT IS THE NEXT SPATIAL FIX FOR LOW COST PRODUCTION IN STEEL AND IRON SECTOR?

Global Economy 2500 Word Assignment

WHATIS THE NEXT SPATIAL FIX FOR LOW COST PRODUCTION IN STEEL AND IRONSECTOR?

Course GLOBALIZATION,GLOBAL-GOVERNANCE AND THE GLOBAL ECONOMY (ULMS543-201516)

Course Dr. ClaesBelfrage

WrittenBy: SONG Gaonan

StudentNumber: 201105500

Contents

Introduction 2

Evolution in the Iron and Steel Industry 2

The Processes in the Iron and Steel Production 4

Prices in the Iron and Steel Industry 4

Labour in the Iron and Steel Industry 5

Depleting Iron Ores in Luxembourg 6

Spatial Fix 6

Advantages and Challenges of Spatial Fix 7

Conclusion 8

Bibliographies 10

Introduction

Luxembourg has a stable andhigh-income economy. It borders France, Germany, and Belgium. Ironand steel industry has dominated the Luxembourg’s economy since the19thcentury. Iron and steel are the major export of Luxembourg. In 2004,iron and steel accounted for 32.05 percent of the total Luxembourg’sexports (GlobalEdge, 2015). Luxembourg is the headquarters of thegiant iron and steel producer, ArcelorMittal, which is present in 60countries with industrial footprints in 19 countries.

Steel products are used inbuilding and infrastructure, machinery and equipment, tools,appliances, weaponry, ships, and automobiles. The average worldconsumption of steel was 178.9 kg per capita in the year 2009(Ignacio et al. 2011). Additionally, Asia was the largest consumer ofsteel products at 67.37 percent of the total consumption. TheEuropean Union was the second largest consumer of steel products at10.56 percent. In total, the world steel production in 2009 wasconcentrated in Asia (Worldsteel, 2010).

The iron and steel industriesare material, labour, and energy intensive. Location of theseindustries where there are endowments of these resources meanssuccess. Capital and labour have become more global and can beshifted from one place to the other. This has enabled companies torestructure themselves geographically in order to maintain acompetitive edge. This paper will present the current situation inthe iron and steel industry in Luxembourg and try to bring a spatialfix solution to the challenges.

Evolutionin the Iron and Steel Industry

Iron and steel industry hasdominated the Luxembourg economy since the 19th century. In 1842,Luxembourg joined the Zollverein treaty (Eninger, 1982). Thisenlarged its markets in the East and saw the country’s industrialdevelopment. The expansion of the railway line from 1855 to 1875further expanded the Luxembourg steel industry (Brooks et al. 1920).Up to 70 percent of steel in the 19th century was sold to Germany(Deipenau &amp Seidler, 1990). The immigration of Germans andItalians provided skilled labour and machinery for the furtherexpansion of the steel industry. Towards the end of the century, thesteel industry, integrated the exploitation of minnette, ironextraction, steel production and rolling steel. Luxembourg had becomethe sixth-largest cast iron producer and eighth-largest steelproducer worldwide before World War 1. After the war, Luxembourgadjusted from being a supplier of German steel companies to anindependent producer of competitive products (Bain, 1992).

Across the Europe, steel hasbeen a significant industry. In a bid to establish a cross-nationalregulatory regime, the 1952 Treaty of Paris was signed and a EuropeanCoal and Steel Community were formed. However, companies did notmerge for various reasons first, steel was seen as central tonational armaments and defense industries. Second, steel companieswere largely owned by governments. Third, the steel industry wascentral to other manufacturing industries. Overproduction led to theworld steel market collapse in 1974. As a result, cross-bordermergers were forced by the steel crisis.

In Luxembourg, the iron andsteel industry started declining at the beginning of the steelcrisis. Between 1974 and 1975, sales from Luxembourg fell from 6.4million tons to 4.6 million tons. To survive in the crisis, iron andsteel companies employed survival strategies. Some formed mergers.For example, in 2002, ARBED, merged with other steel companiesUsinor and Aceralia to form Arcelor. In 2006, Arcelor merged withMittal Steel to form the ArcelorMittal group, which is the world’snumber one steel producer. Some companies cut down on wages byreducing their workforce. Mergers among the iron and steel companiesfurther cut on the workforce. However, a law was enacted in 1975 toprevent further lay-off. Third, companies which were not profitablewere closed down, such as Steckel mill and Dudelange. In 2005, therewas a huge decrease in the iron and steel trade caused by the globaleconomy crisis. In 2008, AcerlorMittal, cut down some of itsproduction functions to contain the crisis. The Luxembourg governmentalso invested in the iron and steel industry to stabilize it.

TheProcesses in the Iron and Steel Production

There are four stages in steelproduction (Stahlfibel, 1989). First is the extraction andpre-treatment of iron ore and coal. Second is the production ofpig-iron. Pig-iron is made of 95 percent pure iron and 5 percentcarbon. The third stage is the production of crude steel. Pig-iron istransformed into at least 99 percent pure crude steel. In someprocesses, pig-iron is substituted with scrap iron. The fourth andthe most labour intensive stage is the production of finished steel.The first three stages are concentrated in one location near the rawmaterials. The production processes are both material and labourintensive. Due to the materials used in the production process, itmakes economic sense to cut down on transport costs and locateindustries near the raw materials.

Pricesin the Iron and Steel Industry

Steel prices depend on variousfactors choice of technology, raw materials, transport costs andenergy costs are the other factors. Replacing the open hearth steelfurnaces with basic oxygen (BOF) or large arc furnaces (LEF)significantly substitutes electricity for fossil fuels energy.Luxembourg has this advantage as the industry is large andestablished. The mergers experienced since the 1970s has helpedcompanies to adapt to better technologies.

The iron and steel industry ismaterial intensive. This also implies on the transportation costs ofthese materials. Luxembourg is running low on iron ores meaning thatit continues to incur higher costs in acquiring raw materials (Franz&amp Lichte, 1991).

Labourin the Iron and Steel Industry

Iron and steel industry islabour intensive. Regulatory and tax advantages of relocating toLuxembourg have seen more inflows of foreign companies and immigrantworkers to Luxembourg. Compared to its neighbouring countries,Luxembourg employees enjoy lower tax and social security deductions.Over 40 percent labour in iron and steel industries are from othercountries such as Belgium, France, and Germany (Feenstra et al.,1997). This globalization is likely to lead to an economic crisis. Asthe immigrant workforce continues to increase, native Luxembourgworkforce is on the decline, especially in the private sectors. Over40 percent of the employed Luxembourg, nationals work in the publicsector or closely related sectors (Auer, 1992). There are rigidlabour codes in Luxembourg, which prevent more flexible workcontracts. Where such contracts exist, they are held by immigrants.In 2000, there were about 6,000 workers with temporally workcontracts with only 3 percent being held by Luxembourgers (OECD,2003). Although the immigrants offer a more flexible workforce, theirwages are quite close to those of the residents once certain labourmarket characteristics are considered. In 1993, wages among frontierswere 16 percent below those of the residents, but there was nosignificant difference when comparing that of similar age, economicsector and status (STATEC, 1995). A more recent survey shows nodifference in wages among frontiers and Luxembourgers. Although ARBEDis the largest private employer, employment in the iron and steelindustry has continued to decline since 1975 (Hamilton, 1996).

DepletingIron Ores in Luxembourg

Luxembourg can no longer boastof its geographical location. The iron and steel industry inLuxembourg faces low iron deposits in its ores. This means that ithas to import raw materials. The Luxembourg industries have relied onLorraine and other neighbouring countries for the supply of ironores. This is disadvantageous as it implies high transportation costsand eventually low profits (Zahlen, 2007).

SpatialFix

The spatial fix is a solutionto over-accumulation of capital and labour. Over accumulation occurswhen there are surpluses of labour and capital side by side without away of putting them together in productive as opposed to sociallyuseful ways. If the over-accumulation crisis cannot be resolved, amassive devaluation of both capital and labour occurs. Suchdevaluations can be seen in bankruptcies, unsold products, idlefactories and unemployment. Devaluation can also trigger war andphysical destructions. The spatial fix prevents devaluation of labourand capital. Spatial fix resolves inner crises through geographicalexpansion and geographical restructuring.

Spatial fix entails twodimensions. One, companies can spread out capital over space toovercome over accumulation or two, deepen their presence in specificlocations built over continued investment over time. Companiesoperating in labour intensive industries such as iron and steelemploy spatial fix strategies to cut on production costs. Wheneverworkers gain collective power and wages start to increase, thecompanies lose in profits.

Therefore, relocating to newregions with new workforce help companies safeguard their profits.Some major steel producing countries are not endowed with productionresources (Glacio, et al., 2011). Countries such as Australia andBrazil have large iron ore deposits, which they export to China andEurope. For example, ArcelorMittal is manufacturing in 19 othercountries.

Deepening presence in specificlocations with large iron ore deposits is important for Luxembourgiron and steel industry. Asia is emerging as the largest iron oreproducer with ores in Europe declining. This strategy will ensurethat investments are done where they return the most profits. Forexample, ArcelorMittal through a partnership with Hunan Valin Ironand Steel Co. is the largest foreign investor in the Chinese steelindustry.

Advantagesand Challenges of Spatial Fix

Spatial fix in the iron andsteel industry is likely to bring more benefits. It makes theLuxembourg products more competitive in the market. There are severalcountries competing in this market with large ore deposits at theiradvantage. Countries such as China and India continue to competefiercely in the market. Relocation to counties with iron depositswill increase Luxembourg’s competitive advantage by decreasingtransport costs.

Access to cheaper labour isanother advantage. Over 40 percent of the workforce in Luxembourgcomes from neighbouring countries. Most of the employed workforceform Luxembourg work in the public sector. This means that they arenot available for the private iron and steel companies. Compared tothese countries, Luxembourg has high wage rates, which push theprofitability of iron and steel companies down. The spatial fix willsee that the iron and steel companies employ this readily availableworkforce at a lower rate. More market opportunities in the countryof relocation are likely to happen. Relocation will pave a way fornew relationships, which turn into new markets. In the past, thelegitimacy of certain brands has been questioned due to accusationsof labour rights abuses, poor working conditions and abusivemanagement at the new sites (Pardo, Moya &amp Vatopoulos, 2012).

Conclusion

The iron and steel industriesare material, labour, and energy intensive. Location of theseindustries where there are endowments of these resources meanssuccess. Capital and labour have become more global and can beshifted from one location to the other. This has enabled companies torestructure themselves geographically in order to maintain acompetitive edge.

The iron and steel industry inLuxembourg is faced by two major challenges shortage of labour anddepleting iron deposits. This means that re-investing capital intothe industry will not give a return, which leads to over-accumulationof capital. There are rigid labour codes in Luxembourg which preventmore flexible work contracts. Where such contracts exist, they areheld by immigrants. In 2000, there were about 6,000 workers withtemporally work contracts with only 3 percent being held byLuxembourgers (OECD, 2003). Although the immigrants offer a moreflexible workforce, their wages are quiet close to those of theresidents once certain labour market characteristics are considered.In 1993, wages among frontiers were 16 percent below those of theresidents, but there was no significant difference when comparingthat of similar age, economic sector and status (STATEC, 1995).

The iron and steel industry inLuxembourg faces depleting iron ore deposits. The Luxembourgindustries have relied on Lorraine and other neighbouring countriesfor the supply of iron. This is disadvantageous as it implies hightransportation costs and eventually low profits.

Over accumulation of labourand capital is a serious problem. If the crisis cannot be resolved, amassive devaluation of both capital and labour occurs. Suchdevaluations can be seen in bankruptcies, unsold products, idlefactories and unemployment. Devaluation can also trigger war andphysical destructions. Spatial fix prevents devaluation of labour andcapital

The spatial fix works suchthat if over accumulation occurs in a particular region, thenexporting capital and labour to new territories will solve theproblem. If the problem is due to lack of demand, then opening newmarkets in non-capitalist markets will work best. Capital surplusesor labour shortage can be resolved by either movement of capital tolabour surplus areas/areas or weak labour organization or importationof cheap labour.

The iron and steel industry inLuxembourg plays a big role in the economy. However, this role mightreduce significantly if the industry does not remain competitive inthe region. Neighbouring countries such as Germany continue toflourish in this sector alongside other emerging economies in theiron and steel industry. The iron and steel industry in Luxembourghas been competitive and remained strong even after the World War 1and 2. It has withstood the steel crisis of the 1970s due to properstrategies. To remain resilient, the iron and steel industry mustfocus on spatial fixes for the current problems. This will ensurethat it competes favourably in the global markets and continues toexpand.

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