Saving the UK steel industry: What are the options?

6 April 2016

The recent decision to sell Tata Steel followed lengthy board meetings in Mumbai, where it was confirmed that all its UK operations would be sold.

The Indian-owned company decided to put its UK plants up for sale, with one of the largest of its operations in Port Talbot, Wales being one of the first to go.

The steel producer, the second largest in Europe announced its intention to sell all UK works following dwindling profits and reporting losses of up to £1 million per day.

Up to 15,000 jobs could be at risk from the closure of the plant with another 25,000 in jeopardy.

The cheap import tax from Chinese steel has been blamed for the crisis.

Embarrassingly for the UK government, a report in the Guardian states that, “Britain has been accused of deliberately undermining efforts to protect Europe’s steel industry from a deluge of unfairly cheap steel from China.”

EU rules prevent Britain from blocking cheap Chinese imports. Currently the tariff on Chinese cold steel, which is a high-value product used in the manufacture of furniture, appliances and vehicles is set at just 16%. In stark contrast, the American duty is 266%.

Steel prices across the world have fell, resulting in China’s steel producers looking for more export markets. This has created a serious problem for the UK’s industry overall as steel importers have looked towards Chinese imports to cut costs. To put it into perspective, according to a report in the BBC, in 2014 – 687,000 tonnes of steel was imported from China. More than twice the amount (303,000 tonnes) imported in 2013.

Business Secretary Sajid Javid cut short his personal trip to Australia to return back to the UK to visit Port Talbot last week, where union leaders urged him to put a stop on blocking higher tariffs on cheaper Chinese steel.

However, he riled the industry by saying he would not be supporting moves to change the current rules, preventing higher taxes on cheap Chinese imports and choosing to keep the current low trade tariffs, set by EU governance.

His response has disappointed supporters of a higher tariff. The business secretary told Andrew Marr on his show that he had not expected the announcement, which exposed the government to being blasted for undermining and not recognising the full scale of the dilemma.

The government is now under pressure to save the industry, with a joint statement from the UK and Welsh governments stating, “This is a difficult time for workers in Port Talbot and across the UK.

“During the review process, we remain committed to working with Tata and the unions on a long term sustainable future for British steel making.

“Both the Welsh and UK governments are working tirelessly to look at all viable options to keep a strong British steel industry at the heart of our manufacturing base.”

With so many supporters of saving the industry and too much to lose, there are a few options available:

Staff buy-out

One option believed to have been proposed to Tata Steel is a buy-out from managers and staff at Port Talbot. The steel manufacturer have said this option is ‘unaffordable’ – but with financial backing from the government, could be a viable option.

However, in a BBC report, the European Commission stated, “EU rules do not allow rescue or restructuring aid such as emergency loans or government guarantees on loans to steel manufacturers in financial difficulties.”

“This is because of past experience and taking into account the features of the EU steel industry, in particular its overcapacity.”

Nationalisation

David Cameron said in a recent meeting with government officials, “I don’t believe nationalisation is the right answer, what we want to do is secure a long-term future for Port Talbot and for other steel plants in the UK.”

Labour’s shadow chancellor, John McDonnell told Andrew Marr on Sunday that the government was wrong to rule out nationalisation and that this option should be considered as a ‘fallback.’ He was critical of the government’s approach to the crisis saying that nationalisation would, “…will give us the stability we need in the sector.”

Labour leader Jeremy Corbyn also retaliated by saying he was ‘shocked’ at the thought of nationalisation not being an option, especially as there are up to 40,000 jobs at risk.

Part-nationalisation could be considered, however the government has been warned by officials that this could cost up to £1.5 billion a year.

Finding a buyer

Whilst finding a buyer would be an immediately viable fix, it is hardly likely that a private investor will take on the risk. However, with a group of investors to bridge the gap, the risk would be reduced. There seems to be a high level of interest from potential buyers and investors.

It emerged over the weekend that ThyssenKrupp, a German industrial conglomerate is interested in the purchase.

Also, there has been preliminary talks with steel magnate Sanjeev Gupta, Boss of Liberty Group.

Sajid Javid has met with Gupta to gauge his level of interest Sanjeev Gupta who has purchased other steel assets in the UK believes the government have been “Highly supportive” when in talks to buy-out.

The government is also currently in talks with Greybull Capital in a £400 million rescue package to save the Tata site in Scunthorpe site. If the deal does go ahead, one of the conditions could be that it reverts back to its original brand name of British Steel.  It is believed that the Chiefs from Greybull would want to rebrand because of its #association with quality.’

Government support

Sajid Javid has mentioned that government support would be on offer if there were to be a buyer (or buyers). This would come in the form of help with power costs and pension liabilities. Javid recently told Sky News “Where the buyers are coming forward, we’re ready to work with them.”

Javid is on his way to Mumbai to meet with Tata Chariman, Cyrus Mistry to try and halt the job losses that will inevitably incur and is going to try and encourage a ‘responsible sales process’ with Mistry and clarification of the timeframe for sale after the Steelworkers’ Union has asked for support and to make sure that it isn’t a ‘rushed process.’

Stephen Kinnock MP said that it was vital that any sale was allowed enough time. He told the BBC, “”My sense is that Tata Steel are keen to move very quickly, they want to find a buyer as quickly as possible.

“I think what’s absolutely critical is that the government now comes forward with a plan that will buy as much time as possible in terms of helping Tata Steel to keep going while we search for a buyer.”