It is not the government’s place to rescue British Steel

The steel-maker is not viable in the long-term and a rescue package would simply postpone the problem

May 23, 2019
Photo: Danny Lawson/PA Wire/PA Images
Photo: Danny Lawson/PA Wire/PA Images

So British Steel has gone into administration. We know that this is a blow politically for Theresa May just as people are voting in the European elections, and it will be a big personal blow for workers. But it was probably the right decision nevertheless for the government to withhold the emergency funding. It is still reported to be considering whether a part nationalisation might attract potential new investors, but it may be a forlorn hope.

You probably remember the struggling steel industry being in the news in 2016. That year, British Steel was bought for £1 by the private equity firm Greybull Capital, which acquired the Scunthorpe long products arm of the business from Tata, promising a major capital injection to turn it round. That seems to have come mainly in the form of loans from its Jersey-based parent company, while management fees were charged to British Steel and interest payments were made on those loans. Still it managed to make profits in a booming world market and on the back of a depreciated pound in 2017 and 2018. And it currently provides some 4,000 jobs directly and another 20,000 via the supply chain.

But more recently the climate has changed. The world economy has slowed down, steel prices have dropped and there is widespread overcapacity in the sector. US tariffs on steel and aluminium have encouraged more Chinese steel exports to Europe. Export orders to the EU for UK steel have thus slumped, made worse by Brexit uncertainty.

Moreover, the lack of clarity over Brexit has also necessitated a bridging loan from the government, due to a lack of synchronisation over the EU emissions trading scheme, with British Steel paying the EU bill for emissions it generates and receiving credits in return.

But in the end the problems were deeper and meant that longer-term viability could not be guaranteed. The fundamental issue of course is that with globalisation, the emergence of cheaper steel from around the world has rendered much of steel production in the UK—and many other parts of the world—uncompetitive. Trump's tariffs are themselves a manifestation of a country trying to hang on to its industrial past. But it is expensive.

From an economic perspective therefore, rescuing British Steel would make little sense. The government’s convenient excuse is that it would have amounted to unlawful state aid under EU rules.

But these rules are not insurmountable. Could we ignore them and take a risk? The UK spends a lot less than France, Germany and a number of other EU countries on state aid as a percentage of national income. However, we would still need to convince the EU—and ourselves—that the help would be only temporary, which is difficult given the evidence that the company was in fact unlikely to be viable in the long-term.

One could of course go for the argument that the this is a strategic industry that needs to be supported—as Trump has done to justify his tariffs. After all, Network Rail relies almost entirely on the company for the steel it uses for its tracks. However it is unlikely that the EU would buy that argument given the current state of the steel market—and it has resisted that from others before. There is no shortage of steel at the moment.

So we are left with a conundrum. But throwing good money after bad would just postpone the problem rather than provide a solution.