Yahoo News British Steel's closure would have 'huge' knock-on effects
Failure to save British Steel would have a nationwide knock-on effect, experts have warned, hitting suppliers, hurting industries that rely on its products and forcing up costs dramatically for Network Rail.
Efforts to find a buyer for the company are under way, overseen by the government’s official receiver and accountancy service EY, in the hope of saving 5,000 direct employees and protecting 20,000 jobs in its supply chain.
But industry sources and companies with ties to British Steel warned that the ramifications, if no saviour comes forward, might not yet be fully understood.
Related: British Steel on verge of collapse as government talks stall
Network Rail, which manages the UK’s rail infrastructure, buys up to 97% of the steel used in its track from British Steel.
The company said it had put contingency plans in place, understood to include switching contracts to suppliers from Europe, who provide the small percentage of steel it does not source from British Steel’s Scunthorpe site.
But a well-placed industry source said that switching to European suppliers could massively increase costs for the company. Network Rail is funded by train operators, income from its property portfolio and taxes.
“If they have to start importing it from France then undoubtedly transport costs are going to go up significantly,” the source said.
Related: What went wrong at British Steel?
“The only way you’d pay the same price is if European suppliers are producing it significantly more cheaply. There are some costs that British firms face that European counterparts don’t but I can’t see how the costs wouldn’t go up if you’re switching supplier.
“There’s a reason that Network Rail buys 97% from British Steel and they’re not just doing it to be nice. There are major disadvantages to buying it all from outside the UK. You have to hope that doesn’t happen.”
What has gone wrong at British Steel?
When Greybull Capital bought British Steel in 2016 it promised great things. The private equity firm pledged to invest £400m and within months it was boasting of a return to profit and a bright future ahead. Two years later it appears to be on the brink of collapse unless it receives a government-funded bailout. In a letter to staff last week, the British Steel chief executive blamed weak market demand, high raw material prices, the weakness of sterling and uncertainty over the outcome of Brexit discussions.
How much is Brexit to blame?
It is not the only factor in the crisis but it is very important. Steel contracts are typically agreed well in advance of the product being delivered. As things stand, the UK is due to leave the EU on 31 October and the terms of that separation are yet to be agreed, meaning British Steel’s overseas customers don’t know what tariffs will apply to steel they buy from the company. Sources close to the company say orders from customers in the EU and further afield have dried up as a result.
Can the company survive in some form?
The steelworks in Scunthorpe represents the bulk of the company and it is hard to see who would be an obvious buyer for the site, given that it has struggled under successive owners. The fundamental problems affecting it show no sign of solution any time soon.
Is the whole UK steel industry in trouble?
The UK steel industry has been in decline for some time due to a variety of factors such as overcapacity in EU steelmaking and Chinese state-subsidised firms flooding the global market with cheap product. An industry that employed 323,000 people in 1971 now employs less than a tenth of that, at 31,900. The closure of the Redcar steelworks in 2015 was a significant blow to the sector and left the UK with just two blast furnace steelworks: Scunthorpe and Tata Steel-owned Port Talbot in south Wales.
Network Rail said it had been doing its best to support British Steel, including making a commitment to a minimum annual order of 100,000 tonnes and stockpiling steel supplies, resulting in increased orders.
“We have strong plans in place to make sure that we are able to carry out all critical work on the railway,” a spokesperson said.
“As well as additional supply, our contingency includes reallocating line-side stock, servicing rail to reuse it, and employing measures such as increased track inspection and maintenance.”
Suppliers to British Steel, which employ more than 20,000 people between them, have also warned of the impact if it collapses.
One of the company’s major suppliers, Durham-based logistics firm Hargreaves Services, warned on Wednesday morning that 170 jobs could be affected.
The firm manages the transport of raw materials to Scunthorpe from the Immingham bulk terminal on the Humber, loads it into the furnaces and moves finished product into British Steel’s warehouses.
Hargreaves said if British Steel cannot be saved it could take a £9m financial hit this year, and next year’s revenue would fall by a further £11m, reducing pretax profit by £1.5m.
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Customers who rely on specialist steel grades made at Scunthorpe could also face difficulties, according to Richard Barnfather, chief executive of British Steel customer Barnfather Wires.
He said that while his company does not expect to suffer, some customers would not be so lucky. “To see the mill close would be an absolute tragedy,” he said.
“The knock-on effect could be huge. Companies that produce cold heading steel for fastenings tend to need the more exotic grades that British Steel makes.”
He added: “Car seating springs, furniture seating, mattress springs, 90% of that comes from British Steel.
“To import you’re looking to six to eight-week delivery. Whereas if you buy from British Steel, you can have it weekly or fortnightly. There could be some casualties along the way.”
