What went wrong at British Steel?

Rob Davies


British Steel has entered insolvency after the government refused to provide it with a £30m loan, saying the terms the company and its private equity owner Greybull Capital were asking for would have amounted to unlawful state aid. Here are the answers to some key questions.

What has gone wrong at British Steel?
When Greybull Capital bought British Steel for £1 in 2016 from Tata Steel, rebranding it with the old British Steel name, it promised great things. The private equity firm pledged to invest £400m to revive the company and within months it was boasting of a return to profit and a bright future ahead. Two years later it has entered insolvency. In a letter to staff last week, British Steel’s chief executive, Gerald Reichmann, 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 do not 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.

That is why the company wanted an urgent cash injection, to replace the drop in sales in the hope that a favourable Brexit deal could be signed in the meantime. Another factor is the weakness of sterling since the referendum result, which makes the cost of imported raw material used in making steel higher. Greybull bought British Steel after the referendum but it did not expect Brexit uncertainty to last this long.

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 anytime soon. The government has said it would bring together the company, its unions and suppliers in an effort to avoid losing one of the UK’s last two blast furnace steelworks. But that will probably require someone to come in and offer to buy the company. The metals group Liberty House, which was interested in Tata Steel’s Port Talbot plant and has since bought steel mills from the company, is one name in the frame.

Why was the government reluctant to bail it out?
For a start, propping up failing businesses goes against the Conservative party’s free market ethos unless absolutely unavoidable. Also, the government has already loaned the company £120m to help it pay an EU bill for its carbon emissions. Not to mention that the date of Brexit has already been delayed once. Ministers did not want to lend British Steel money to tide it over in the hope of a Brexit deal that may not come.

However, the official stance is that British Steel and its bank lenders wanted the government to lend the company £30m on terms that were not commercial, which would have been unlawful under EU state aid rules.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Is the whole UK steel industry in trouble?
The UK steel industry has been in decline for some time because of 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 only two blast furnace steelworks, which make steel from raw materials: Scunthorpe and Tata Steel-owned Port Talbot in south Wales. There are also four electric arc furnaces in the UK, which make products from recycled steel. There are three of these sites in Sheffield and one in Cardiff.

How important is the steel industry?
Very. For a start, steelmaking jobs are highly skilled and well paid. The average salary of £36,000 is around 50% higher than that of workers in regions where the industry operates such as Wales and Yorkshire. The ability to make steel is seen as a crucial component of a developed nation’s defence capability, not to mention its role for strategically important industries such as transport and oil and gas.

British Steel is also important in its own right. The UK’s six producers all essentially produce different steel products, meaning there’s very little overlap. So the loss of any one producer immediately reduces the UK’s capability to make all the different products the country requires.

British Steel is the only UK producer of rail, and a vast array of construction products. A loss of this would mean Britain has no choice but to import increasing volumes of steel for construction and infrastructure projects.

What else could be done?
About 42% of steel that the government buys comes from abroad. Not all of that could be sourced from the UK as we do not make every grade of steel that the state purchases. However, on Monday the government committed to consider social and environmental benefits when buying steel, in a move that the industry hopes will make British companies more likely to win contracts within EU state aid rules. The industry has also complained that it is being hit by the twin burdens of high business rates and energy costs, given how energy-intensive steelmaking is. Policy changes could offer some relief in those areas too.