Tata Steel in talks to receive £500 million bailout

Tata Steel is in talks with the government for a bailout of its UK operations worth a potential £500 million.

While the company has refused to comment on “ongoing discussions with governments”, such an agreement would make it the first recipient of funds under Chancellor Rishi Sunak’s Project Birch, which aims to rescue strategically important companies from the effects of coronavirus via bespoke funding agreements. In Tata’s case such an agreement is expected to come with guarantees to protect jobs and further decarbonise their plants.

As things stand, Sunak is understood to prefer to offer these funds as a loan, and ensure that the UK government is prioritised when it comes to repayments. Others, including former chancellor Alastair Darling, have suggested the government should consider taking on equity, i.e. purchasing a stake in the business.

Even if this is not Sunak’s preferred option such a move may be forced upon him by the fact that many companies may struggle to deal with the mountain of debt they are racking up under coronavirus.

In some ways Tata Steel is a natural fit for such a strategy. The company employs some 8,000 people in the UK, most at the huge plant in Port Talbot in south Wales. It is almost the platonic definition of a keystone industry, propping up the local economy in a region which, without it, would face potential economic devastation. Loud voices, including Ed Miliband and Stephen Kinnock, have been calling for intervention to prevent the steel industry’s collapse.

However, such a move raises uncomfortable questions about the state of British steel more generally. Sunak has declared that the funds from Project Birch will be aimed at “viable companies which have exhausted all options”. But even before coronavirus had hit, Tata Steel’s UK operation was in serious trouble.

Worries about its future made headlines back in 2016, and while its collapse was averted the situation did not improve greatly. A merger with ThyssenKrupp aimed at saving on costs fort both was blocked by the EU regulator on competition grounds last year. Tata’s last published results show its British business running an operating loss of £157 million in the year to March 19, having posted a loss of £48 million the year before. In September 2019 it had closed a plant in Newport, and in November 2019 it announced plans to cut 3,000 jobs in Europe, 1,000 of them in the UK.

Nor is the problem just Tata. The steel industry’s UK output has declined sharply over the past 25 years. In 2016 Tata suffered a particularly precipitous drop of 30% when the wider industry went into crisis that year.

Indeed, steel manufacturing was struggling not just in the UK but across Europe even before the pandemic. Overcapacity, high raw material costs, cheap Chinese imports, US tariffs, and the growing cost of EU carbon credits had all weighed heavily in recent years.

Now China, which was already squeezing out European steel production, looks set to increase its dominance. The country already accounted for 54% of all steel production last year. This has now jumped to 62%, as Chinese producers kept their mills running throughout the coronavirus crisis. A potential glut is also in the offing as consumption is depressed worldwide by the pandemic and consequent recession.

While the entire industry stands to suffer, Chinese companies’ are in a better position than most to ride this out. One advantage is their sheer size. The other is the presence of a major client in the form of the Chinese government, which launches infrastructure projects as a stimulus strategy. All this means Chinese steel production looks to be in a good position to further increase its dominance.

It is far from clear that Tata’s British operations are viable in the long term, and this raises political as well as economic issues. Johnson’s administration was already more willing than most previous Conservative governments to break with free-market orthodoxy, as seen with the near bailout of FlyBe earlier this year, and the pandemic has forced it to get used to state intervention on levels that it would never have previously contemplated.

But these moves have also stirred disquiet in the Tory backbenches who fear it will prove extremely difficult to roll back the state after the crisis has passed. The bailout of a company whose future already doubtful will only stoke their worries.

For the moment it seems the Chancellor has deemed an expensive rescue of Tata Steel to be a price worth paying economically and politically. Whether he will be able to make good his investment remains to be seen.