Will the British steel industry level up or crash and burn?

Once upon a time, Britain was the world’s biggest steel maker. Even as other countries went on to eclipse it, the industry still employed 323,000 as late as 1971.

By 2016 the workforce stood at 32,000, a tenth of its former size. The plants that remain are concentrated in south Wales and north east England – areas that could ill-afford the loss of well-paying jobs in a foundation industry. Yet the pandemic threatens to become the final nail in the coffin as it disrupts production and hammers demand worldwide.

Even before the pandemic the UK steel industry was in trouble. A slump in the steel market already drove the entire sector into crisis in 2015-16. Thousands of jobs were shed. Tata Steel, the UK’s biggest steel manufacturer, nearly pulled out of Britain completely. While this was averted, Tata was desperate enough to sell off one division to Greybull Capital for the price of £1.

The crisis prompted a government report on the sector. It found an industry eroded by high energy costs, business rates that disincentivised investment, and a flood of cheap Chinese steel. The last point was particularly eyebrow-raising, given that the government, at the time still pursuing the now-dead “golden decade” with China, had blocked Brussels anti-dumping measures and failed subsequently to take national action as almost every other EU economy did.

Nearly five years down the line little seems to have improved even before the pandemic hit. Now the industry is facing “the perfect storm” according Jay Hambro, Chief Investment Officer for GFG Alliance.

Well before the lockdown, Tata’s UK operations were racking up losses in the tens of millions and had closed plants with yet more cutbacks planned. Now the pandemic has driven it to apply to the UK’s Project Birch for emergency funds. The initial request was for £500 million. Reports say this has grown to £900 million, with it being proposed that in return the UK government should take a 50% stake in Tata’s British operations.

Meanwhile Greybull’s acquisition, renamed British Steel, was declared insolvent in 2019. It was rescued by the Chinese Jingye Group in March, just as the pandemic spread. Two months later the new Chinese owners asked the government for a loan of £100 million.

The company also faces the challenge that as relations between China and the West deteriorate, so might the company’s position in the UK. Already Jingye’s attempt to acquire the steel mill in Hayange, France – one of British Steel’s few profitable sites and a key supplier of material for the Scunthorpe plant – has been blocked by a French court, which cited concerns over the industrial conglomerate’s finances and Chinese steel dumping.

Despite all this, can the UK steel sector be saved?

A good start would be the government taking serious action on the 2015 report’s recommendations, having so far confined itself to tweaks.

Business rates remain unreformed. Stephen Kinnock, Labour MP for Aberavon, which contains the massive Port Talbot steel works, complained that the current regime “punishes investment”. Making a change here should not be too difficult – and would fit with the moves Chancellor Rishi Sunak has made elsewhere to encourage investment.

Greater local procurement, called for in a petition circulated by steel unions, is another possibility. The government has previously avoided major moves to boost local purchasing of steel, arguing they would violate EU competition rules which may still be in effect post-Brexit, subject to the ongoing negotiations. However, Kinnock argued that the excuse was “absolute nonsense”, claiming that that EU rules allowed benefits to local industries to be taken into account when awarding contracts.

Boris Johnson’s indebtedness to ex-Labour voters, many of whom live in the steel-producing north east of England, could also make it very tempting to complement his infrastructural levelling up agenda by favouring British steel through local procurement measures.

Kinnock, who also serves as Shadow Minister for Asia and the Pacific, suggested the pandemic had shown the need for “greater resilience” in the supply chains and to reduce dependence on China.

Progress is already being made on Chinese steel dumping. While deteriorating relations between the West and Beijing might spell bad news for British Steel, the wider sector looks set to benefit. The Trade Remedies Authority, established 2019, has opened anti-dumping investigations in February and June this year at the request of the International Trade Secretary, Liz Truss. The EU, a major importer of British steel, is also taking strong action on the issue.

Yet even all this may well not be enough. Tariffs in particular have a way of being circumvented. As Hambro observed drily when Donald Trump placed tariffs on steel wire entering the US, “the amount of people sending coathangers into the US went through the roof”. China is also far from the UK’s only competitor in this market.

The most important problem for the steel industry, energy prices, remains the knottiest. Energy prices for UK steel producers are extremely high, even in comparison to those of EU countries. A report published by UK Steel in 2019 the price for electricity for steelmakers in the UK was 80% higher than in France and 61% higher than in Germany.

The problem is that high energy costs are a function of the UK’s drive to decarbonise which the government seems unlikely to reverse. Kinnock’s proposed solution is a “root and branch reform of the energy market so that energy costs are fairly and evenly distributed across consumers and suppliers, rather than concentrated on energy intensive industries.”

Considering the most obvious way to do this seems to be charging people more for their heating bills, at a time when high heating bills are a source of universal complaint, this seems unlikely.

Hambro for his part called for the government to “encourage the costs down for energy”, pointing to how the UK had successfully done this for wind energy. While the costs of green energy are falling quickly hoping that this will eventually balance out the costs remains a bet which will take an uncertain amount of time to come to fruition.

Decarbonisation also means other costs are looming on the horizon as across Europe the steel industry prepares to shift to “green steel”. This means recycling scrap metal in electric arc furnaces powered by renewable energy, and possibly using hydrogen over coal as reductant.

Here GFG has led the charge. According to Hambro the UK’s plentiful supply of high-quality scrap and green energy, plus good downstream infrastructure, makes it “very well suited” to lead the way on green steel.

However, such a move is not without difficulties. A proposal by Tata to convert one of its blast furnaces in Port Talbot into an electric arc furnace is facing opposition from the unions – and Kinnock – over fears it will cost jobs.

Furthermore, the massive costs involved with converting to this method of manufacture drives up the steel’s price. According to Hambro changes on the demand side mean that people are willing to bear extra costs in the name of going green: “Across the board the OEMs we supply are excited by target to go carbon neutral by 2030.”

Still, it remains to be seen how many companies that GFG doesn’t currently supply are willing to accept the extra costs.

Ultimately it is extremely unlikely that the British government will let a keystone industry like steel fail completely, even in the face of economic headwinds. However, unless some way is found to put a sector that seems to be lurching from one crisis to the next on a surer footing, the UK government may find the bail-outs currently being negotiated simply amount to shovelling money into a furnace.