Steel Crisis: A Good First Step, But Government Must Steel Itself For Further Action

imagesBy Professor David Bailey

It’s great news that the government seems to at last ‘get it’ and is ready to part-nationalise Tata’s UK steel assets and offer debt financing if a private buyer can be found.

The business secretary, Sajid Javid, had previously said that the government was prepared to “co-invest” in British steel, having been caught on the hop by Tata announcing it was selling its UK operations.

Javid reminds me somewhat of the hapless former DTI Secretary Stephen Byers who was asleep at the wheel when BMW offloaded Rover back in 2000. Maybe the EU referendum has focused minds now, in that the government doesn’t want thousands of lay-offs if the steel industry goes down.

Of course, it’s better late than never… but it’s still not enough. Progress on the ‘5 Asks’ outlined in earlier blogs is still very much needed.

The government has said that it is prepared to take a minority equity stake of up to 25% in the steel plants, including Port Talbot in south Wales, in what is effectively part-nationalisation.

State Aid rules will have to be complied with, as Anna Soubry, the business minister said recently.  But let’s note that European governments have intervened in a range of ways to support their steel industries, including via part nationalisation, energy compensation schemes, part-time wage subsidies, solidarity compacts and more. Where there’s a will, there’s a way.

Government sources are already being cited saying that this was a commercial offer in the event of a sale and did not amount to ‘part-nationalisation’.

Fine; let’s avoid the loaded ‘N word’ if need be – especially as Javid had, of course, ruled it out a few weeks ago before backtracking under pressure and saying that all options were still on the table. The intervention may in fact be closer to our ‘conservatorship’ idea floated in Birmingham Post blogs a few weeks ago.

The Department for Business, Innovation and Skills said it would tailor its offer to a buyer’s needs. Much of the support could come through debt financing, but options include an equity stake or convertible debt.

As well as being ready to take a minority stake, the UK and Welsh governments said they would consider other support, for example to support R&D, training, the development of power plant infrastructure, energy efficiency and environmental protection measures. The government also said it was working with the pension scheme trustees of Tata Steel and British Steel to minimise any pension impact on a buyer.

Let’s be clear; this is a very welcome move.  As we have noted before in blogs, over the medium-term UK steel industry is commercially viable and over the longer-term it is economically essential.

But for any steel sector short term intervention to be successful, the government also needs to make progress on ‘5 Asks’ that we have highlighted at the Midlands Steel Task Group in recent months:  energy costs; emissions policy; business rates; procurement; and temporary trade defence. Removing large pension liabilities may also indeed be needed.

On energy costs, current UK energy policy is more ambitious in pursuing carbon-neutral aspirations than is the current practice in the EU.  As a result, high intensity users in the UK are paying considerably more than similar producers in Germany.  This places the manufacturing sector at a disadvantage not only to global competitors but also its EU partners.

While higher carbon prices and hence energy prices may well be required to meet global environmental needs, better forms of compensation for energy intensive industries like steel is required, as happens in Germany and Sweden for example.

On trade protection, Chinese firms have been accused of deliberately “dumping” steel on European markets, by selling at a loss to undercut prices. It is estimated China’s top state owned steelmakers are losing US$34 a tonne on crude steel. This comes on top of losing US$11 billion in the first ten months of 2015 alone.

All of this makes the UK government’s recent decision to block proposals to scrap “the lesser duty rate” that would have allowed the EU to significantly raise tariffs on imported Chinese steel, somewhat puzzling.

It is also fair to say the current EU tariffs and anti-dumping measures (tariffs of between 9% and 13% on imports of Chinese steel) lack the force of those imposed by the United States, which recently introduced tariffs of up to 266% on imported Chinese steel, to support its own steel producers.

In deciding to block proposals to scrap the “lesser duty rate” and impose higher tariffs, business secretary Sajid Javid emphasised the knock-on impact such tariffs would have on UK users of steel, who would then face higher steel prices.  But his fears are largely misplaced as we have noted before as prices are artifically low at present and anyway tariffs would affect steel users across Europe and not just in the UK.

In summary, not only should part-nationalisation be actively considered, it needs coupling with action on the ‘5 Asks’ if the UK steel industry is to be given the opportunity to recover.

Professor David Bailey works at the Aston Business School

Ends

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