Is British Steel a Victim of Brexit or an Undeserving Wastrel?

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According to the BBC last week, British Steel, the U.K.’s second-largest steel producer, is knocking on the door of the British government for the second time in as many months looking for support.

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In April, the firm borrowed £120 million from the government to pay an E.U. carbon bill so it could avoid a steep fine, arising when the E.U. arbitrarily withdrew the carbon credits the firm would previously have used to offset such fines. However, the E.U. decided to suspend U.K. firms’ access to such free carbon permits until a Brexit withdrawal deal is ratified.

Having survived that, the firm is apparently now back on the brink of administration and asking for £75 million to help it cope with Brexit-related issues, the news channel says. The firm cites uncertainty over the U.K.’s future trading relationship with the E.U. as a deterrent to European clients to place business with the British steel company.

That may be so, but all European steel producers have been hit with a weak market.

Prices have fallen 16% this year, according to Platts, due to rising competition from eastern Europe and China, in addition to rising costs due to iron ore, electricity and environmental compliance costs.

So far, British Steel looks like a victim of bad fortune.

Following Greybull Capital’s acquisition of the assets from Tata Steel in 2016 for £1, the venture capital firm managed to turn a pre-tax profit of £92 million in the first year after the deal, a significant turnaround from the £122 million loss booked in the final full year as part of Tata’s European operations, The Telegraph reports.

But that profit seems to have been swallowed up at least in part by £250,000-per-month management fees charged by Greybull to British Steel and some £33.8 million in interest charged at an eye-watering 9.6%, according to The Guardian newspaper.

You can understand the passions the proposal to save British Steel has raised.

The company employs some 4,400 workers and some 20,000 in the wider supply chain and local communities. The firm is the largest supplier of railway track rails to Network rail in the U.K. and was, until recently, a significant exporter.

But equally, should the government be bailing out private equity investors? Is that a good use of taxpayers’ money?

If a Labour government came to power, it would probably renationalize the company. It was, pre-Tata, part of Corus; before that, it was the original, state-owned British Steel. However, the firm has struggled to be consistently profitable for decades.

A cheaper option in the short term would be to allow it to go into administration and pick up the company as a going concern, much like Greybull did. Even so, any buyer will struggle to regularly turn a profit.

Greybull has never paid a dividend or made any repayment of interest capital since it was purchased in 2016 – but then, when you are charging millions in fees and interest at 9.6%, maybe such niceties are not such an imperative.

Ultimately, the British government will have to decide whether producing steel in the U.K. is a priority or not. Historically, it has tended to let the market decide — but in a post-Brexit world, its future could be a little more assured in a protectionist environment (possibly with import tariffs).

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Politicians will be torn when they know how deeply unpopular they are as a result of the Brexit debacle — maybe compassionate action to save the workers will prevail.

Somehow, I doubt that will be the case.

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