Steel industry goes cap in hand for government bailout

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gui yong nian/Adobe Stock

Every industry claims to be a special case; in times as dire as these, the clamor of claims all but drowns out sensible debate.

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Some industries are clearly in a perilous state.

Consider airlines, with huge fixed costs and, in most cases, operating at one-tenth of capacity, or the automotive industry, which all but shut down last month and is only now beginning to gradually ramp up a reduced capacity return to work (Volkswagen was said to be losing a billion Euros a week).

But one industry that has not had a lot of attention outside of the localities where its plants operate is the steel industry.

In the U.K., British Steel had barely seen the ink dry on Chinese steel company Jingye Group’s purchase than the future of the U.K. company was thrown in doubt as its markets collapsed.

According to The Economist, steelmakers have seen demand fall by as much as 40% since car production shut down and most construction projects were suspended. Both are slowly coming back, but steel production has continued and inventory has built up in the supply chain, so the feed through to mills will be slow.

You can’t put a blast furnace onto go slow or furlough (it takes 8-12 weeks to safely mothball). The Economist quoted one industry boss, who said, “It’s not just a last resort, it’s often terminal.”

Not surprisingly, the industry is asking the government for special help.

Tata Steel is reported in The Guardian to be asking for about £500 million in government support to see it through the coronavirus crisis after its big European customers halted production.

The company employs 8,385 people across the U.K., including more than 4,000 workers at the Port Talbot steelworks in South Wales. While it can furlough some staff on 80% pay under the government’s jobs support scheme, the sums involved just to meet cash flow far outstrip the government’s Coronavirus Large Business Interruption Loan Scheme.

“The government [CLBILS] is capped at £50m, which is only one 10th of what Tata Steel believes will be the cashflow impact on the company over a six-month period,” a local MP is quoted as saying, pleading a special case: “Will the government now urgently take steps to lift the loan cap to a level that will give our steel industry a fighting chance of surviving this crisis?”

The answer is probably yes.

After throwing money at so many causes, some more deserving than others, the government will not want to see large-scale, permanent closures of the steel sector just as lockdown rules are being relaxed and manufacturing is being encouraged to restart.

The jobs at risk are a fraction of some retailers, airlines or large parts of the leisure industry equally on the brink. But this is not just about jobs — it is how the industry survives the rest of this year that counts.

Steel will be needed as manufacturing recovers. However, already overburdened with debt, there is a limit to what the industry can borrow commercially to get through the next six months.

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The chancellor will have to put his creative hat on and come up with a solution. As much as he will hate carving out special cases, maybe steel really is one that we cannot do without.

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