The revival of steel production in mature markets does not need to be all about state aid and protection. Although some would argue the steel industry in the U.K. would not be in the condition it is now if it had state aid and protection in previous decades.
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But years of underinvestment by corporate owners Corus and Tata Steel have left the U.K. steel industry technologically behind rivals in mainland Europe, according to an article in The Telegraph last week.
After considerable M&A activity over the last 2-3 years, there are now three major commodity steel producers in the U.K., although some 600 firms are active in the industry. Apart from what is left of Tata, there are two new contenders. First, the newly formed British Steel Limited, a long products steel business founded in 2016 from assets acquired from Tata Steel Europe by Greybull Capital. Secondly, there is Liberty House, a more diversified metals producer owned by entrepreneur Sanjeev Gupta and (at least as far as the steel part is concerned) formed largely out of the specialty steel division of Tata Steel Europe last year, when Tata sold off various assets prior to its current merger with ThyssenKrupp of Germany.
The question on everyone’s lips when Greybull and Liberty stepped in to buy parts of the Tata group was how they were going to make money out of these assets if Tata could not.
Somewhat to the market’s surprise, Greybull posted a profit of £47 million ($66 million) in the first 12 months following years of losses under Tata, but last year fell back into loss when production at its Queen Victoria blast furnace in Scunthorpe was temporarily halted in the summer due to technical problems, The Telegraph reports. The furnace, which is capable of producing 1.5 million tons of iron per year, was out of action for several weeks and cost the firm tens of millions of pounds. Although Greybull only paid £1 for the business. it clearly has faith in its long-term future, announcing this month plans to raise £100 million of funding to upgrade existing plant and invest in new technology. The margins are in value add and years of under investment have left the firm not just with creaking infrastructure, but outdated technology that deprives them of the opportunity to compete in more lucrative market segments.
Liberty was not quite so fortunate in buying Tata’s castoffs on the cheap. Liberty paid £100 million last year for the specialty steel division, but has already brought back capacity previously mothballed. The most recent example of that is an 800,000-ton electric arc furnace in Rotherham, fired up in a ceremony attended by the Prince of Wales this month, according to the BBC.
Even Tata is investing in upgrading plants. Just last November, it announced it was investing £30 million ($42 million) in its Port Talbot steelworks with the installation of a new 500-ton steelmaking vessel and would make other upgrades as part of a £1 billion, decade-long deal agreed with unions in return for their support for agreement to spin off the £15 billion ($21 billion) pension attached to Tata’s U.K. steel business.
How this long-term investment plan will shake out following the merger with ThyssenKrupp remains to be seen. Many still see Port Talbot as a prime candidate for closure for the enlarged group, particularly if Brexit changes the economics of the plant by putting tariff barriers in place between the U.K. and E.U.
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Berlin and the E.U. will not favor preservation of Port Talbot over closure of continental steel plants, as the combined group looks to achieve cost savings and streamline the merged businesses.