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British Steel To Enter Insolvency – What Went Wrong?

Published on:May 22, 2019Author:alex

British Steel is set to enter insolvency, a move which will put more than 5,000 jobs at risk.

The manufacturing company is on the verge of collapse after a breakdown in rescue talks between the government and the business’ owner, Greybull.

As reported by the BBC, the Government’s Official Receiver will now take control of the company as part of the insolvency process and accountancy firm EY will take on the role of Special Manager to try and find a buyer for the business.

The Official Receiver said British Steel Ltd had been wound up in the High Court and that the immediate priority was to continue safe operation of the site, adding that “staff have been paid and will continue to be employed.”

British Steel has around 5,000 total employees with 3,000 at Scunthorpe, with another 800 on Teesside and the North East, and the others in France, the Netherlands and various sales offices around the world.

One of the company’s biggest customers is Network Rail, 95% of whose rails are supplied by British Steel’s Scunthorpe plant.

The other companies within the British Steel group are continuing to trade as normal and are not in insolvency.

What’s gone wrong at British Steel?

In 2016, Greybull Capital bought British Steel for a token £1 from Tata Steel, promising to invest £400m to revive the company with assurances of a bright future.

However, less than three years later, the company has entered insolvency.

As reported by The Guardian, British Steel chief executive Gerald Reichmann has blamed weak market demand, high raw material prices, the weakness of the pound and uncertainty over the outcome of Brexit talks.

But Greybull Capital themselves will have to shoulder some of the blame for British Steel’s troubles.

Greybull seemed an unlikely saviour of the steel manufacturing industry, given their previous mismanagement of Monarch Airlines and Comet. Hard questions will now be asked of their management.

Is Brexit to blame?

The uncertainty over Brexit is also a factor in British Steel’s troubles.

Greybull bought British Steel after the EU referendum but didn’t expect Brexit uncertainty to last this long.

The main issue has been a reduction in orders from European customers ‎due to the uncertainty over the Brexit process.

This is because steel contracts are generally agreed well in advance of the product being delivered. However, the terms of the UK leaving the EU have still yet to be agreed, meaning British Steel’s overseas customers don’t know what tariffs will apply to steel they buy from the company.

This is why the company has been hoping for an urgent cash injection from the government, to replace the drop in sales in the hope that a favourable Brexit deal can be signed in the meantime.

On top of that, British Steel has also been struggling with the weakness of the pound since the EU referendum, an issue which makes the cost of imported raw material used in making steel higher.

Why is the government reluctant to bail them out?

The government has been unclear on the future of the steel industry in the UK for years.

On Monday, they announced a new “steel charter”, pledging to increase the amount of UK steel used in national infrastructure projects.

Unfortunately, the new policy didn’t address the more urgent issue of British Steel and its 5,000 employees being under threat.

Rescuing struggling businesses goes against the Conservative party’s free market ethos unless it is absolutely unavoidable.

The uncertainty over Brexit has also played a role here too. The date of the UK’s exit from the EU has already been delayed once so MPs are reluctant to loan British Steel money to tide it over in the hope of a Brexit deal that may not come.

The official stance is that British Steel wanted the government to lend the company £30M on terms that were not commercial, which would have been unlawful under EU state aid rules.

Some may even point to the very presence of Greybull as being the main obstacle to the government agreeing a bailout for British Steel.

The government likely has questions over the private equity firm’s trust and credibility, given that when Monarch went into administration under Greybull’s ownership in 2017, taxpayers were landed with a £60M bill.

It’s worth noting that the government has already loaned the company £120M to help it pay an EU bill for its carbon emissions.

How important is the British steel industry?

The UK steel industry has been in decline for some time.

The steel industry employed 323,000 people in the 1970s but now employs less than 10% of that, at 31,900, in part due to the closure of the Redcar steelworks in 2015.

Steel manufacturing remains extremely important in the UK, playing a crucial role in defence, as well as important industries such as transport, oil and gas.

British Steel itself is hugely important too, as the UK’s six producers all make different steel products which means that the loss of one producer can have a debilitating effect on the UK’s capability to make all the different products required.

British Steel is the only UK producer of rails for Network Rail, as well as a number of specific construction products. If the company collapses, the UK would be forced to import increasing volumes of steel for construction and infrastructure projects.

Could the company survive in some form?

For British Steel to be saved, a buyer will need to be found for the company.

The search for a buyer for British Steel has already begun and, in the meantime, it will continue to trade normally.

The problem is, the Scunthorpe site represents the bulk of the company and it’s hard to see who would be an obvious buyer for the site, after it has struggled under successive owners.

Labour have called for the company to be nationalised to rescue the company.

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