Boris Johnson, has said that steel ‘is a very important national asset’ and ‘It would be crazy if we were not to use this post Brexit moment to use the flexibility we have to buy British Steel’.
There are nearly 5,000 people employed in the UK steel industry. This should be the first focal point for the government when dealing with the current crisis in the UK Steel industry. These workers are employed in a viable industry that is profitable in counties such as Germany and could be profitable in the UK. The current crisis is a case of financial mis-management and not operational mis-management.
The simple facts are that the UK Steel industry is a deeply cyclical industry. It follows a typical 10 year cycle with huge profits in 3 of these years and losses to breakeven in the other years. However, over a cycle it is profitable. Historically, the steel industry did not hold any debt and held cash to see it through the lean and loss making years. This is how any steel business needs to be financed. The level of cash on the balance sheet have made the steel industry a repeated target for ‘investors’, who have taken the cash and run the business with high debt levels.
Liberty Steel in Yorkshire is an example of this and is currently running on just two weeks working capital. Even the most profitable steel industry in the world would not survive on this short term financing.
It is crazy how the UK steel industry is managed and needs to be changed. That is clear and has been glaringly obvious for many years. The government can not pass responsibility on this.
The latest scandal involving Greensill capital is just another version of ‘rape and pillage’, where profits are privatised and losses nationalised. On 16th October 2018, Rebel Economics wrote a piece ‘Why nationalise when you can regulate?’, arguing that better regulation is needed in the UK. For sure the steel industry needs strong regulation to give a sustainable future.
Historically, one of the obstacles to defending UK steel has been cited as European regulation. When the EU referendum was held, all those towns in the UK where steel is a part of every day life voted to leave the EU. It was a clear mandate from the industrial regions of the UK to the government to take back control of these vital industries as outlined by Rebel Economics on Jan 10th 2020 ‘Brexit demanded by UK Industrial Towns’.
The vote for BREXIT was a surprise to politicians who seemed not to grasp the strength of feeling in these industrial towns. Now that BREXIT has occurred and we have another scandal hurting our industrial towns. How can these towns feel supported by the government and Westminster when our previous prime minister is lobbying for the benefit of Greensill Capital. Who is representing the interests of the workers in these industrial towns? The UK steel industry may only make up 0.1 percent of economic output, but it provides highly skilled jobs, above average wages and products that go into strategic industries.
It would be crazy for the UK government not to offer protection to the UK steel industry. Now, the very word ‘protection’ will have the government running for the hills. It will go against their belief in ‘free market capitalism’. There will be those that fight to maintain the current status quo but the case for protecting the UK steel industry is a strong one and important. In Germany the largest steel company Thyssen Krupp benefits from a supportive ownership structure and long term financing which ensures the longevity, stability, sustainability and the success of this business. The UK Steel industry needs both of these to survive.
Firstly this is a long cycle industry which over the cycle makes a good profit. Financing needs to be long term in nature to match the long term nature of the steel cycle. The financing of the UK steel businesses had apparently become so short it was down to a crazy two weeks!
Secondly, the government needs to take a stake in the industry or to nationalise it. The government have nationalised Royal Bank of Scotland when we had a financial crisis, and independence from the European Union gives the UK more flexibility. Thyssen Krupp in Germany has a supportive shareholder structure, and that prevents it from being taken over by companies or people with motives that are not aligned to the long term future of the steel industry.
Finally, a future plan for the UK steel industry needs to be addressed. On September 27th 2019, Rebel Economics wrote ‘Time to Transform UK Steel’. This article focused on the future of the steel industry in the UK and looked at the research of Julian M Allwood, Professor of Engineering and the the Environment at Cambridge University. He produced a paper entitled ‘A bright future for UK Steel’ outlining a strategy for transformation of UK steel.
There is an opportunity now for the UK government to manage the outcome of the UK Steel industry. Liberty Steel has a strong order book and before the pandemic the business had been heading to profitability. The underlying business is sound.
It remains to be seen if Johnson will back up his words with action. The aptly named Sarah Champion, MP for Rotherham has said that if the government is going to step in ‘it needs to do so before the steel operations become insolvent’.
Rebel Economics 