British Steel loan the worst of bad options compared to nationalization or shutting down plants

Source:Global Times Published: 2019/5/23 17:07:31

Greg Clark has one of the worst jobs in the UK government. The business secretary needs to decide whether to nationalize British Steel, let it go bust with the loss of at least 5,000 jobs, or apply a sticking plaster to let it limp on. All three are bad options, but the last is the worst.

Despite its name, British Steel provides only a third of the UK's annual 7.8 million tons of steel production from its Lincolnshire works. And since 2016, it has been owned by a private equity outfit called Greybull Capital, a specialist in distressed corporate situations that also owned the now-defunct Monarch travel business. Its steel company is to receive a 120-million-pound ($152 million) loan from the government to deal with technical issues associated with carbon credits due to the UK's tortuous departure from the European Union. Now, British Steel wants a loan of another 30 million pounds to help pay its suppliers.

The argument for the defense is that British Steel exports 70 percent of its output and is not to blame for its business model being hit by Brexit. If the government extends credit now, its claim on the company will outrank that of Greybull. Also, if British Steel were to fail, the state would lose the taxes paid by its workers and potentially have to import more steel.

These arguments are not watertight. British Steel may have turned a profit in 2017, but robust demand from China, which represents around half of global steel consumption, made it hard not to. 

Chinese demand is less strong this year. Weak European growth and a flood of imports from Turkey have also dented steel prices. British Steel's labor and energy costs, which make it harder to compete when times are tough, are an argument for shuttering the plants rather than keeping them alive.

If Clark rejects this as unpalatable ahead of European Parliament elections this week, he could nationalize the operations. That would leave him facing a difficult conversation with the European Union over state aid. But even that would be more palatable than a loan that might only be a short-term fix, and which delivers most of the reputational hit of nationalization without sufficiently penalizing the current owner.


The author is George Hay, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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