May 21, 2019 / 11:20 AM / a year ago

Breakingviews - British Steel rescue loan is worst of bad options

British steel workers protest outside of the Houses of Parliament in London, Britain October 28, 2015. REUTERS/Toby Melville

LONDON (Reuters Breakingviews) - Greg Clark has one of the worst jobs in the UK government. The business secretary needs to decide whether to nationalise 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 tonnes 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 which also owned the now-defunct Monarch travel business. Its steel company is to receive a 120 million pound 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 defence is that British Steel exports 70% 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 labour 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 nationalise 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 nationalisation without sufficiently penalising the current owner.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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