The Future of Steel in the UK

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In recent days, Tata Steel (NS: TISC) announced it would shut down its UK steel plants unless it found a suitable buyer.  Members of the UK government are running like chicken without heads trying to find a market solution, the opposition demands full nationalization (they would nationalize the whole country if it was left to them), the unions are yelling foul play, and the taxpayer looks like its about to get duped again.  So, what are the options for the steel industry in the post-1960s free market?  First let’s explore the causes, then we’ll check the potential solutions, and drawbacks.

  1. High wages: Although many would argue otherwise, UK steel workers earn more than their counterparts in China and other markets, making it more expensive to produce.
  2. Green taxes: The UK, along with most of the western world insist on levying vast amounts of green taxes on energy, making energy hungry industries such as steel less competitive.
  3. Global slowdown: When China and most of the booming emerging markets pressed the pause button in their glut for global commodities, the prices took a hit, and it is no wonder price of steel has dropped dramatically, making the UK industry uncompetitive.
  4. Cheap Chinese steel: Since its demand for steel dropped, China was suddenly left with a steel overproduction which they are selling around the world (UK included).

Taking all that into consideration, it’s no wonder that there aren’t many economical reasons to keep the plants open.  So what are the options?

Outright purchase: Very unlikely.  So far only one potential buyer has emerged: Sanjiv Gupta of Liberty House, and he’s been courted like a prom queen by the business secretary Sajid Javid.  But there are many issues standing in the way such as the defined benefits pension plan.  Tata inherited the pension plan from British Steel, which has are over 134,000 members, out of which only 15,000 are currently contributing to the scheme.  This has generated a £2 billion deficit, which Mr. Gupta has made clear he won’t take over;  then there are potential environmental lawsuits for which he doesn’t want to take responsibility (seems only fair); finally he wants an exception on green taxes for energy.  So it is very unlikely that an outright purchase will take place under the current conditions.

Nationalization: Extremely unlikely.  For a conservative government to nationalize an industry is as unnatural as finding a polar bear in the tropics; besides, there are so many arguments against that it is hard to understand why is it even being discussed.  The industry is losing £1 million a day and that is not going to change, at least not in the near future, translation: the taxpayer would have to assume that loss; then there is the underfunded pension pot, which the taxpayer would have to fund; then they would need to crank up the price of steel in order to make the plant profitable, so who would buy it? certainly not the private sector, they would keep buying cheaper Chinese steel, so it would have to be sold to government contractors making public infrastructure or defense projects, and who will end up paying for that bloated price? you guessed it: John and Jane Q. Taxpayer.  So this is a big no-no.

Assisted purchase: More or less likely. Sounds a bit like JP Morgan’s (NYSE: JPM) purchase of Bear Sterns back in 2008, which saw the US government taking the toxic assets off of Bear’s balance sheet and allowing JP Morgan to snap it at a heavily discounted price.  This would mean that the UK government would have to bow to all of Mr. Gupta’s demands regarding the pension fund, green energy taxes, and exception from any liability regarding Tata’s tenure of the plant.  This would leave the taxpayers on the hook for the pension plan, and it is more likely than not, that the green taxes will be added to everybody else’s energy bill hitting.

Let the market decide: Less likely, but may ultimately be unavoidable if a deal isn’t reached by the deadline Tata has set out.  This will involve one of the following scenarios:

  1. Nothing happens, the company goes bust, everybody loses their jobs and the pension fund evaporates.
  2. Someone cherrypicks what to purchase, and leave the rest to rot
  3. Someone buys everything, fires everybody and sells whatever is valuable

Either way it looks grim for Port Talbot.

So here is a suggestion, a mixed solution:  Sell it to Liberty House, with the following clauses:

  1. Convert the DB scheme into a DC scheme.  Calculate the amount owned by each retiree based on their contributions and calculate the new payout based on their historic contributions.  Use all current and future funds consistently with a DC scheme and reorganize the pension pot so that it is funded with whatever is in the pot today.
  2. The government can give a guarantee that there will be no litigation or no costs relating to environmental issues or cleanups falling on the new owners, without taking the responsibility themselves.  This sounds logical, since most of the potential lawsuits would come from Port Talbot, and the price of keeping the economy alive is for them to forego any potential litigation against the company.
  3. The government should exempt the new company of any green taxes, and not attempt to make them up from the public.

… just a thought

 

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One Response to The Future of Steel in the UK

  1. I think that it’s a real government pitfall that the Tories have rejected EU efforts to reject imports from other countries, in order to protect our steel. See my blog for more: robertguthrieblog.wordpress.com

    Like

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