May 31, 2019 / 10:37 AM / 25 days ago

Breakingviews - Steel is awkward candidate for UK bailout largesse

Smoke billows from a fire at oil refinery, owned by Russian oil producer Gazprom Neft, in Moscow, Russia, November 17, 2018. REUTERS/Tatyana Makeyeva

LONDON (Reuters Breakingviews) - Steel is a tricky candidate for a UK government bailout. The fate of 4,000 workers employed by British Steel is in question after the operator of the Scunthorpe steelworks entered insolvency in May. Unless one of the private enterprises now examining its books steps in, public cash will be needed. Unfortunately, three decades after it was privatised by the Conservative government of Margaret Thatcher, neither company nor sector looks sufficiently strategic or sustainable.

The European Union’s concern about overcapacity means that bailouts of struggling steel groups are even harder to get past its state-aid laws than other sectors. However, the government could make a case for helping British Steel by arguing that it needs to retrain workers or help the environment, areas where Brussels gives some leeway.

Expending that political capital is hard to justify. UK steel production has fallen from 20 million tonnes in 1990 to 8 million tonnes in 2017, and government figures suggest steel contributes only 0.1% towards employment. Security arguments that stress the importance of self-sufficiency for the military or manufacturing are weakened by the fact Britain imports iron ore, the key raw material for making steel.

The sector is also losing money. Port Talbot, owned by India’s Tata Steel, has been loss-making over the last three years. A 50% jump in iron ore prices since September has pushed up costs for producers, but the price of the processed steel products that they sell has fallen by a sixth, according to S&P Global Platts. UK producers’ competitiveness suffers from high energy costs, and the need to transport raw materials from places like Australia. In the first quarter, Port Talbot and British Steel were in the most expensive quartile for global producers, according to Metals Consulting International. And Brexit imperils relations with the EU, which accounts for over two-thirds of UK exports.

Theoretically, the government could justify a partial bailout. Public money would help Scunthorpe mothball its uncompetitive blast furnaces that produce unprocessed steel, import it instead, and focus on making end-products like rail lines. A smaller plant could break even, saving some jobs, Metals Consulting International reckons. Yet given that this would still mean big layoffs, and draw criticism from both the left-wing opposition and Conservative free-market ideologues, the government probably won’t make the effort.

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