A Steely Resolve: British Steel Enters Compulsory Liquidation
June 16, 2019
2 min read
What's going on here?
Last month, the High Court put British Steel into compulsory liquidation following the failed rescue talks between Greybull Capital (a private equity firm) and the UK government.
What does this mean?
Talks for a £30 million government rescue pack broke down, putting the jobs of 5,000 employees and a further 20,000 in the supply chain at risk. The company’s failure also has the potential to greatly damage Britain’s steel industry as British Steel’s main base in Scunthorpe is one of one two places in the UK that makes steel from scratch. The closure of this plant would mean that the country maintains only one operating blast furnace (located in Port Talbot, Wales).
Fortunately for the company, the government has granted it an indemnity to enable British Steel to operate as usual. This means that the government will fund the steelmaker’s operations as well as the insolvency process.
Greybull blamed Brexit uncertainty and the weak sterling as major factors in the “dry up” in orders from EU customers. Yet Greybull’s chequered past has given it a reputation for “milking a company’s acquisitions dry before discarding them”, with five of its major acquisitions becoming insolvent over the last five years. In British Steel’s case, Greybull has accrued £9m of “management charges” while insisting that it will “not make a penny” from British Steel, despite gaining £51m interest on a £154m loan.
What's the big picture effect?
Closure of the main manufacturing base of British Steel has many severe consequences. It would force the UK to rely on importing foreign steel, increasing costs for businesses as well as causing short-term supply shortages. For example, a company like Network Rail (which relies on British Steel for up to 97% of its track infrastructure) would be badly affected. The costs of having to use European or Chinese suppliers may be passed directly onto consumers and taxpayers in the UK.
For the UK’s economy, steelmaking is a very important sector. The jobs are highly skilled and well paid (especially for the regions where steel manufacturing takes place). British Steel is also the exclusive producer of many rail construction products in the UK. Losing this means that those products would have to be imported from abroad.
The company’s situation has been particularly bleak since April, when UK firms were blocked from accessing free carbon permits until a Brexit deal was ratified. Nonetheless, the UK has still benefited from the EU’s imposition of higher tariffs on steel-dumping nations such as China.
Now, liquidators are searching for a buyer for British Steel to save the company. But is this the right thing to do?
Report written by Heerim H
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