British Steel: overproduction crisis claims another scalp

The bankruptcy of British Steel threatens the jobs of 5,000 workers in the company’s Scunthorpe, Skinningrove and Teeside plants, and puts at risk more than 20,000 further jobs in its complex and extensive supply chain, striking another body blow to Britain’s manufacturing base in the north.

The fundamental cause of this collapse is the global overproduction crisis, with the market glut in steel production exerting a catastrophic downward pressure on prices. In the case of British Steel, these detrimental market conditions have been compounded by the fact that the private equity outfit that owns British Steel has mired the company in an orgy of dodgy book-keeping and reckless indebtedness that have hastened its demise.

As has been the case in the car industry, steel production in Britain has long since been scaled down from the erstwhile volume capacity which used to hire vast armies of workers, focusing instead on more niche production of special steels serving the needs of the construction and railway industries. When British Steel was sold by Tata Steel to Greybull Capital for £1 in 2016, the company was seen to be developing this niche approach, and for a time the it appeared to thrive.

As a stratagem for navigating a way through glutted commodity markets, niche production has the seeming merit of making the company indispensable in certain specific markets, guaranteeing its preeminence as the producer of choice. The problem with this is that no company can ever be truly indispensable, least of all in the middle of a crisis of overproduction such as this one.

Workers in Scunthorpe who supply specialised steel to a British Steel rail factory in France now fear that French steel producer Ascoval could take over as chief supplier. (To make the situation still more bizarre, at the very moment British Steel was begging the government for a bailout it was pressing on with a £40m investment into Ascoval!) Moreover, by specialising production in this way and narrowing its market reach, British Steel has rendered itself vulnerable when the trade winds change direction.

In the bigger picture, this is one more episode in the narrowing of Britain’s manufacturing base, not absolutely – automation of industrial processes allows the expansion of commodity production simultaneous with the shrinkage of the work force – but relatively, as financial services and the export of finance capital increase their relative domination of the economy and domestic manufacture dwindles in significance.

How else can one make sense of the truly bizarre relations obtaining between British Steel, its monopoly capitalist owners Greybull Capital, and the British capitalist state?

Before the spectacular liquidation of British Steel, Greybull Capital was hardly a household name, unless you were a keen reader of the Financial Times, or maybe if you used to work for Comet or travelled by Monarch airlines. Greybull was a key backer of the buyout of Comet, which collapsed in 2012 leaving 7,000 workers without a job, and it became the owner of Monarch airlines when that firm went into liquidation in 2017, leaving the taxpayer to fund the repatriation of 110,000 stranded holiday makers – an operation that drained £60m from the public purse.

In short, Greybull is a vulture capital outfit with an eye on the main chance and its finger never far from the asset-stripping trigger.

British Steel, however, is a name that is ingrained in the national consciousness, evoking in the popular imagination the heyday of big volume steel production, but the reality of the present-day ‘British Steel’ is very different.

India-based Tata Steel decided in June 2016 to hive off part of its business and Greybull snapped it up for £1, grandiosely rebranding it as British Steel. After the first year it appeared to be achieving a return to profitability, but in recent months it has been begging the government for help.

And the deeper British Steel has plunged into debt, the more hair-raising have been the tales of creative accounting (which Ernst and Young will doubtless make a fortune for disentangling).

One scam that backfired on the company was trying to play the three-card trick with its free allocation of carbon credits from the EU. We’ll let the FT explain the mechanics of the trick:

“British Steel could have avoided asking UK taxpayers for a £100m rescue if it had saved permits to produce carbon that it instead decided to sell in an ill-judged bet on the EU’s emissions trading scheme.

“The metal manufacturer cashed in on allowances it was granted under the Brussels scheme aimed at curbing climate change. The scheme requires industries to match each tonne of emissions with an ‘allowance’ or permit.

“Companies are awarded a certain number for free but many end up with a greater allocation than required when emissions are cut. This is a potential source of cash as permits can be sold on the carbon market.

“British Steel was allocated more allowances than the total greenhouse gas output from its two main UK plants from 2013 to 2018, according to data seen by the Financial Times.

“When the company sold off some of its allowances, prices were much lower than current levels after a recent rally to 10-year highs. The sold-off allowances would now be worth £138m.

“It now faces a hefty bill after Brussels put a temporary suspension on UK companies receiving new allowances until a Brexit withdrawal agreement is finalised. However they must still honour last year’s commitments on matching emissions with allowances.” (British Steel sold excess carbon credits before seeking state aid by Leslie Hook and Michael Pooler, Financial Times, 16 April 2019)

In the end, the government wound up subbing the company for £120m to keep the EU wolf from the door. Not content with this, British Steel angled for a further loan of £75m, which it then adjusted to £30m, piously pointing out that Greybull and other lenders had agreed to stump up £30m of their own.

This is where all normal logic breaks down: the owner of British Steel, Greybull, promises to inject cash into its own company, British Steel, in exchange for which [!] the taxpayer is expected to shell out a further massive loan.

It gets better though. British Steel (the company) has paid £9m in the past three years to Greybull (the owner) for so-called ‘management fees’, in recognition of its careful stewardship. And in an act of astounding magnanimity, Greybull Capital offered a loan of £154m to British Steel via a Jersey-based parent company, Olympus Steel, at an interest rate of 9 percent, for which kind gesture British Steel was charged £17m per annum.

Its failure to pay up means that the company now owes Greybull more than £200m. Switching effortlessly from proprietor to creditor, Greybull now stands in line awaiting its share of any loot when the company is wound up.

Needless to say, no place is reserved in that usurers’ queue for the 25,000 workers who are seeing their jobs go down the toilet.

Even as British Steel bosses were busy blaming Brexit for their woes, the government was getting advice from its lawyers that any offer of support to British Steel would have been illegal under EU state aid laws, including nationalisation.

It will be interesting to see how Labour leader Jeremy Corbyn reconciles his correct call for nationalisation (illegal under EU rules) with those in his party who are busily trying to sabotage Brexit, rowing furiously in the direction of a second referendum.