There are very few industry observers right now who are willing to make any kind of prediction about the long-term future of the UK’s steel industry, thanks in large part to the ongoing uncertainty around Brexit and its likely impact. Brexit might well be casting a huge shadow over the steel industry, but it is far from the only factor to consider when looking at the health of the sector and the future of this once-great industry in the UK. In this article, we take a look at the challenges currently facing the UK’s steel producers and steel buyers, to see if there is any light at the end of the tunnel.
Brexit - the big question mark
The fallout from Brexit started almost from the date of the referendum, back in 2016. As the clock ticked closer to the original Brexit deadline of March 2019, orders for UK steel from EU customers slumped, due to concerns about import tariffs on British products. The postponement of the leave date to October has done nothing to ease those worries, and increased talk of a no-deal Brexit has further reinforced concerns, making trading conditions very difficult indeed.
British Steel - will OYAK be its saviour?
It might not be accurate to blame all of British Steel’s woes on Brexit alone, but the UK’s decision to leave the EU has certainly caused the company to pay a very heavy price. As well as a huge slump in orders, British Steel has faced a number of Brexit-related hurdles, some of which proved insurmountable. Firstly, the company had to be bailed out to the tune of £120 million by the British government, in order to be able to pay its EU Emissions Trading Scheme (ETS) bill for 2019 - since the UK was supposed to have left the EU in March 2019, it did not receive its free credits allocation for this year.
Other problems faced by the ailing company include rapidly rising raw materials costs and a seriously weakened sterling. Of course, producers all around the world are affected by rising prices of raw materials, but factor in some quite dramatic currency fluctuations and it’s easy to see just how much these problems are exacerbated for UK producers such as British Steel. Additional challenges include high energy costs when compared with other EU countries and extra logistics costs caused by the geographic spread of British Steel’s production facilities in the UK. All of these things made trading extremely difficult for British Steel, long before the shape of Brexit is finally decided. Post-Brexit, with no EU safeguard protections, the UK will have no preferential tariffs for trading anywhere in the world, and undoubtedly, there will be more nimble players looking to exploit that fact. With a global oversupply problem, British Steel’s struggles will be someone else’s golden opportunities.
So, can OYAK, the Turkish military’s pension fund, bring about a miracle U-turn in the fortunes of British Steel, signalling a fresh start for UK steel producers at the same time? With more than 80 potential bidders initially approached, Ataer Holding, owned by OYAK, is now in exclusive negotiations to buy British Steel, and is currently completing its due diligence process, with a deal hopefully finalised by the end of 2019. The timing of the British Steel acquisition couldn’t be more complicated, and it remains to be seen whether the final sale agreement will take place before or after the October 31st Brexit deadline, since that date, and the UK’s subsequent relationship with Europe, would surely have a huge impact on the price that OYAK is willing to pay and the terms on which it is willing to proceed.
OYAK has stated publicly that it intends to keep British Steel whole, and that it wants to invest £900 million in British Steel’s Scunthorpe facility. It remains to be seen whether this will be enough to turn the firm’s fortunes around, especially given the wider issues facing the UK steel industry as a whole. OYAK is the majority shareholder in Erdemir Group, Turkey’s largest steel producer, which may give it the strength, experience and resilience that will be needed to rescue British Steel. Yet on the other hand, many in the industry have concerns about Turkey’s reputation on human rights and employee rights, and also about Turkey’s recent keenness to pump low-priced steel into Europe, putting pressure on European producers across the board.
The impact on the UK’s domestic steel buyers
With the broader picture remaining so uncertain, it’s almost impossible to predict the likely effect on the UK’s domestic steel buyers. Firms like Heaton Products, for example, need a steady and reliable supply of steel rod and mesh, with some degree of price certainty that they can pass on to end users.
With every period of significant change comes both challenge and opportunity. For small producers of steel products in the UK, the hope is that whatever outcome Brexit finally delivers, international trade and supply routes are protected. If the UK remains tied to the single market, there’s hope that a degree of stability will return and that sterling will also pick up strength. If, however, Brexit turns into a crashout scenario, all we can do is hope that new trade deals can be put in place quickly - deals that are more favourable to the UK than the existing EU trade framework. That might seem unduly hopeful at this stage, but until things become certain, both with Brexit and the future of British Steel in OYAK’s hands, hope is perhaps one of the few things we have in plentiful supply.