Tata puts the future of British steel in doubt

With Tata’s decision to put its UK operations up for sale, Britain’s long history of steelmaking — and particularly the Port Talbot plant which has formed the focus of recent discussions — is in serious danger. Unfortunately for the workers involved, the steady decline of steelmaking will be hard to reverse. The government can help via levelling somewhat the playing field by reducing energy costs, and providing temporary support during the search for a buyer. But more radical interventions like nationalisation and other forms of long-term state assistance, or blocking imports, are likely to be ineffectual and counterproductive.

The global steel sector has for decades been marked by chronic state-subsidised overcapacity, with China by far the biggest recent culprit. Beijing has recognised the need to reduce production: many of its mills have been closed, frequently with none or little worker compensation. Global steel prices have recently risen a little. But with weak global demand for raw materials, the likelihood that world steel production will correct enough to return the UK industry to comfortable profit any time soon seems unlikely.

Whatever views steelworkers may have about the impact of Tata’s business decisions, it is hard to cast it as a heartless asset-stripper. Since it acquired Corus for £6.2bn in 2007, the Indian company has ploughed £3bn in investment to its European operations and tried to make them economically viable.

Fundamentally, it is hard consistently to make money from blast-furnace steel plants in countries with relatively high labour costs and power prices inflated by environmental taxes. If the UK government wants to help the steel industry, it could start by reducing some of those energy costs.

Other solutions to Britain’s steel problem are frequently touted, including Britain pushing for EU antidumping and countervailing (anti-subsidy) duties on Chinese imports. To its credit, the UK has always been sceptical of such restrictions and generally argued against them during internal EU discussions. Higher prices for steel would harm the speciality manufacturing companies in Britain and other EU countries which use it as an input, and which have more of a future than producers of the basic commodity.

More radically, some advocates of Brexit argue that if the UK left the EU and sloughed off the restrictive rules against state aid to industry, it would be free to back its steel industry with government money. This is improbable and unwise.

For one, the UK has an unspectacular record in successfully supporting companies in competitive markets. If it rescues steel production, it will have sunk financial and political capital into keeping it alive, making it that much harder to pull out in the future.

There is limited justification for temporary state intervention in sectors where entry is expensive and investment is largely irreversible, such as the US bailout of its automobile industry during the global financial crisis. Governments have longer time horizons than management and shareholders, and can therefore intervene at times of turmoil to keep businesses afloat while conditions stabilise or a company is restructured. But it would be a risky proposition to assume that the problems of the steel sector are temporary rather than endemic.

As for the idea that leaving the EU would free the government’s hand, this apparent escape route is illusory. It is inconceivable that the EU would sign any post-Brexit trade deal with the UK without requiring Britain to adhere to existing EU state aid rules. Both Norway, through the European Economic Area agreement, and Switzerland through its bilateral treaties with the EU, are compelled to accept state-aid disciplines as the price of market access.

Moreover, if the UK ever did manage to pour sufficient amounts of government cash into the steel industry to bring down the prices of its output to internationally competitive levels, it could itself promptly be hit by antidumping and countervailing duties by the EU.

It is fine for the government temporarily to support production at British steel plants while a new buyer is found, though it is hard to imagine that many companies will find it easy to succeed where a global powerhouse like Tata has failed. But nationalisation in whole or part, or other long-term government support, would be unwise. The state should not be the buyer of last resort. Tata’s decision may prove devastating for the communities affected, but the government would do better to put money into reskilling and helping with job searches rather than undertake a risky and potentially counterproductive intervention.