Ta-ra Tata : What future for Welsh steel-making?

(Pic : The Independent)

This is an immediate follow-on from the National Assembly debate held earlier today. This post will look in more detail at some of the options facing Tata and other interested parties (like the UK and Welsh governments), as well as what the next steps might be.

The Options



1. Sell the plants to a new (private) owner

Liberty House appear to be the front-runners to buy
Tata's steel operations in the UK - but caution is needed.
(Pic : South Wales Argus)

• Liberty House (who are expanding their UK steel business) and Greybull Capital (cited as experts at turning around under-performing companies) have been named as possible buyers. Preliminary negotiations are reportedly starting with Liberty House, but their steel business revolves around recycling scrap metal, not primary steel-making. Germany's ThyssenKrupp emerged as the latest interested party and reportedly made an offer for Tata's European operations a few months ago - but have apparently gone cold on the idea for now.
• The economics of the Port Talbot site will put off all but the bravest investors – issues with energy costs, business rates, Chinese steel-dumping and pensions would still need to be dealt with or guaranteed by the Welsh & UK governments as well as the EU Commission.
• Tata are unlikely to want to create a rival to its IJmuiden plant in The Netherlands which makes the same products as Port Talbot and is currently profitable. They'd probably want to sell them both at the same time, which could still put Port Talbot at risk as it's the weaker-performing of the two.
• Would still lead to mass redundancies (more than were announced in January) and probably partial mothballing. There's no way all the jobs can be protected. There are also serious issues with the pension fund.

Verdict : It sounds as though something's happening behind the scenes, but it's too early to get any hopes up. For Port Talbot there's only an outside chance due to the serious underlying cash flow problems, but this is a likely outcome for other Tata sites (Llanwern, Orb Newport, Shotton, Trostre) as some sites remain profitable and are highly-specialised. It seems government wants all the sites sold as a single package.

2. A management/worker-led buy-out

• Managers and union officials have put together an independently-assessed "turn around plan" for Port Talbot steelworks (presumably building on Tata's original announcement in January and described as the McKinsey plan in the Assembly).
• It's unclear how much Tata would expect for the steelworks. It could be a significant sum of money and the buy-out could struggle to get enough to do it. However, considering the current losses at the steelworks Tata might be convinced to sell it for a nominal sum (i.e. £1)
• As option one, Tata are unlikely to want to create a rival to its IJmuiden plant.
• It's a realistic avenue for government intervention, whether that's by underwriting a loan, acting in the same way as a commercial investor, taking over pension obligations or providing guarantees on future investment (i.e a power station).
• Shouldn't fall foul of any EU state aid rules even if a buy-out is backed by government.
• Retains the skills of the existing workforce, but job losses and partial mothballing are still likely.

Verdict : Difficult but not impossible as long as potential investors are convinced the turn-around plan can work at Port Talbot. Presumably doesn't include the other Tata sites in Wales.

3. Nationalisation (temporary, whole or part)

Would nationalisation (on any scale) simply shift the heavy burdens
to the government and let Tata walk away from its responsibilities?
(Pic : London Met University)

• The state takes temporary or permanent ownership (part or whole) of Tata's steel-making business.
• The UK Government would have to do it because of the scale of the requirements; they've ruled it out. Permanent nationalisation (as opposed to "temporary government ownership") is also opposed by some members of the main steelworkers' union, Community.
• It would provide a temporary measure of stability but not much else. It would delay the inevitable by passing liabilities from a private company to government. It needs a long-term strategy to accompany it (see more at Borthlas).
• There's no guarantee taxpayers would see a return on investment. Private investors would've shown interest anyway or would perhaps only be willing to buy profitable parts of the business, leaving the government with the rest (particularly blast furnaces), perhaps for a very long time.
• Taxpayers would be paying steelworkers to make something they can't sell. It wouldn't solve the underlying problems with the business losing money and wouldn't address problems in the global steel market.
• Might fall foul of EU state aid rules. It hasn't stopped other EU member states doing it and there are provisions to allow governments to intervene to protect competition, however the EU Commission have started investigations into some of this state support.
• It's incomparable to Scotland as the two plants involved there were a fraction of the size of Trostre, let alone Port Talbot. There was a buyer (Liberty House) immediately lined up and the nationalisation was done to avoid a lengthy due-diligence process. Even if the government took ownership of Port Talbot, mothballing would still be likely to prevent it becoming a budget drain. Instead of a private company laying workers off, the government would be doing it.

Verdict : An option of last resort to retain the assets and prevent a complete collapse of the steel industry. Not realistic for Port Talbot, but could work as a temporary solution for some of the smaller Tata plants (as happened in Scotland). I'd imagine both governments would prefer a sale than a state take-over.

4. Mothballing

• All steel-making activity would stop with a skeleton staff (perhaps as few as 100-200 people) retained to maintain the blast furnaces. Everyone else would be laid off.
• In terms of job losses and impact on the supply chain it would be just as bad as a complete closure.
• It could lead to an artificial shortage of steel which would raise the price and bring the industry closer to profitability again.
• Steel-making could be resumed at short notice when the market picks up.
• There's a risk skills would be lost as workers seek alternative employment in the downtime.
• There would still be problems with energy costs, business rates etc. but on a much lesser scale than currently.

Verdict : A realistic outcome at Port Talbot short of complete closure. Could happen to one or two of the other Tata plants, but unlikely.

5. Complete closure of one or more of the plants

Redcar : The worst possible outcome.
(Pic : ITV)

• Self-explanatory; everyone would be laid off and this would have a knock-on impact down the supply chain. The skills would go with them.
• Tata would scuttle a potential rival plant – so it's actually in their business interests to close Port Talbot, but when you factor in the costs of decontamination it might not be the best longer-term move.
• The UK would lose its primary steel-making ability, so for strategic economic reasons it's not in the UK's interest to let Port Talbot (or other large plants like Scunthorpe and Corby) close.
• Would need a long-term plan for the Port Talbot steelworks site, which – if future resale isn't considered as an option – includes decontamination, clearance etc.
• Would require massive social and economic regeneration efforts – on the scale of Cardiff Bay at the very least.
• Environmentally-speaking it would be the single biggest contribution to reductions in Wales' greenhouse gas emissions.
• There would be an opportunity to fully explore alternatives to steel-making and future-proof the Swansea Bay and Welsh economy for materials production of the future.

Verdict : I'd say that at the moment it's more unlikely than likely for Port Talbot though it could happen quickly if a solution isn't found. I think mothballing is more likely as Tata want to sell the business as a going concern. Less likely for the other Tata plants in Wales - though they would have to find alternative steel supplies.

Steps to Recovery?

A vision needs to be developed for a post-steelmaking Port Talbot;
making higher value products with steel could be the answer.
(Pic : dwell.com)

Until last week, Tata had a reputation in the area for being a good company to work for. That's been irreparably damaged, though from a hard-hearted point of view the writing was on the wall and it makes January's announcement look like jolly news in comparison.

The situation in the UK's steel industry was clearly worse than we were being told (if losing £1million a day at a single plant isn't bad enough - it's now said Tata's UK business is losing £2.5million a day). Tata's decision isn't even the worst case scenario as they could've justified a complete closure. Also, this is now about more than Port Talbot, and includes all of Tata's plants in Wales - like Trostre, Llanwern and Shotton - in addition to their plants in England.

There are short-term, medium-term and long-term considerations.

The short-term terms ones are simply to keep Tata's steelworks open – if a solution isn't found, steel-making in Port Talbot could reportedly finish as soon as the end of April/May when the next Tata board meeting is scheduled (as said, I suspect Tata's other plants would be able to find buyers). This should be the priority right now; energy costs and business rates are so peripheral to the issue they're barely worth bringing up. There actually needs to be a steelworks left!

The medium-term considerations require a strategy for manufacturing as well as stabilisation of both Tata's business and the steel market – which includes addressing long-standing problems on energy prices, business rates, Chinese steel dumping, pensions and innovation. The Welsh Government and National Assembly will have a vital role to play in this; whoever succeeds Edwina Hart will have to start work on Day 1.

Long-term, there'll need to be a vision for a Port Talbot beyond steel. If they get it right, there could be positives out of this. Port Talbot could easily become an R&D hub for experimental materials science (in collaboration with Swansea University), or the steelworks site could be diversified; for example, a container port or a pre-fabrication production line (i.e. homes and buildings). We can't just make steel as we'll struggle to compete in a globalised market; the true value comes from being able to make things with steel.

Unless Tata can find a buyer willing to put a restructuring plan into action, a state-backed management buy-out (perhaps with the EU Commission, Welsh and UK Governments underwriting a loan) sounds like the best option on the table and would be reminiscent of Tower Colliery but on an unprecedented scale. So far it's unclear whether any buy-out would include Llanwern (Llanwern and Port Talbot operate as a joint site) or whether the sites would be sold separately.

When it comes to steel-making I trust the opinions of managers, workers and union officials – who know the industry inside-out - over politicians and civil servants. If they're convinced they can make it work and the sums add up, they deserve the total support of government (even if it's still a risk).

My gut instinct is that the steel industry still has a future (as long as decisive action is taken) and I don't believe Port Talbot steelworks will be allowed to close completely. Regardless of what happens, significant job losses are inevitable and steel-making operations will be smaller than they've ever been – at least until the market recovers. I also wouldn't be surprised if the next crisis will revolve around the pension fund.

What impact could this have on the Assembly election?

The "black swan" of the 2016 election and EU referendum?
(Pic : National Assembly of Wales)

Although I said a few weeks ago the steel crisis was going to be an election issue anyway – and I'll probably get pilloried for bringing this up - as BBC Wales' Vaughan Roderick put it last week the sudden acceleration of events is a "black swan" that's caught the parties on the hop. There's more from Jac o' the North.

Labour and the Conservatives will face accusations of "not doing enough" for different reasons; the Conservatives for actively blocking things like EU tariffs on Chinese steel, Labour for consistently ruling out measures at Welsh Government level and not moving quickly enough on things like business rates. The Tories will probably come off worse due to Sajid Javid's behaviour and their previous inactivity - which has probably done more damage than anything the Welsh Government have control over. Expect Labour and the Conservatives to point fingers at each other as usual.

Plaid Cymru have plugged their own proposals (which revolve around state intervention) for months and went as far as sending a delegation to the EU Commission in February. They can say they've "got a plan". However, (and typically Plaid) accusations of fantasy economics threaten to stick because their plans sound cherry-picked to support their own arguments - which have now shifted from nationalisation to the creation of a tripartite government-private-workforce mutual (which sounds like a good idea). They can at least say they've treated this with a sense of urgency, have shown some ambition and have "been doing something".

The Lib Dems haven't had a single coherent policy on this, but they've raised the idea of a urban development corporation for Port Talbot (in the same vein as Newport Unlimited) as a vehicle for long-term regeneration of the area. The ghost of Vince Cable also recently called for the UK Government to take over Tata's pension fund : all sensible and practical ideas, but they don't have the same sense of urgency. The Greens have stressed steel's importance to the local economy....and the birds go tweet.

The joker in the pack is UKIP. They can, somewhat justifiably, say EU regulations are partly to blame for the lack of action on Chinese steel and complicate state intervention measures. EU action could, however, also help turn things around and there's a risk they're coming across as an opportunistic single-issue party obsessed with winning the EU referendum in June instead of coming up with anything constructive in the here and now. Many people will believe them, but many others will start to see through them.