HomeCompany NewsParisian politics divide deal for British Steel

Parisian politics divide deal for British Steel

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Guest Writer: Daniel Pyke – Rail expert and railway technical marketing professional

Early March was a turbulent time for the UK, with the unfolding virus situation spreading ever closer and rumours about lockdown timing were abound. However, this was not the only important news being watched from China, especially for those involved in supplying rail and steel in the UK.

On 9 March, a long-awaited agreement was made by a Chinese company (Jingye) to buy beleaguered British Steel, which supplies over 90 per cent of the rail for Network Rail. However, some may say this deal has more politics surrounding it than an entire season of ‘The West Wing’.

Greybull boom – and bust

In June 2016, Greybull Capital purchased British Steel from Tata Steel for £1. The operations purchased included mills in Middlesbrough and Skinningrove, Teesside, and Hayange, France, as well as its steel production plants and mills in Scunthorpe. Also included in the sale were a York-based consultancy business and an engineering company.

In an apparent miracle business turnaround, the steel operations went from losing £79 million in Financial Year (FY)16 to a profit of £47 million in FY17, growing further still in FY18.

In October 2017, the group expanded with the acquisition of FNsteel, a Dutch wire processing company, adding just under 300 employees to the workforce. In May 2019, a deal was announced by the parent company to purchase Ascoval, a distressed French steelmaker with around 270 employees. This deal sourced 47 million Euros from the French state and local government bodies to match 47 million euros of funding from British Steel’s parent company.

From initial appearances, the future looked bright – almost as bright as the company’s orange logo.

All was not quite as rosy as appearances portrayed. Just weeks after posting its record profits of £68 million, the company needed emergency government loans of £120 million just to stay afloat. Only two weeks later, further emergency government loans of £30 million were requested, but this time were not provided, and British Steel Ltd was forced into liquidation on 22 May 2019.

Disused blast furnaces mean Hayange is reliant on imported steel.

There may, in future, be a thorough investigation into just how a seemingly profitable company found itself in such dire straits, but none has yet been announced due to the sale process being carried out. What has come to light so far makes for eyewatering reading for those left picking up the pieces – largely the taxpayer and the employees.

Large high-interest loans (nine per cent above bank rates) were made to the company from its offshore parent, requiring a £17 million interest payment each year. A directors’ pay-out of £3.3 million was recorded in 2018 and Greybull charged a £3 million management fee each year.

Perhaps the biggest questions lie around how carbon credits, essential for the business operation, were sold to keep the company afloat. This built up a £120 million bill it had no way of funding with no escape from the deadline. In essence, the company was loaded with debt until it could be hidden no longer, and its collapse was inevitable.

Unusually, despite being forced into liquidation, British Steel was permitted to continue to trade, limping along in a government-assisted liquidation limbo, whilst a buyer was sought for all its operations. Due to how the business was structured, only the UK steel operations were forced into liquidation, with the consultancy business, and its French rail and Dutch wire operations, continuing to trade as normal.

Some may ask: “Why was the UK steel business allowed to continue to trade?” Part of the answer lies in the fact that many of the steel plant operations cannot be simply switched off without incurring massive rebuild costs, which would have crippled any potential sale of the whole business. Blast furnaces cannot simply be switched on and off.

Turkish interest

In August 2019, the first glimpse of progress in the sale of the business became visible. After considering several bids, a Turkish company Oyak (via a holding company Ataer) emerged as the first-choice buyer for the steel business. Portrayed by the media as the Turkish military pension fund, the group also happened to own the largest Turkish steel company.

In a separate transaction on 30 August, the consultancy business (TSP Projects) was sold to Systra as an ongoing business to continue to operate in both rail and other construction project areas.

In October 2019, after 10 weeks of exclusive negotiations, the Oyak bid stalled amid reports that British Steel’s suppliers had refused to accept lower prices, sinking the deal. The Brexit brinkmanship being played through parliament may have also played its part, along with emerging allegations of corruption and mistreatment of workers, as well as uncomfortable links with Turkish military actions in Syria, all tarnishing the deal’s appearance.

Chinese offer

With the government desperate to avoid massive job losses in a key Brexit-voting constituency on the run up to a December general election, a new surprise contender emerged from China – Jingye.

Jingye group is a conglomerate of companies including steel, pharmaceuticals and hotels, led by a former Communist party official, Li Gangpo. Jingye emerged the hot favourite to save British Steel, securing a government support package of £300 million in the process by promising to invest £1.2 billion to reinvigorate the UK-based steel maker. Jingye offered to buy the whole of the remaining British Steel group, which included its French rail mill and Dutch wire operations.

However, the deal was not yet done, and more twists and turns remained on the road, or indeed railway, to redemption. The deal required approval from various government and EU bodies – and the thought of China owning key strategic industry did not sit comfortably with some.

In mid-November, the European steel association (EUROFER) raised objections to the deal, arguing it was yet another example of Chinas practice of “steel dumping” into the European Union, and that the UK government support as part of the deal might flout state-aid rules.

Rails ready for despatch.
Rolling rails at Scunthorpe.

French politics (and Greybull again)

They say a week is a long time in politics – the same is true in steel sometimes, too. Just a week after the European steel association publicly threatened to block the steel deal, a rail-related coup also emerged.

Ascoval, the small, French electric steelmaker bought out of administration by the owners of British Steel (Greybull) just weeks before the UK steel business entered liquidation, pulled off a seemingly impossible ask. Ascoval announced it had secured a four-year deal with French state-owned railway group SNCF to supply over half a million tonnes of steel starting in September 2020. The steel was, of course, to be supplied to the Hayange rail mill.

Whilst, on the surface, that may initially sound like good news for the rescue of British Steel, the direct opposite was true. Due to the fact only the UK steel operations of British Steel were in liquidation, the Hayange rail plant remained solvent and owned by Greybull. So, a government-supported steelmaker, controlled by Greybull, won a multi-year contract for the majority of steel supply to the French railway via a rail mill also owned by Greybull.

It is worth noting that, when the contract was announced, Ascoval did not produce rail steel and, indeed, did not have the production machines needed to supply it. The reader can decide whether that sounds a little unusual.

Days later, in December, adverts emerged in the press for the sale of a rail mill based in North East France. It was not too difficult to guess which mill this was. These adverts were not placed by the liquidator but were, reportedly, placed by well-meaning local managers eager to secure a Plan B should the Jingye deal fail. Well, that was the story.

As might be expected, both Jingye and British Steel personnel were furious at the unfolding French revolt. UK representation was installed on the French board of directors in short order, but the damage was done. Jingye founder Li Ganpo even took to the French press to put forward plans to develop the site, attempting to woo the unions to secure backing for his bid for the plant. The French rail business had remained consistently profitable and so formed an attractive and important part of the deal for Jingye, as well as being a base within the European Union to reduce rail business Brexit risks.

In January, just hours before Brexit day, another trade row raged in the halls of politics. It was reported that French finance minister Bruno Le Maire told Chancellor Sajid Javid the Paris government would not sign off on a deal and there was “no way” the £50 million sale of British Steel to a Chinese buyer would be supported by the French government, landing a heavy blow to the deal’s chances of success.

Takeover details

Later in January, the UK workers were presented with the stark sacrifices any purchase by Jingye would involve. It was dressed up as a negotiation between unions and the new owners, but only one side had any real power. The deal would require a further reduction in workforce of around 450 jobs and a significant erosion of terms and conditions. Indeed, by negotiating to protect blue-collar workers’ pay, the unions negotiated up the number of job losses required, and white-collar staff were hit with a well disguised 10-12 per cent reduction in their benefits over two years.

Reheated steel ready for rolling at Hayange, France.
Rails cooling – Hayange.

On 9 March 2020, some 292 days after British Steel (Ltd) went into liquidation, the sale of British Steel’s assets was completed, saving 3,200 jobs and with Jingye pledging to invest £1.2 billion over the coming decade.

However, the rescue left a bitter taste in the mouths of the 450 people not offered employment at the new company with an old name. Hundreds of workers, given at best a week’s notice, were dropped into the job market abyss just days before the Covid lockdown commenced. Those trawling the job adverts were further dismayed to see British Steel procurement vacancies listed with desirable attributes including speaking Mandarin, reinforcing rumours that sourcing from the far east was a key cost-saving strategy for the company.

On many fronts, it was not quite the company-saving deal originally envisaged. It did not include several parts of the UK steel distribution business, totalling around 100 employees, which were closed or sold separately. In addition, and importantly for this readership, it did not include the profitable French rail business, totalling around 450 employees. Both changes turned colleagues into competitors overnight.

Looking deeper into the rail business divorce, it was a difficult time for both British and French rail businesses. The French rail business was rebranded and relaunched as “France Rail Industry” celebrating its departure from British Steel in its initial announcements. However, it soon found itself baulking at the new commercial price for steel supply from Scunthorpe.

The result was all steel flows (around 400,000 tonnes per year) from Scunthorpe to the French rail mill stopped and have, at the time of writing, not resumed, nearly three months later.

With only a few months’ steel supply held, the French rail mill is now increasingly reliant on imported steel from elsewhere. This steel is shipped from either Germany, which is of insufficient size to produce the longest rails customers want, or from low-cost sources in India. The French steel maker Ascoval does not yet have the capability to supply. It is somewhat ironic that a deal which was partly scuppered by French politics over concerns of handing control of a strategic asset to Chinese owners, now relies on imports from India and Germany instead of from the UK.

Current situation

In a quirk of Covid fate, the lockdown caused the closure of the French rail facility for three weeks. It has since only partially reopened, whereas the UK operations remained in production. This has eased the short-term steel sourcing supply challenge, at least temporarily, for the French rail mill whilst its final buyers are decided and the necessary French government approvals sought. It is rumoured that the deal should be completed by August.

Arguably, British Steel’s UK operations came off worst in the separation. It needs to find a profitable home for the steel volumes that were destined for France, quite a challenge in the current climates and doubly so once outside the EU, with whatever trade barriers are erected.

The UK rail mill, although arguably more efficient, does not offer the breadth of products that the older but better-invested French facility does. Due to the split in businesses, British Steel lost around 60 per cent of its rail capacity but over 90 per cent of its product range and the entirety of its heat-treated rail capability. Although investment in the Scunthorpe rail mill has been promised, which will add a heat treatment facility, no date for the project has yet been announced, leaving it at a significant disadvantage if trying to compete on the world stage.

Looking at the impacts on the UK’s rail industry, they are numerous but not all negative. The potential loss of 300,000 tonnes of regular freight to the continent each year is likely to put a dent in the freight statistics – at least in the metals area. However, the extra European steel freight flows will offset this, for continental operators at least. UK rail networks, both large and small, also get a new rail supplier (Hayange) on their doorstep, with proven routes into the UK, which will be eager to make its mark on the UK market.

Network Rail perhaps gets to enjoy three benefits. First, the second reincarnation of British Steel ensures that it will have locally available rail and it will continue to enjoy the levels of service with which other suppliers cannot currently compete.

Secondly, the promised investment in UK rail production facilities will likely bring greater levels of product choice.

And lastly, but by no means least, Network Rail now has another approved supplier to source from on its doorstep, reducing reliance on one key supplier. Whether, and to what degree, the last option is exercised is largely down to politics once again.

In the current turbulent times with Brexit deals looming and protectionism rife, it is a brave person who can predict the future fortunes of British Steel, but it will certainly be an interesting one to watch.

Steel blooms from Scunthorpe awaiting rolling at Hayange.
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