Why did the government take over British Steel – and was it a good idea?

Has British Steel been nationalised?

Not quite. Earlier this month, the government passed an emergency law to take operational control of the company, but it doesn’t actually own it. That’s an uneasy, temporary solution to a chronic problem, and it’s not yet clear whether the state will find a willing buyer – or at least someone who’ll pay a nominal sum to take on the bulk of British Steel’s debt pile and operating losses – or whether full state ownership beckons. The government stepped in to save 3,500 jobs in Scunthorpe, and because the Chinese-owned British Steel plant there is the last remaining manufacturer of “virgin” steel in the UK (meaning steel made from scratch from raw materials, as opposed to steel made from recycled scrap). According to Jonathan Reynolds, the business secretary, “it’s never been more important” to build domestic resilience in supply chains, adding that it was “in the national interest to help secure UK steel-making for the future”. Eventual full nationalisation is the “likely option”, says Reynolds.

What’s the current situation?

The two sides – Chinese owner Jingye and the government – had been negotiating for months about a taxpayer-funded package to help British Steel invest in greener technology. Jingye rejected an offer of £500 million, insisting it needed £1 billion towards building two less carbon-intensive electric arc furnaces (that are used to make recycled steel, but not virgin). Earlier this month, there appears to have been a sudden and dramatic loss of confidence within Whitehall in Jingye’s good faith and willingness to keep the loss-making plant running in the face of Donald Trump’s 25% tariffs on steel. Once furnaces cool it’s prohibitively expensive to start them up again – meaning it was now or never for the government to act. Closing the two Scunthorpe furnaces would have left the UK as the only G7 economy without the ability to manufacture its own virgin steel.

Does that matter?

Almost the whole of parliament agreed that it does. Others are more sceptical. There are many strands to the pro-nationalisation drive, says Daniel Finkelstein in The Times, but the most important concerns national security and defence. It has been widely accepted that we must be able to make virgin steel for our defence sector. And steel would clearly be important in the event of a war. “But so would lots of things,” says Finkelstein. Microchips, rare-earth elements, propellants, batteries, imaging equipment, tracking systems – we import them all. It’s unclear why Britain’s tiny sliver of global steel production – it accounts for less than 0.3% of it – would help much, especially if cut off from supplies of iron ore and coking coal. In the House of Lords debate, Daniel Hannan put it like this: “to have security of supply, whether of steel or anything else, is to source from the widest possible variety of sources so that you are not subject to a localised shock or disruption, which might as easily happen in your own territory as anywhere else”. As such, the UK’s position is “extremely comfortable”, in that no foreign country accounts for more than 15% of imports – and the four biggest are our friendly neighbours Germany, Spain, the Netherlands and Belgium. “If, in some bizarre world, we were blockaded by the EU, we would still be able to import from Algeria, Turkey, Vietnam and South Korea before we got to China, which accounts for only 7%” of UK steel imports.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

How much is all this costing?

Even without nationalisation, keeping British Steel’s operations running is going to cost the Treasury hundreds of millions, at least, since it’s a highly loss-making business. Jingye says that as of March, British Steel was losing more than £700,000 a day and that it was no longer “financially viable”. That figure is consistent with the most recent accounts, which show that British Steel made a pre-tax loss of £231 million in 2023 (and an even bigger loss in 2022, of £408 million on turnover of £1.7 billion). Moreover, it has a massive debt pile – £736 million at the end of 2023, and likely to be higher now, given the surge in the prices of raw materials and energy costs. The government is expecting to cover annual losses of around £230 million, but reckons the price is worth it, compared with the cost of the company’s complete collapse, which (according to Reynolds) would be “easily over £1 billion”.

What happens next?

That’s very unclear. The government may have felt forced to step in, but the current situation can only be a stopgap. The bottom line is that the furnaces are “old, unprofitable and very polluting, and will have to close if the UK is to meet its net-zero climate targets”, says the Financial Times. Ministers hope to find a private-sector buyer rather than nationalise the business, but that might be a vain hope. There may be viable private suitors, especially if the government chucks in a £500 million subsidy and promises action to help reduce energy costs. “But to get an investment deal over the line, ministers need to offer a genuinely sustainable and profitable business case for Britain’s steel industry. That may yet be the toughest thing to pull off.”

Shouldn’t British Steel just be nationalised?

No, says The Economist. The government takeover smacks of desperation and reveals they have no sensible plan. Reynolds argues that the steel industry can have an “enormous role” in driving Labour’s growth agenda. “Yet the notion that propping up an ailing sector will somehow boost Britain’s productivity is bizarre.” Yes, we need to build lots of houses, railways and wind turbines. But that can be done using cheaper metals from elsewhere, with no need for state ownership. Nationalising British Steel looks like defence spending or employment subsidy by another name. If so, there would be better ways to spend the money.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.