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Indian steelmaker Tata Steel has sold its European long products arm to UK turnaround investment firm Greybull Capital, and is in the process of finding a buyer for its remaining UK assets.
With many question marks hanging over the economic and industrial strategies of any government after a “Brexit” – the term which has been coined to indicate that the UK will leave the EU after the vote on June 23 – Steel First analyses the challenges and opportunities that leaving the union could present for UK’s struggling steel industry.
Access to the single market
The EU single market is the UK’s biggest trading partner. In 2014, it accounted for 45% of UK exports of goods and services, worth £230 billion ($334 billion), and 53% of UK imports, worth £289 billion ($420 billion), according to a UK parliamentary briefing released in February.
The single market allows regulations and product standards to be harmonised across all 28 EU member states, removing tariffs between them.
“Given that steel is integrated across the value chain in Europe, there would be fewer positives than negatives for the UK steel industry if they vote to leave,” one European steel industry source told Steel First.
“For example, two-thirds of steel produced in Wales goes into Europe, and many producers with operations in the UK such as Celsa also have facilities elsewhere in mainland Europe,” he added.
The heads of steelmakers ArcelorMittal, ThyssenKrupp and Voestalpine were co-signatories to a letter last week urging the UK to remain part of the EU, arguing that an unravelling of the single market would decrease prosperity across EU industry.
Depending on the type of post-Brexit settlement that occurs, if that is the action decided, the UK could select one of many possible trade relationships with the EU, which is itself the descendant of the European Coal & Steel Community founded in 1951.
The result of the UK's referendum could have profound consequences for both the UK and the EU as a whole
Many Brexit advocates, such as former London mayor Boris Johnson, have suggested that multiple independent free trade deals would be the solution outside of the EU.
Meanwhile, free market advocacy group Economists for Brexit have suggested that World Trade Organisation (WTO) rules would suffice and that no future trade agreements (FTAs) would have to be agreed, arguing that the EU would have to offer the UK “most favoured nation” (MFN) terms.
MFN terms would mean that any concession the EU offers to one of its trading partners should also be applied to other partners, but it does not necessarily mean that tariffs or standards would be abolished on all products traded with the EU.
“Steel exporters would still have to follow EU product standards so, in practice, larger steelworks would be less affected by this,” Jonathan Lindsell – a former Brexit researcher at Eurosceptic UK think-tank Civitas and now a Remain campaigner – told Steel First.
Simon Boyd – md of UK structural steel engineering company ReidSteel and a regional chairman of Business for Britain, which is aligned with the official Brexit campaign group Vote Leave – believes that an “uneven playing field” exists across the EU.
“The single market makes it more difficult for steel companies such as ours to do business,” Boyd said, referring to small and medium-sized businesses that are still bound by single market regulations and unable to compete on even terms, regardless of whether they export to the EU.
Even EU single market membership does not guarantee barrier-free trade in Europe. Boyd noted that, in order to obtain the legal insurance required by French law to fulfil a contract to supply steel in the country, firms must have both an office with a paid secretary there, and use products which have satisfied French checking authorities.
However, other countries could benefit from increased trade, should the UK leave the EU, according to Ivan Dzvinka, a research associate at investment bank Eavex Capital in Kiev, Ukraine.
“As the UK is a big steel exporter mainly inside the EU, its exit from the union may lead to a decline in its trade volumes with the EU. This could potentially open up a niche where currently British steel is being sold – for Ukraine and other world exporters,” Dzvinka said.
A vote to leave the EU, by market consensus, would lead to the depreciation of sterling, which could boost UK steel exports but would hit investment.
“I expect that Brexit will bring changes to global steel prices, but rather through currency exchange rates – as, after Brexit, the pound’s exchange rate to other currencies may change significantly, and this will affect prices inside the UK and for their export-import trading partners,” one trader based in Moscow said.
Sources in the Chinese steel market told Steel First that the most direct effect of a Brexit may be the appreciation of the yuan against both the euro and sterling, which would “put great pressures” on Chinese steel exports into Europe.
Global ratings agency Standard & Poor’s pointed to “a potential sharp depreciation in sterling” and “a likely reduction in both domestic and foreign direct investment” as shorter-term challenges of Brexit in a report released on June 1.
“A Brexit would result in large capital outflows – potentially going to the US dollar,” Jason Schenker, analyst at Prestige Economics, told Steel First at the Bureau of International Recycling (BIR) conference in Berlin on May 30.
However, such capital outflows appear unlikely “due to the UK’s institutional credibility, independent monetary policy and diversified economy – but we cannot rule it out”, a paper from UK investment company BlackRock in March said.
The US dollar has slightly weakened against sterling, with the official exchange rate at $1 to £0.69 on June 9, compared with $1 to £0.70 three months earlier, according to Oanda.com.
“Even if the pound [sterling] did fall in value [after Brexit], this would not last, and any short-term blip where imports became more expensive would be offset by the rise in exports,” Boyd said.
Brexit would be “a shot in the arm for those UK companies like ours that rely on [exports] across the world, which would go some way to help balance out our enormous trade deficit with the EU”, he added.
Gareth Stace, director of industry body UK Steel, is adamant that remaining a member of the EU will bring more positives for the UK steel industry.
“While a weaker pound [sterling] would help exports, it is not the sole issue at hand, and it would be short-sighted and naïve to think so,” Stace told Steel First.
UK Prime Minister David Cameron addressed the European Council before the referendum
Tariffs and protectionism
One such pressing issue is how to tackle global steel overcapacity and cheap imports from a number of countries, including China.
Campaigners for leaving the EU believe that a Brexit could allow the steel industry to benefit from the UK controlling its own trade policy.
“Britain would be free to level anti-dumping [AD] measures against China, or to raise its overall external tariff on steel, hampering all other states’ exports to Britain,” Lindsell said. “This is very unlikely, however, looking at the main [campaign] groups that could influence post-Brexit policy.”
One UK steel trader doubted there would be any application of tariffs and quotas on EU mills in light of a Brexit, but said that imports from non-EU regions could be targeted.
“Brazil, the CIS, China and Iran almost certainly would face heavy trade restrictions, and maybe Turkey as well,” he said.
Another point of contention has been whether the EU should remove its currently-used lesser-duty rule (LDR), which means that authorities must set the rate of any AD duties at the lower of two calculated margins – the dumping and the injury margins.
A motion calling for the UK government to support the abolition of the LDR – and to publish a full industrial strategy, including a national procurement policy to use steel produced in the UK wherever possible – was defeated in the UK parliament on February 29.
The European Commission said on March 16 that it intends to cut the length of the consultation process for AD investigations by as much as two months, as well as urging member states – the UK and others – to vote to scrap the LDR.
“Looking at anti-dumping, even if a UK outside of the EU could investigate cheap imports and threats of injury to UK steelmakers faster than the EU currently does, the fact is that it is the UK government that has effectively been blocking EU action,” Stace said.
“So, based on that track record, who’s to say that this government would impose tariffs at a higher level than we currently see at the European level?” he said.
The aforementioned European industry source agreed.
“I can’t imagine that the UK would go any way other than more openness and free markets, which is positive – but not in the context of anti-dumping,” the source said.
But not all UK steel producers are in favour of protectionist trade measures.
“Having barriers on steel imports increases the domestic prices for steel which then has an effect on downstream customers,” Liberty House ceo Sanjeev Gupta, who supports the UK remaining in the EU, told Steel First sister title Metal Bulletin Magazine.
The UK’s light-touch stance on AD, which it seems would be likely to continue after a Brexit, has also sparked discussions over the expiration of China’s non-market economy status in December 2016 at the WTO.
The UK government currently supports granting market economy status (MES) to China, which would mean using Chinese domestic pricing data to calculate AD margins.
“Granting market economy status to China in the absence of important safeguards would significantly diminish the capacity of the EU to guard against Chinese dumping, which has the potential to destroy the UK steel industry, so it must not be granted until the criteria are objectively met,” UK shadow business secretary Angela Eagle said in a debate in the UK Parliament on February 29.
The European Parliament passed a resolution to reject MES for China in May, but the European Commission may approve Chinese MES in a deal which could include exemptions for certain sectors, such as the steel industry, Yuriy Rudyuk, partner at Brussels law firm Van Bael & Bellis, said in June.
State aid rules
The EU regulates both the circumstances and the amount of public investment that a national government can put forward to help a struggling industry such as steel, although any direct investment below €200,000 ($227,550) is not subject to prior authorisation.
Leaving the EU would therefore allow the UK government to escape EU state aid rules and “help the industry either by nationalisation, indirect subsidies such as R&D [research and development] grants, or a preferential energy cost”, Lindsell told Steel First.
However, should the UK vote to remain in the EU, there are a number of measures that the government could take to support the UK steel industry which would not fall foul of EU state aid rules. These include investments in green technology to facilitate low-carbon steelmaking and R&D, the UK National Trade Union Steel Coordinating Committee said.
The UK trade union umbrella body the Trades Union Congress (TUC) doubts that a post-Brexit government would either nationalise or subsidise the industry, saying that “it is the free-market ideology, which so many Brexit backers support, that has brought British steel to this perilous position”.
However, some Brexit campaigners have emphasised that, although they believe in free markets, the UK government should have the power to grant state aid to its steel industry when necessary.
“I am not an advocate for tariffs and the like, but I do believe that, on occasion, state aid should be provided where there are exceptional circumstances,” Boyd said.
The UK government has offered a commercial support package to the buyer of Tata UK’s assets, which include the 4.9 million-tpy Port Talbot steelworks
Meanwhile, the UK justice secretary and pro-Brexit campaigner Michael Gove has said that the government would be open to giving state aid to the steel industry if the UK left the EU.
In April, the UK government and the regional assembly in Wales revealed a commercial support package “worth hundreds of millions of pounds [sterling]” to potential buyers of Tata Steel UK. This will mainly involve debt financing, but could also come in the form of a minority equity stake as big as 25%, without acquiring “a material element of control over the business”.
It is unclear whether this offer would stand should the UK vote to leave the EU on June 23, but the UK government would be free to intervene where appropriate to ensure the future of the industry, Boyd said.
Meanwhile, a Chinese market participant told Steel First that a Brexit would “encourage” Chinese steelmaker Hebei Iron & Steel, which is rumoured to be interested in purchasing Tata’s UK assets, “to win the bid”.
The UK has the highest industrial electricity prices in the EU, with steelmakers paying around £80-90 ($116-131) per MWh, statistics from UK industry representative Energy Intensive Users Group (EIUG) have showed.
But several environmental levies on industrial energy costs have actually been set by the UK government, and not the EU.
Of the £80-90 ($116-131) per MWh, £14 ($20) per MWh is due to the UK’s carbon price floor levy (CPF) and the EU’s emissions trading system (ETS).
Another £20 ($29) per MWh can be attributed to renewable energy subsidies from the UK-enforced Renewables Obligation (RO) and Feed-in Tariffs (FITs) – support schemes for large-scale and small-scale renewable electricity generation, respectively.
If British people vote to remain in the EU, the government would still require approval from the EU to remove such UK-specific energy levies, since such a decision could be seen as state aid in favour of certain industries, Liberty House’s Gupta said.
After agreement with the European Commission, energy intensive industries (EII) will be exempt from the policy costs of RO and FITs from April 2017 – rather than receiving backdated government compensation as they currently do, UK chancellor George Osborne said last November.
However, for some, this can lead to confusion and delays in the policy process.
“Once you decide to be part of a union, you will also have to defer to collective decisions,” Gupta said. “Certainly, for our specific industry, energy policy would be much easier if we didn’t have to go through Brussels.”
Regardless of the result of the vote on June 23, the UK’s steel sector has several obstacles to hurdle if it is to revive itself from its existential crisis.
Should the UK remain an EU member, it will enter into a new relationship with the 28-member bloc which was agreed as part of UK Prime Minister David Cameron’s EU negotiations before the vote.
In this new agreement, there is little evidence to suggest that government policy on the UK steel industry would change, as industrial policy was not an area covered in the negotiations.
Those in favour of Brexit argue that, by regaining full control of its trade, energy and industrial policies, the UK government would have greater flexibility in supporting its steel industry without being constrained by regulations set and controlled by the EU.
But in practice, it remains to be seen if a post-Brexit British government would choose to offer more or less support to its steel industry than it currently does as an EU member.
The consensus of economic research appears to indicate that EU withdrawal would offer short-term economic difficulties, while the longer-term effect would depend on which trade agreement the UK decided to pursue.
One post-Brexit scenario from reformist think-tank Open Europe estimates that the UK’s gross domestic product (GDP) would be 0.60% higher in 2030 if it leaves the EU. However, this would require an open free market economic approach, a liberal immigration policy and an FTA with the EU, it said in a report in April.
But if such an approach is implemented by a politically right-wing Conservative government keen to boost its post-Brexit GDP and investor confidence, it would be difficult to imagine that it would simultaneously support its steel industry through protectionist anti-dumping duties and generous state aid handouts.
Therefore, a post-Brexit UK steel industry may find itself equally bereft of state support and more exposed to cheaper imports from China – although the cost-effectiveness of steel imports will also depend on the value of sterling and how far it depreciates against the euro, the dollar and the yuan.
Alona Yunda in London and Veronica Qin in Shanghai also contributed to this report.
With only two weeks to go until the UK holds a referendum on its continued membership of the EU, the country’s steel industry is in the midst of an existential crisis.