Why the Chinese want loss-making British Steel

The Chinese rescue of British Steel is replete with irony and creates more questions than answers.

The biggest irony is that a Chinese company, Jingye, is buying this company when it was the dumping of cheap Chinese steel that rendered so many European steel manufacturers uncompetitive.

And that leads into the questions. The first of these is what makes Jingye think that it can make the British Steel plant at Scunthorpe, which accounts for one-third of UK steel production, profitable.

A flood of cheap Chinese steel has been widely blamed for curbing prices in Europe over the past decade
Image: A flood of cheap Chinese steel has been widely blamed for curbing prices in Europe

After all, at present, not a single blast furnace in the whole of Europe is making a profit. Scunthorpe, which is currently losing £1m every day, is among the more heavily loss-making.

:: British Steel rescue deal ‘to preserve thousands of jobs’

Getting this venture to turn a profit, on a long-term sustainable basis, proved beyond the company’s previous owner, Greybull Capital, which blamed Brexit when the company went bust in May this year.

Ataer Holding, the investment arm of Turkey’s military pension fund, was in exclusive negotiations with EY, the Official Receiver, for three months during which time it had a good look at the books.

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It, too, decided that this was not a business that could be turned around and walked away from talks when its period of exclusivity ended late last month.

Yet Jingye has seen something in British Steel that has convinced it that it can make a go of these operations.

What that is, precisely, is hard to know and not least because not much is known about Jingye itself other than that it is based 200 miles to the south-west of Beijing and is part of a conglomerate that also has interests in the hotel, chemicals, pharmaceuticals and retail sector and which employs 23,000 people in total.

Its website recounts how the steel it has made has been used in Beijing Daxing International Airport and the Three Gorges Project, a giant hydroelectric dam. There are, however, no accounts available.

This photo taken on June 28, 2019 shows the terminal of the new Beijing Daxing International Airport. - Beijing is set to open an eye-catching multi-billion dollar airport resembling a massive shining starfish, to accommodate soaring air traffic in China and celebrate the Communist government's 70th anniversary in power. (Photo by STR / AFP) / China OUT / To go with China-Aviation, Focus by Patrick Baert        (Photo credit should read STR/AFP/Getty Images)
Image: Jingye’s interests have included the construction of the new Daxing International Airport in Beijing

The assumption is that Jingye, a supplier to China Railway Group, has a particular interest in some of the products in which British Steel specialises and most notably railway tracks.

It is possible that British Steel will have some expertise that Jingye wishes to deploy across its domestic businesses. The workforce has also been told today that Jingye sees British Steel’s products, which also include specialist wire rod, as eminently exportable.

There will also be a suspicion, however, that Jingye has seen an opportunity to trade off the excellent reputation that British-made steel enjoys. There is a concern in some quarters that the company wishes to bring cheap Chinese steel into Britain, roll it in Scunthorpe and then slap a ‘Made In Britain’ label on it, before selling it for export.

A second question is how much Jingye intends to invest in the company and where the money will come from. Paul McBean, of the Community union and the British Steel multi-union chair, told Sky News today that a figure of £1.2bn had been mentioned by Li Ganpo, the founder and chairman of Jingye.

There is also a suggestion that loan guarantees worth some £300m have been provided by the government.

The Scunthorpe steel plant
Image: The Scunthorpe steel plant has four blast furnaces of which only three are fully operational

How far this will go remains to be seen. It is understood from unions at the plant that, with only three of Scunthorpe’s four blast furnaces – the so-called ‘Four Queens’, Mary, Bess, Anne and Victoria – operational, an early priority will be to get them all up and running.

Another aim, apparently, is to boost steel production from 2.5 million tonnes annually to more than 3 million.

As steelmaking is such a capital intensive business, the amount that Jingye is prepared to invest will be crucial, particularly with such ambitious targets.

Mr McBean said: “He [Mr Li] has bought us to enhance their company. He’s told us we’ve had three owners in the last ten years and that’s not good for the steel business.

scunthorpe
Paul McBean of the Community Union, tells Sky’s Gerrard Tubb about the assurances he has got from British Steel’s new owner.

“[He’s said] ‘I can assure you that I’m in for the long term with massive investment and I’m not going anywhere’.”

A third question is how the United States will react. Mr Li is a former official of the Chinese Communist Party and references abound on the company website to the Communist revolution of 1949.

The Trump administration has been leaning on the UK not to allow Huawei, the Chinese company, into the roll-out of 5G services in this country. One can only guess at how it will react to a major Chinese company, with close links to the Communist party, buying a major player in a strategic UK industry like steel.

The fourth question is the extent to which the government has been involved in this deal behind the scenes.

A £120m taxpayer loan was given to the company to stave off collapse in April this year, shortly before it collapsed, which is unlikely to be repaid.

The government has also spent an estimated £170m keeping British Steel operational while the Official Receiver sought a buyer. That, too, is unlikely to be returned.

And all this at the time of a general election. Entrepreneur Sanjeev Gupta’s Liberty Steel Group, which owns several UK plants, had also been interested in buying British Steel.

However, had he been successful, the plan would have been to pivot away from traditional steel-making with blast furnaces towards steel recycling with electric arc furnaces. This would have kept the business going but probably not with as many employees remaining as under the Chinese takeover.

So there must also be a suspicion that the deal with Jingye has been cut for reasons of political expediency.

Should the Chinese fail to come up with the investment that was promised to the unions today, those suspicions will only intensify, particularly given the recent chequered ownership history of this company.

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