Should Welsh Government intervene on Welsh steel?

Gerald Holtham and Adam Price explore the options for the future of steel in Wales.

What would it mean for Wales if steel went the same way as coal? Tata steel employs thousands of workers around Wales and companies in its supply chain employ thousands more.  The steel industry provides several percentages points of total Welsh output or GVA. If the industry failed, Wales would be a lot poorer. Workers would find other jobs eventually but after how long and would those jobs be as skilled and well paid as their current ones? It seems most unlikely.

If steel were doomed to be perpetually unprofitable in the UK, an industry of yesterday like making stagecoaches or sealing wax, there would be no help for it. We would have to grit our teeth and move on.  But that is most unlikely to be the case.  The industry faces temporary problems from a global slump in demand and the Chinese dumping surplus steel.  These things will pass and steel, especially speciality steels for modern applications, will remain an essential element in modern industrial society.  With the right investment steel should have a future in Wales.

If Tata cannot ride out the storm, it makes perfect sense for the Welsh Government to come to the rescue – not to bail out a lame duck but in a joint venture with Tata to weather the tough period and ensure Welsh steel is fighting fit to compete when the upturn comes.

After all, a private company like Tata ultimately looks to profit to justify its operations – and profits there must be. From a community viewpoint, though, the profits in the supply chain that do not accrue to the company itself are just as important.  And if workers can find alternative employment only at lower wages, their wage losses matter too. The social benefits of keeping the plant going are therefore greater, much greater, than the profit made by one company. It follows that it makes perfect sense for the government to accept a lower rate of return on investment than the company would or to be more patient in financing a project through a temporary slump.

Under EU rules, the state is not allowed to subsidise a domestic steel industry. But the same restraints do not necessarily apply – at least not quite in the same way – if the industry is in state hands.  There are EU precedents for temporary nationalisation to save an operation.  The government of Lower Saxony in Germany did it in 1998 and eventually resold the works at a profit.  The Italian government has done it as recently as 2014.  The Scottish Government is reportedly considering it for Tata’s two moth-balled plants in Motherwell and Clydebridge.

Now the Welsh Government hasn’t got unlimited money and does not know how to run a steel business. But if it could work out a medium–term strategy along with Tata it could get the company to hive off its Welsh operations – Shotton, Trostre, Llanwern and Port Talbot .  Together these plants represent an entire portfolio of products, including some of the most cutting-edge in the world: dent-resistant steels for the car industry, anti-corrosive steel perfect for those tidal lagoons and a sort of steel paint that generates solar energy, developed jointly with Swansea University’s material scientists. Tata’s Welsh holdings could be structured as a joint venture with the Welsh public sector taking a majority interest while Tata continued to operate the plants.  The money the Welsh Government put in to fund taking the interest would not go just to finance operating losses but for investment to restructure the business.

There are, after all, several potentially exciting projects at Port Talbot.  The company has secured planning permission to build a much larger power station onsite using gas produced in the production process to generate electricity. There are also long-standing plans to exploit the 35 million tonnes of coal lying almost underneath the steel plant; that would save shipping coal thousands of miles from Australia or Brazil, giving it a unique advantage in the European steel industry.  Either development might reduce costs and raise revenue contributing to higher returns in future.

Could the Welsh Government afford the cost of taking a stake big enough to finance such developments? It has an annual capital budget of £1 1/4billion. It must ask the question whether it has a better use for, say, a tenth of that budget for a couple of years or one that will create more jobs. It could reduce the price by giving Tata a buy-back option on the JV so it can reassume control at an agreed price. It could encourage the local authority to take a stake,  which could be financed by a local authority bond – and even explore the employee stock ownership plans supported by steel unions in the US.  A way could be found to reduce the business rates bill without infringing state aid rules. With a clear plan and serious public support other equity investors could probably be found for complementary projects.

Perhaps none of that will be necessary and Tata will find its own way through. Yet in the worst case, surely Wales does not have to be a passive mourner at a funeral. It could be an energetic para-medic rescuing the patient from a temporary seizure enabling him to lead a long and prosperous life. It will take energy, hard discussions with the company, a lot of ingenuity and some money too.  Time to start thinking and planning now.

Gerald Holtham is an IWA Trustee and Managing Partner of Cadwyn Capital LLP. Adam Price is a former Plaid Cymru Member of Parliament for Carmarthen East and Dinefwr and is a candidate for the Carmarthen East and Dinefwr seat at the next assembly election in May. This piece first appeared in the Western Mail.

8 thoughts on “Should Welsh Government intervene on Welsh steel?

  1. If the Welsh government can intervene on Welsh steel in Port Talbot shouldn’t it also be duty bound to intervene on Welsh nuclear in Anglesey to bring about the cancellation of New Wylfa.

    Or does this ‘new thinking’ just apply to jobs and businesses in South Wales?

  2. If you throw a few random things together, maybe there are solutions, because we are committing to spending on infrastructure and other things here in Wales and maybe we need to find allowable linkages that won’t break any rules. Looking at things like the City regions with commitments to greater than £1bn investment and the new metro system, perhaps other ideas as well such as an upgrade of mainline tracks instead of new M4 relief road or electrication – high speed rails etc – new rail lines could be needed everywhere, new rolling stocks etc, plenty of steel requirements in the next five to ten years and investment needed for them. We would benefit from a steel maker that we could work in partnership with and maybe Tata might share some mutual interests and benefits from working together on our Metro/Infrastructure and maybe a link to a Swansea Bay equivalent in return for a partnership enterprise linked to the cost of the steel required – could we hedge and place potential advanced orders for materials – commit to some new R&D spemding for new materials and alloys (that would be a technology investment, that sounds better than a blind subsidy) with all sorts of agreed payback routes for investments etc?

    Could Swansea University pay Tata for some R&D – Tata has very extensive R&D capabilities. Lots of routes to funnel investments potentially, that might be in our long term interests in a broader fashion?

  3. Corus went from 10p per share and near bankruptcy in 2003 (when international market conditions were relatively much better than now!) to 608p four years later when Tata took over – a damn good turnaround. It is fundamentally a sound business in good shape.

    But industrialists are past masters at wringing their hands and getting dozy politicians to hand over taxpayers money which somehow never gets seen again. WG is particularly gullible – remember the definition of insanity – doing the same thing over and over again and wondering why you get the same outcome.

    In this instance if WG is to gamble with our cash then simply play hard ball and wait for the fire sale when the share price goes through floor and then buy in. Once that is done, manage our destiny by changing the rules and establishing trade barriers Europe wide – this must be inevitable as all steel making countries in the EU are feeling the pinch. (The governments of India, China, Indonesia, Brazil etc wouldn’t bat an eyelid in doing this!) As the share price rises, sell out and make a healthy profit. This would be in stark contrast to the RBS exercise and most amusing if done successfully by a Labour led Assembly in Cardiff under the nose of ‘the give away to me mates’ Osborne in Westminster.

    However, I have a sinking feeling that we are all going to be taken for a ride.

  4. How much can Welsh Government intervene? Will the loss of these jobs lead to greater support for a local fracking industry??

  5. YES. With the huge success that WAG has made on a)NHS,b)Education,c)M4 Relief it could turn around the steel industry ‘overnight’.I wonder why this type of idea has been so long in coming,as WAG’s ‘expertise’ can also be used on FORD/AIRBUS and they would go from success to success.

  6. I would like to be convinced by this article. I would like to believe that WAG could intervene and make the difference. Gerald and Adam`s case needs some numbers. Could a tenth of the Capital budget make a difference? £125m is a lot of money but apparently the plant is losing a million a day so this investment covers their losses for 3 months What does this money buy? Does WAG become a TATA shareholder or do we just end up owning a part of the plant? Would the money buy us a guarantee that Tata would continue to invest in Port Talbot ?
    .

  7. Would the WAG be able to intervene on behalf of British Steel? Would intervention contravene UK / EU regulations? The WAG got a scolding from Westminster for supporting Cardiff Airport.

    The underlying problem of British steel is it cannot compete in price with steel made in China, India or any non-Western country. We live in a free economy and we either accept the flip side of a free economy or we go back to the 1920s and 1930s and we all play beggar our neighbours (and going back to the 1920s and 1930s is not me supporting a certain party which wants Britain to leave the EU).

    Since privatisation the steel industry in the UK has collapsed. In the UK Consett, Corby and Ravenscraig have closed. In Wales Ebbw Vale and Shotton have closed down, and Llanwern is on it’s last legs. What can any UK government do to keep alive the British steel industry, except pour money into an industrial relic that can not compete with other countries.

    Wales is a small, mostly rural country, we need to develop industries we can sustain and not rely on crumbs from England. The WAG inherited an economy that was top heavy and ineffective. Wales was rightly criticized for having public sector employment on a par with the old USSR, we are moving away from this and the WAG has some good initiatives, such as the Creative Industries Sector. What Westminster does with British Steel will just postpone the demise of British Steel.

  8. Howell, the piece says explicitly that the Welsh government doesn’t know how to run a steel company. And it doesn’t talk about ‘overnight’ or Welsh government ‘expertise’ either. I daresay there is something wrong with this scheme but let’s criticize what’s said not things that are not said. The Welsh Government handled the foot and mouth epidemic pretty well so they are not bound to make a mess of everything.

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