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.

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