UK Government Comes to Rescue of Ailing Steel Industry

Summary

• UK’s steel production for May was greater than other developed nations
• The oversupply and dampened demand for steel is likely to push the prices of steel downwards
• British Government bails out Celsa Steel with an emergency loan of £30 million under ‘Project Birch’
• It is important for the steelmakers to keep increasing the steel prices gradually while cutting the production simultaneously until they strike a balance between the supply and demand

As the novel coronavirus washed up the shores of more than 200 nations around the world, the respective governments of these nations-imposed lockdowns and clamped all the economic activities except the supply of essentials.

With negligible economic activities in the wake of the deadly pandemic, the demand for the steel plunged drastically. The steelmakers piled up inventory on their balance sheets and are facing a cash crunch. A higher supply scenario of steel in the market would drive its prices down and would negatively impact the health of the already battered steel industry.

The monthly crude steel production of the European Union was down by 26.8 per cent to 10.48 tonnes for the month of May 2020 in contrast to the same period last year (2019). However, the monthly crude steel production of the United Kingdom for the month of May 2020 was up by 10.1 per cent to 0.7 million tonnes in contrast to the same period last year (2019).

British Government bails out Celsa Steel

Cardiff-based steel producer, Celsa Steel has been reportedly provided with an emergency loan of £30 million. The company was funded by taxpayer’s money under the ‘Project Birch scheme’, which is a government backed scheme to bail out strategically important companies for the economy. There are about six companies, which are seeking funding under the ‘Project Birch’, and Celsa Steel became the first to get the bailout package. The government came to the rescue as the economic fallout continues to intensify and fuel further job losses.

Tata Steel, the largest steelmaker of UK, is reportedly in the line next and is seeking about £500 million under the ‘Project Birch scheme’ to prevent job losses. The government would evaluate all the options available for the company such as the coronavirus emergency loan schemes, and then offer taxpayer support as a last resort for companies that are not able to raise funds. The steel sector has its own strategic importance in an economy; hence the government needs to pitch in to save the industry.

Also read: Project Birch-UK Government’s Plan to Rescue Large Firms

What is happening in the global steel industry?

In the global arena of the steel industry, China plays a huge role. It is the largest contributor to steel to the world. It is also one of the biggest consumers of raw materials such as iron ore and coal, which are used to produce steel. China is way ahead of other countries when it comes to steel production and has a huge influence on whatever happens in the steel industry across the globe. It is believed that China has passed its peak of Covid-19, and it is likely to recommence steel production on its path towards economic recovery.

Last month, the World Steel Association (WSA) released its outlook for 2020 and 2021. In which it was stated that due to the economic impact of the novel coronavirus, the global steel demand would plunge by 6.4 per cent in 2020. However, WSA expects the demand for steel to recover by 3.8 per cent Year-on-Year.

According to industry experts, the catastrophe in the steel industry is less severe in comparison to the financial crisis of 2008. Sectors which are hit severely by the coronavirus pandemic are mostly service- related and less steel-intensive.

With most of the countries entering the phase of lockdowns easing in the passing month, a slight uptick in economic activities is expected in the third quarter of 2020. The demand shock has almost perpetuated to all the steel-intensive sectors such as plant, machinery, and automotive coupled with disrupted supply chain, which would mount further pressures in the ecosystem of the steel industry. The sector is likely to adhere to the new guidelines with reference to social distancing that could lead to lower productivity and an extended production cycle due to change in the working environment.

Due to supply chain disruptions and a shortage of workers during the lockdown period, the construction industry in most of the countries suffered an abrupt halt of projects. The decline in the construction industry will be detrimental to the steel industry as steel is one of the important input factors of the construction space.

Another sector where steel is consumed is the mechanical machinery sector which has been devastated due to significant logistical bottlenecks and supply chain issues induced by the coronavirus crisis.

Also, the automotive industry is the biggest victim of the unprecedented crisis caused by Covid-19 among steel consumers. Due to slower reopening and social distancing norms, the automotive industry could take several years to recover to pre-crisis levels.

In the developed economies, steel demand is expected to go down by 17.1 per cent during the remaining part of the year. The steel industry is likely to see a spill over of downturn from hard-hit consumer and services related sectors, due to substantial job losses and bankruptcies, weakened confidence and implementation of social distancing measures in labour intensive industry. The developed economies are likely to see a partial recovery of 7.8 per cent in the next year (2021).

In the United States, the recession in manufacturing space is likely to scale a new high in the second quarter due to the economic impact of COVID-19. To make matters worse, the fall in oil prices has further delayed fresh investments in the energy sector, which has been already facing backlash from the environmentalists and activists. In addition, ballooning unemployment and weakened consumer confidence has severely impacted the construction sector. In simple words, all the segments where steel was being consumed are severely impacted, which means lesser demand and eventually lesser prices for the steelmakers.

Also read: Impact of Novel Coronavirus on UK Steel Industry; Tata Steel Seeks £500 Million Bailout

Demand for steel is likely to remain subdued due to low activity in terms of road construction, real estate, bridges construction. However, the production has not been cut, which could be a dampener for steel prices globally due to oversupply of steel. It is important for the steelmakers to keep increasing the steel prices gradually while cutting the production simultaneously until they strike a balance between the supply and demand.