UK steel: Brexit cloud — no silver lining

Last week’s UK vote to leave the EU left the global steel industry scratching its head as it tried to assess the consequences. But UK steel industry workers who voted for a UK exit from the EU – ‘Brexiteers’ — despite the warnings may now be looking back ruefully at their ‘out’ votes. For if, pre-vote, it could be said that opinions for and against were in a rough equilibrium, the post-vote landscape looks distinctly one-sided, with positives hard to spot.

Although, as one seasoned industry observer told me on the ‘black Friday’ immediately after the referendum, any forecast would be pure conjecture, some unpalatable truths seem self-evident. Even before the UK gets its decree absolute from the EU, trade flows, production volumes and exports will take a hammering.

And, very importantly, the referendum outcome poses the question — will the sale of Tata’s remaining UK steelmaking assets, including its flagship Port Talbot mill, go ahead?

Speculation is swirling around Tata’s sale and the potential buyers’ post-Brexit vote intentions. While neither party has so far announced a change of plan, Tata executives did say that the uncertainty created by the vote will most likely lengthen negotiations already complicated by the steel workers’ pension plan deficit of around £700m ($932mn). Enter the latest potential saviour private-equity investor Edmund Truell, which has emerged with a plan to acquire the Port Talbot and other unsold steelworks for £1, keep and restructure the £14bn pension scheme and sell the works off piecemeal.

Leaving aside a discussion of the risks associated with a venture capitalist taking over a strategic loss-making enterprise, some are sure that the country is heading straight into recession and is on course to lose the right to trade about 40pc of its output in the EU free market.

Mr Truell cites the advantages of a weaker pound to steelmakers in the export market and the possibility of slapping higher import duties on imports. But there are other factors that may outweigh the benefit of weakened sterling.

To start with, sterling’s weakness will hit demand for steel in the UK, as steel is directly connected to the real economy, and a weaker economy hits capital expenditure first, as any steel stockist or construction company will testify. With domestic demand falling, post-EU divorce, British steelmakers would also stand to lose a significant portion of their export market. Some 40pc of Tata’s total exports, and 70pc of all UK flat products exports and 65pc of all long products exports went to the EU in 2015. Terms of trade between the EU and the UK will take years to settle, but for now there is little appetite in Brussels for giving major concessions.

Some advocates of Brexit have argued that outside of EU rules, the UK would be free to give state support to its steel industry, reducing costs. Beware! What’s sauce for the goose is sauce for the gander. State subsidies would soon be followed by anti-dumping duties.

A weak pound will also increase producers’ costs, and likely outweigh any advantage gained on the export market. Most steelmaking raw materials are imported. Scrap is the exception.

The looming possibilities of quantitative easing, lower economic growth, increased government borrowing and declining overseas investment in the UK put further pressure on the economy and the pound, which fell by 13pc in the wake of the vote, and is forecast by some to reach par with the euro and hit around $1.20.

By all estimations it will be years before there is clarity on terms of trade. Where there is no clarity, volatility prevails. And someone always benefits. Step forward derivatives brokers.

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