Whatever you may think of the merits of Britain’s decision to leave the European Union, and you’d be hard pressed to find any of those merits, one early casualty is likely to be the British Steel industry, of which the most high profile example is TATA STEEL's (NS:TISC) Port Talbot steel mill.
It has been the subject of huge speculation and media attention since the Indian owners mooted closure or sale in the Spring of this year.
After initially inviting bids to buy the massive steel works and associated facilities, Tata had begun to enter serious talks with the British government about keeping the plant when it became clear millions of pounds of financial aid, lower power costs and a 25% government stake in the business may be in the cards.
Is a Port Talbot Sale Viable?
That has now been thrown into doubt, in fact scuppered is probably more accurate as Tata assesses the viability of keeping a steel production plant in Britain if Britain is probably no longer part of the European single market.
As if Tata had some kind of prescient sense of the way the vote would go, it emerged on the same day as Britain’s referendum that Tata could sign a deal with German steel company Thyssenkrupp AG (DE:TKAG) to merge steel operations across Europe. It is thought this would see Port Talbot closed as it would be surplus to requirements in the combined business, particularly as the Welsh plant is said to be less efficient than other plants in the merged companies.
Regardless of efficiency, without free and open access to the single market Port Talbot and — indeed all of the UK’s steel making facilities — become instantly less attractive to a multinational like Tata or a European producer like Thyssenkrupp. Tata is said to be already backing away from a deal with the British government, the outcome of any eventual deal with Brussels being probably two years away, the current owners almost certainly are looking to make a decision in weeks not months or years. Just the possibility the U.K. could face tariffs exporting to the E.U. makes ownership of a plant in the country instantly less desirable.
The Low-Valued Pound
In the short term, sterling’s fall against the dollar and euro makes British produced steel cheaper in export markets and reduces the attractiveness of imported, low-cost steel from places like China but the effect will not last. The U.K. imports its raw materials which will now cost more and electricity and environmental costs will remain some of the highest in Europe.
Gareth Stace, director of U.K. Steel has called on the government to support Port Talbot, and indeed all U.K. steel operations to “…ensure that our vital supply chains, such as defense, automotive and construction, can rely on the production of steel in the UK so we are self-sufficient and can never be left at the mercy of others.” A wonderful sentiment, but it’s unlikely the government is listening, the conservative party is riven with division over the referendum and almost leaderless following David Cameron’s announcement to step down by the party conference in October.
What Does This Mean for Metal Buyers?
Foreign companies buying British steel should not be concerned in the short term about continuity of supply. The mills will continue running and, indeed, may be more competitive due to the exchange rate, but in the medium-to-long term, the health of the industry relies on the deal that is negotiated with Brussels for tariff-free access to the E.U.
France has made it clear it wants no special deal for the U.K., a quick exit and a grab for as much of London’s financial services as it can manage. Germany is being somewhat more conciliatory, suggesting an amicable agreement can be reached, or at least those are Angela Merkel’s statements in public. What is clear is Britain’s decision to leave has terrified the elites in Brussels and there is widespread agreement that a punitive settlement should be reached as early as possible to dissuade other nationalist elements within Europe from pushing for the same decision.
Port Talbot may be the most obviously high-profile example, but we will see over time that it is not alone, wherever a multinational has facilities within the E.U. and the U.K., they will face a decision: do they invest in the E.U. or in the U.K.
Currency may play a part in that decision, but currency advantages only last so long. Wages and other costs adjust and within a year or two devaluations are mitigated by other factors. For British manufacturing, much depends on the outcome of negotiations with the other 27 members of the E.U. For the time being, the U.K. remains a member, but negotiations over the terms of Britain’s access to a market of 506 million people — the largest trading block in the world by value — depends on the willingness of Britain’s former partners to cut it a decent deal. It’s hard to see how that could be on favorable terms, unless the rebel state agrees to all of the restrictions and terms that so riled a portion of its population that it voted to leave in the first place.