Steel crisis in UK spurs nationalization talk

An employee uses an angle grinder on the production line of the tube mill at the manufacturing facility of Uttam Galva Steels Ltd., the Indian unit of ArcelorMittal, in Khopoli, Maharashtra, India.
Vivek Prakash | Bloomberg | Getty Images

Britain's once-mighty steel industry looked in dire straits Wednesday with politicians and union leaders calling for state intervention that could even mean a re-nationalization of the sector.

India's Tata Steel is hoping to sell is U.K. operations after suffering losses of more than £2 billion ($2.9 billion) in the last five years due what it says is global oversupply, a significant increase in exports into Europe, high manufacturing costs, continued weakness in demand and a volatile currency.

But rather than a private buyer being found, some are calling for the British government to support the company with taxpayers' cash in the hope of saving jobs and keeping the industry afloat.

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"The growing chorus of calls for re-nationalization cannot be ignored by the Conservative government," said Len McCluskey, the general secretary of Unite, Britain's largest union, in a statement on Wednesday.

Roy Rickhuss, the general secretary of the steelworkers' union, Community, said the U.K. is now on the verge of a "national crisis" and called for an emergency meeting with Prime Minister David Cameron. Meanwhile, Jeremy Corbyn, the leader of the U.K. opposition Labour Party, said it was "essential" that the government intervened by, if necessary, taking a "public stake in the industry."

Some politicians highlighted that any potential state aid was under tight regulation of European Union rules. Some are also using it to force the argument that the U.K. is better of out of the European Union ahead of the upcoming referendum on June 23.

The European Commission says that a company which receives government support gains an advantage over competitors and it would generally prohibit aid unless it is justified by reasons of general economic development.

However, it does stipulate some exemptions and allows state aid for research and innovation purposes. The European Commission is currently involved in an in-depth inquiry to assess whether Italian state support for steel producer Ilva was in line with its rules.

Meanwhile, the Scottish government is in the process of saving two steel plants. It simply brokered a deal between Tata and metals group Liberty House rather than a full nationalization, but this transaction is yet to be fully completed.

"Historically governments are shocking at running steel mills," Colin Hamilton, a commodities researcher at Macquarie Global Research, told CNBC via telephone. One example he gave was Serbia's purchase of a plant from U.S. Steel in 2012 which has been "hemorrhaging money ever since."

Tata is the U.K.'s largest steel producer and was formerly a government-owned firm called British Steel before being sold by the Conservative government of Margaret Thatcher in the late 1980s. Its stability is seen as a crucial factor for the future which of an industry which has been in terminal decline since the late 1970s.

The issue has even crossed over into U.K. diplomacy, with Prime Minister David Cameron bringing up the subject of cheap steel from China when he met President Xi Jinping last year. The government is sounding a fairly cautious note on any potential takeover, with U.K. Business Minister Anna Soubry telling the BBC on Wednesday morning it was considering "all options."

Forty thousand jobs could be lost in U.K. steel-making communities if no buyer is found, according to estimates from think tank IPPR. This includes 15,000 people at Tata and a further 25,000 jobs in the supply chain.

Peak steel demand has already passed, according to Hamilton. To balance the current oversupply in global markets the world needs to lose capacity, he said. And this capacity would be around 25 times what the U.K. is currently producing, he added.