Brexit and the fall of British Steel

The steel industry in the United Kingdom is on the brink of disaster. Two of the largest steel manufacturing companies in the United Kingdom are now under financial duress. The operations of Tata Steel are in the doldrums. The company tried to enlist the help of the German company ThyssenKrupp. However, the proposal could not go through because of regulatory hurdles. Now, British Steel has announced that the company has gone bankrupt. This comes as bad news for the three thousand workers who are employed at British Steel and for the twenty-nine thousand workers who are employed in the steel industry in the United Kingdom.

Brexit is the most visible change happening in the British economy. There is a generally negative perception of the effects that Brexit is likely to have on the economy. As a result, anything negative is blamed on Brexit. This is also the case with British Steel. Many financial analysts have been of the opinion that Brexit has caused the British Steel situation where as many others believe that the economic problems are the result of policies propagated by the European Union.

In this article, we will have a closer look at the fall of British Steel in order to ascertain the root cause of the problem.

Why is Brexit Considered To Have Caused The Bankruptcy?

According to many critics, British Steel was dependent on the European Union in order to do brisk business. The exit from the European Union has negatively affected British Steel in the following manner:

  • Firstly, as a result of the possible exit of Britain from the European Union, the British exchange rates have gone haywire. As a result, imports have become expensive, and this has had a profound negative effect on the steel industry
  • Secondly, there is a lot of uncertainty surrounding the status of trade deals with the United Kingdom. Hence, customers are not sure about the price that they might have to pay if the buy British steel. This is causing many customers to avoid purchasing products from British Steel

It is true that Brexit has negatively impacted the steel industry in the United Kingdom. Saying anything else would be incorrect. However, the negative impact was not severe that it would end up bankrupting British Steel. The bankruptcy has been the result of several other factors which were also at play. Some of these factors have been listed down in this article.

The Real Cause behind the Bankruptcy

The reality is that the British Steel bankruptcy has been caused by something which media and the common people do not like to blame i.e., the pollution control laws.

It is interesting to note that despite the uncertainty that Brexit brought on, the sales of British steel grew by 11%. The downfall of the steel giant was caused by the fact that its expenses grew by 25% during the same period.

Interest expenses and pollution bills were two of the biggest expenses that British steel had to incur during this period. The details of the same have been listed below.

  • British Steel was earlier owned by Tata Steel. It was later spun off and sold to Greybull Capital.

    Greybull capital kept funding British Steel using the debt route. The funding was provided via Olympus Capital, which was a subsidiary company, held by Greybull Capital extensively for the purpose of loaning out money to British Steel.

    These loans were made at a very high-interest rate of 10%! As a result, the expenses of British Steel shot through the roof. The expenses became so high that a large portion of them had to be capitalized. Now, since British Steel is in liquidation, Greybull Capital stands to lose a large portion of the principal as well as the accrued interest. This is the reason why Greybull was extensively lobbying for a government bailout to be provided to British Steel.

    It would, therefore, be accurate to say that predatory lending by a private equity firm was another major factor for the fall of British Steel.

  • Also, pollution bills at British Steel began to skyrocket. The European Union allows companies from its member countries some concession on fees and taxes. The steel industry does cause a lot of pollution.

    Hence, once Britain was no longer a part of the European Union, the EU decided to levy a pollution tax on companies like British Steel. This tax has made the production of steel in the UK unviable.

    At first, the British government was sympathetic to the needs of British Steel. This is the reason why they first loaned out close to $50 million to British Steel to enable them to pay taxes. This was because British Steel found itself in this precarious position thanks to the Brexit decision made by the British government.

    However, later, the British government changed its stance and decided not to loan out any further money to British Steel. As a result, the company ran out of money and went bankrupt.

It is unlikely that any new buyer will be willing to acquire British Steel given that all its previous owners have ultimately gone bankrupt. The reality is that predatory financing, pollution laws, and Brexit were the major reasons behind the fall of this British giant.

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