Ministers are drawing up secret contingency plans for the collapse of British Steel amid a fresh funding crisis that could trigger thousands of job losses at its plant in Scunthorpe and intensify fears about the entire industry’s future.
Sky News has learnt that insolvency experts have been placed on standby in case the UK’s second-largest steel producer cannot secure tens of millions of pounds to see it through the coming months.
The contingency plans are being drawn up as the company seeks a further loan of up to £75m from the government.
A financial support loan on commercial terms was agreed in outline with Whitehall as part of a broader package announced earlier this month, insiders claimed on Tuesday.
However, the second part of the deal was supposed to have been finalised by the end of last week, with the delay leading some existing lenders to question whether to continue backing British Steel, according to sources.
One said that part of the company could fall into administration as soon as Wednesday.
The potentially calamitous outlook for one of the UK’s most prominent manufacturers has emerged just two weeks after it was handed £120m of taxpayer support by the Business Secretary, Greg Clark, to meet a payment deadline from Brussels.
That bridging loan was granted in order for British Steel to pay a carbon emissions bill after UK manufacturers were frozen out of an EU-wide scheme.
The new facility is said to be being negotiated with government at an interest rate of up to 12%.
Talks involving the government, British Steel’s lenders, company executives and other stakeholders are understood to have taken place in recent days and are continuing this week.
People close to the discussions blamed a slump in orders from British Steel’s European customers amid uncertainty about potential trading arrangements with the EU in the event of a no-deal Brexit for a sharp downturn in the company’s performance.
One source said that ministers had acknowledged in private discussions that the Brexit impasse had been the catalyst for the crisis at British Steel.
KPMG, the big four accountancy firm, has been advising the government on the situation.
In a worst-case scenario, British Steel’s collapse could trigger the end of steel production at Scunthorpe, according to people briefed on the discussions.
The official receiver is said to have been notified about the ongoing situation, partly because of the significant environmental risks associated with the possible decommissioning of such a major industrial site.
If British Steel does collapse, administrators would be likely to attempt to run the business as a going concern while trying to find other sources of capital.
The precise timing of the new funding requirement, or of any binding decisions about the company’s future, were unclear on Tuesday.
While an insolvency could be triggered this week, firm news could still be weeks away, according to insiders.
British Steel is among the UK’s most important manufacturers, employing about 4,500 people directly and as many as 20,000 more in its supply chain.
More than 4,000 work at the Scunthorpe site, where the company produces steel used for railways and is Network Rail’s biggest supplier.
Sources said the company needed between £50m and £75m of new funding to support operations including the construction of a new mill.
British Steel has been adversely affected by sterling’s weakness and the prolonged uncertainty caused by the Brexit process and the escalating tariff war between the US and China, analysts said.
Last autumn, the company axed about 10% of its 5000-strong workforce in what it said was an attempt to “streamline” its operations and preserve its long-term future.
Nic Dakin, the local Labour MP, said at the time that the government had failed to provide the steel industry with adequate support.
Industry executives have cited the absence of a sector deal as part of the government’s industrial strategy as evidence of a lack of commitment to steelworkers.
The timing of the crisis could hardly be more awkward for ministers, with European parliament elections due to take place next week.
It also comes just days after a joint venture between Tata Steel and Germany’s Thyssenkrupp was abandoned amid opposition from the EU, raising renewed doubts about the future ownership of Tata’s steelworks at Port Talbot.
Collectively, the uncertain fate of the UK’s two largest steel plants heralds further anxiety for steelworkers, thousands of whom have already been forced to agree pay and pension cuts to keep their employers afloat.
More broadly, the British manufacturing sector has endured a torrid few months, with confirmation on Monday that Honda’s Swindon factory will close in 2021 with the loss of approximately 3,500 jobs.
People close to the latest talks about the future of British Steel said it remained possible that the company would secure the funding it required.
However, its need for further support is likely to raise urgent questions about the decision to provide it with government funding as recently as a fortnight ago, as well as the terms on which that money was provided.
One insider said it would be “bizarre” if ministers did not provide a second tranche of funding agreed as part of a single package.
They added that the taxpayer was “assured” of recouping the £120m handed to British Steel earlier this month, although they declined to give more detail about the basis on which it could be recovered in the event of an insolvency.
If the company is bailed out by taxpayers, it would preserve an important plank of the UK’s manufacturing base but would be at odds with a Conservative-led administration’s insistence that it does not pick winners in a free market economy.
The possibility that new money will not be forthcoming will spark fears about the viability of the Scunthorpe plant, which is responsible for producing 2.8m tonnes of steel each year.
Potential buyers for the business are likely to be scarce given the difficult backdrop confronting the sector.
The Scunthorpe site is a pivotal part of the UK’s steel production capability, and its purchase from Tata Steel by the private investment firm Greybull Capital almost exactly three years ago was seen as a landmark moment in signalling investor confidence in the industry’s prospects.
Mr Clark, who made a statement in the House of Commons on 1 May about the carbon emissions loan, said the decision to intervene was supported by the independent industrial development advisory board.
Unless the bill had been settled by the end of April, British Steel would have been hit by “an immediate and unremovable fine of half a billion pounds”, he added.
Mr Clark described the decision to purchase the necessary carbon credits on British Steel’s behalf was “a unique one in exceptional circumstances”.
Owned by private investment firm Greybull Capital, British Steel was brought back from the brink of closure after being acquired from the Indian giant Tata Steel in 2016.
The company broke even in its first year after Greybull’s takeover and has reported positive earnings before interest, tax, depreciation and amortisation in each year since then.
Greybull is being advised by PricewaterhouseCoopers (PwC) on the talks, while EY, another of the big four accounting firms, has been advising the company’s lenders, which include PNC and ABN Amro.
A spokesperson for British Steel said: “As we have previously commented, the uncertainties around Brexit are posing challenges for all businesses including British Steel, and we are holding constructive discussions with our stakeholders on how to navigate them.
“Last month the company agreed a short term bridge facility with government to help it meet its EU emissions obligations, and discussions are continuing about a package of additional support to assist the company address broader Brexit-related issues, whilst continuing with its investment plans.”
KPMG and the Department for Business, Energy and Industrial Strategy both declined to comment.