On 22 May 2019, British Steel announced that they had become insolvent and the company entered receivership with the UK. The explanation provided for this failure is that British Steel is a victim of the UK’s decision to exit the European Union’s bureaucratic fold . On the surface, this appears to be true, as the company stated that orders from the continent have declined due to uncertainty over the exit process that the UK Parliament has dragged out over the past three years. However, if we dig deeper, we find that it was the EU, not the Brexit decision, which killed the company.
If we look at the company’s latest annual report, we find that the company went from a profit of £92 million in FY ending 2017 to a £19 million loss in FY ending 2018. To douse water on the Brexit claims, the company’s revenues actually increased 11% year-over-year. The real problem was the company’s expenses bloated by a tremendous 25% over the same period. The steel production process is energy intensive, so a significant portion of this price increase is related to a sharp spike in energy prices in the UK over late 2017 to early 2018. The second major cost driver is British Steel was no longer able to delay paying for the EU’s mandatory cap-and-trade policy. Under the cap-and-trade system, companies were able to pull forward future credits to pay for current years. British Steel’s future credits ran out in 2018 and were facing a £100 million bill to cover their 2018 charges. This amount represents a full 10% of the company’s annual revenue base and was so large thatthe company requested the British Government to provide a loan to cover the costs as the company only has around £5 million in cash to make such a payment. A good deal of the aforementioned energy price spike is also related to the EU’s cap-and-trade regime becoming more aggressive as it moves into the 2021-2030 phase of the program .
British Steel would have become financially insolvent on 22 May 2019 even had the UK voted to remain in the EU.
Had British Steel not been handed an insane £100 million bill for carbon emissions and who knows how much passed through via the utility bill, the company would be in good shape right now. And people don’t even get to enjoy the feeling that a polluting industry is held in check as the steel purchases will only shift to countries like China, Russia and India, which occupy three of the top four places in global emissions, where there is little concern for emission levels and EU emissions credits have no legal authority. The Brexit excuse is just a convenient way to latch onto a more visible event as pointing out that EU environmental policy destroyed British Steel would be politically embarrassing to the EU Parliament and UK politicians that would see a domestic cap-and-trade program created after Brexit.