British Steel: gauging the supply chain impact

In May 2019, British Steel was placed in compulsory liquidation, putting 5,000 jobs at risk and endangering 20,000 in the supply chain. But why did this happen and why is it more important than ever for buyers to optimize supply chain health?

What’s happened?

British Steel’s rocky fortunes go back some time. The company was acquired by Indian conglomerate Tata in 2007, but in 2016 Tata sold the struggling business to private equity group Greybull Capital for £1. Things seemed to be going well at first: after making a £79 million loss in 2015-2016, the company announced profits of £47 million in 2016-2017.

But British Steel continued to face major pressures. For one thing, the measures announced last year by the Trump administration included a 25% tariff on steel imports. As well as triggering a trade war with China, this has brought major uncertainty for steel producers around the world and dented UK steel exports to the US.

Then there’s the issue of Brexit. The results of the UK’s 2016 EU referendum resulted in a fall in sterling, leading to higher import costs. And the prospect of Brexit has led to considerable uncertainty for international customers about future tariffs – particularly problematic for an industry with long lead times.

To compound these challenges, British Steel was previously eligible for carbon credits under the EU’s Emissions Trading Scheme. But UK companies have been barred from accessing carbon credits until the EU withdrawal agreement has been signed, leaving British Steel with a £120m bill. In April, the government provided a bridging loan, so the company could avoid a hefty fine for missing its deadline. However, with the company reportedly seeking a further loan of £75m – reduced to £30m – for “Brexit-related” issues, the government argued it would be unlawful to provide further support. The company subsequently went into liquidation.

What are the implications?

The implications extend far beyond British Steel itself. One company facing major challenges is Network Rail, which sources as much as 95% of its rails from British Steel. Following news of the liquidation, Network Rail released a statement noting that it has “improved our order book with the company – increasing rail production volumes, bringing orders forward and committing to a long term schedule – as well as offering immediate payment to ease the pressure on cash flow.”

While other options for Network Rail could include sourcing more steel from European suppliers, such a move would likely result in higher costs and longer delivery times. And of course, many other customers of British Steel are watching developments closely – particularly those that benefit from the company’s specialist steel grades.

Likewise, British Steel’s suppliers are also facing major consequences if the company collapses. For example, The Guardian reported that logistics firm Hargreaves Services could reduce pre-tax profit by £1.5m, affecting 170 jobs. And the Federation of Small Businesses also pointed out the impact for small businesses in the communities surrounding the company’s plants, from visitor attractions to shops and cafes.

Last but not least, losing a firm like British Steel could have implications for the wider economy. Think tank IPPR has predicted that the collapse of British Steel could result in lost wages of £2.8 billion over a decade, while households could spend £1.2 billion less over the same period.

Supporting suppliers in tough times

The uncertain fate of British Steel is a sobering reminder of the impact that adverse macroeconomic and regulatory developments can have on companies large and small. It also illustrates how difficulties faced by suppliers can have severe repercussions for other businesses in the supply chain.

That’s all the more reason for large buyers to consider the impact of market developments, both on their own liquidity needs and on their supply chain health. Increasingly, concerns about such threats are prompting companies to adopt early payment solutions like supply chain finance that can give suppliers access to lower funding costs whilst helping them optimize working capital and achieve greater predictability over future cash flows.

Likewise, platforms that are effective in harnessing the power of technology can not only give valuable insights into your own working capital position, they can also provide greater visibility into the health and behavior of your suppliers. For example, by upgrading our platform with world-class AI capabilities, Taulia has aggregated data on historical supplier behavior with external data sources, enabling you to make better informed decisions about your own strategy and the likely impact of any changes on your supply chain.

While the challenges faced by British Steel are complex and unique, many other companies are facing major uncertainty in today’s market conditions. Optimizing your own working capital and supporting your supply chain has never been more crucial.