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Why Port Talbot can't be saved in current form

Steel workers in Port Talbot met with Business Secretary Sajid Javid last week in the aftermath of Tata's shock decision to sell its loss-making UK assets. Credit: PA Wire

My conversation with a potential rescuer of Tata Steel, and its massive loss-making Port Talbot plant, has helped me to understand the big issues at stake.

Sanjeev Gupta, founder and chairman of Liberty House - who is meeting the Business Secretary Sajid Javid to discuss his ideas to save the UK's steel industry - is some considerable way from being in a position to make a formal offer to buy Port Talbot.

But his plan is both compelling and plausible.

David Cameron has hosted talks on Port Talbot's future with First Minister of Wales Carwyn Jones at Downing Street. Credit: PA Wire

He believes there is good money to be made out of all aspects of steel manufacturing except the most basic - and has shown money can be made from engineered steel, he says, through his acquisition of part of the failed Caparo Group.

Huge global excess capacity in steelmaking, much of it stemming from the insane expansion of steel plants in China since 2008, makes it incredibly difficult for blast furnaces such as those at Port Talbot to make a profit ever again from the production of basic steel slabs.

And Gupta also says that the UK economy and its dwindling manufacturing sector could cope if ultimately there is no slab making in this country.

Business Secretary Sajid Javid has been tasked with negotiating with Tata Steel in the UK and India. Credit: PA Wire

We could import all the slabs we need, and still have thriving businesses making steel products from rudimentary rolled steel coil up to precision-engineered items.

But, Gupta insists, that does not mean we have to roll over and just accept that the rational path is to shut down all the furnaces, at Port Talbot or anywhere else, as some economists have urged the government to do.

Gupta has a dream to preserve all Port Talbot's jobs, by radically re-engineering the site.

To be clear, he does not believe there is any long-term future in traditional smelting, or converting iron ore into liquid steel, in the way that Port Talbot currently does it.

Entrepreneur Sanjeev Gupta says he is ready to open talks with the government on a rescue plan for Port Talbot.

The competitive advantage of producers like China and Brazil, which have big local deposits of ore and cheap power, is just too great.

But he thinks it is industrially mad that the UK has little indigenous capacity to recycle scrap steel. He argues that it is almost a crime that most of our scrap steel is exported to arc furnaces abroad, many of them in Turkey, for melting down and re-using.

He points out that there is needless financial cost in shipping this scrap abroad, and environmental cost from both the transport and from the recycling being done in countries where coal is still used to generate power.

So his proposal is for Port Talbot, over a period of years, to install arc furnaces, for recycling scrap steel, to replace its two blast furnaces.

His model for this is Nucor, America's biggest steel producer, which both gathers huge quantities of scrap steel and then recycles them - and has still been profitable even in this acute steel industry depression.

Tata Steel works in Port Talbot has become the defining site of the steel crisis. Credit: PA Wire

And what some would see as his trump card is that he thinks his strategy would mean that not a single job would be lost at Port Talbot. In fact he told me that if he goes ahead, he would guarantee to protect all jobs (though the current operators of the blast furnaces would obviously have to be retrained to use the arc ones).

So will any of this happen? Well this is where perhaps our chat was most enlightening - because it shows quite how bold the Prime Minister and Business Secretary would have to be to make it happen.

The sine qua nons (or essential conditions) of a full Port Talbot rescue, according to Gupta, include:

  • 1) None of British Steel's massive pension liability falling on him - which would be difficult to achieve unless current owner Tata put the business into administration under insolvency procedures, and that would cause uncertainty and potential losses for pensioners.
  • 2) Tata and the government would have to insure him against any environmental and clean-up liabilities incurred up to the moment he makes the acquisition - and they could run to hundreds of millions and even billions of pounds.
  • 3) The government would have to exempt all steel production from any element at all in the cost of energy related to promoting cleaner greener energy - presumably using the argument that shipping scrap metal abroad to "dirty" energy producing countries actually worsens environmental degradation and global warming.

In other words, Gupta says he can only take on the whole of Port Talbot if it is turned into a "clean slate" from which he stands a chance of making decent sustainable profits over the long term.

Which, despite his undoubted enthusiasm and commitment, is reason to be pessimistic that Port Talbot can or will survive in anything like its current form.

Because no British government for decades has shown any ability to engage in the kind of strategic industrial thinking and big investment necessary to turn Gupta's vision into reality.

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