Mint Explainer: Why Tata Steel is jittery about the UK election

The Labour party, which is the current favourite to win the UK’s upcoming general election, has said that a better solution could be reached that would lead to fewer job losses. 

The support deal is part of a £1.25-billion transition plan finalised after three years of negotiations. Tata Steel’s Port Talbot Steelworks in Wales will shut its two ageing blast furnaces and coke ovens to make way for electric arc furnaces that would help cut the company’s emissions as well as losses.

Mint goes into the details of why the UK’s parliamentary election has gotten Asia’s oldest steelmaker worried.

 

What is the deal between Tata Steel and the UK government?

Tata Steel and the UK Government agreed on a rescue plan for Port Talbot Steelworks in September. As part of this, the steelmaker is to receive £500 million to fund its £1.25 billion transition. The remainder is to be invested by the company.

As part of the transition, Tata Steel would shut Port Talbot Steelworks’ two ageing blast furnaces and related equipment, such as coke ovens, and use government funds to replace them with an electric arc furnace.

This is unlike the blast furnace route of steelmaking, where the key inputs are iron ore and coking coal. The process is highly polluting, with the two blast furnaces being among the highest carbon emitters in the UK.

The UK government is keen to retain steel manufacturing in the country and not rely on imports for the key commodity. It also wants to save jobs that would be lost if the steel plant shuts. Tata Steel UK employs over 8,000 people and is crucial to the local economy at Port Talbot in Wales.

However, electric furnaces require fewer people to operate and a different skillset. In all, the transition is estimated to make 2,800 jobs redundant.

Why is Tata Steel keen on shutting blast furnaces?

Blast furnaces and coke ovens are heavy polluters, making them unviable after a carbon tax is levied on top of the production costs. The UK has committed to be a net-zero emitter by 2050.

The assets are also nearing the end of their operational life and are financially unviable. Steelmaking in the UK has become expensive due to high inherent costs, including for the import of expensive iron ore and coking coal, and high utility costs in the country, senior Tata Steel executives have said in the past.

Tata Steel has said unequivocally that without government support for the transition, it will be forced to shut Port Talbot Steelworks. It has already shut its coke ovens in March and plans to shut one of its two blast furnaces by the end of June and the other by the end of September.

The company’s downstream assets that make value-added steel will rely on imported semi-finished steel in the interim.

What is the Labour party’s stand?

The Labour party, which currently forms the opposition in the UK, has called for fresh negotiations post the 4 July general election, if it wins. The Labour party is currently running ahead in opinion polls.

Labour’s Jonathan Reynolds, who is the shadow business secretary, has said a better deal could be struck with “an outcome that might not be what all of us ideally want, but will work better for everybody. Most of all for the people here in Port Talbot," the BBC reported. 

Reynolds has urged Tata Steel to wait until after the election and engage in fresh talks with new the government in “good faith". 

A shadow secretary is part of the shadow cabinet in the UK that follows and scrutinises the cabinet’s actions.

Workers’ unions at Port Talbot have urged Tata Steel to keep one blast furnace running till the new electric furnace becomes operational, expected by the end of 2027. Tata Steel has rejected this plan, calling it technically, operationally and financially unviable. 

What did Tata Steel say?

In a statement on Tuesday, Tata Steel said the company was “apprehensive" reading UK media reports that suggest that its deal with the UK government may be in peril due to policy differences between the Conservative and Labour parties.

The company reiterated its stand that its blast furnaces and coke ovens in the UK are “nearing their end of life, are operationally unstable and are resulting in unsustainable financial losses".

The company said the proposed £500-million grant from the UK Government is ringfenced for building the new electric arc furnaces, and not linked to its financial losses. The existing assets were unstable, “whose closure is now underway and immutable", the company said Tuesday.

“We are therefore concerned with the UK media reports since yesterday as further political uncertainty on the timing and form of the grant will place the EAF project and the long-term future of steelmaking at Port Talbot at significant risk," the company said.

Separately, Rajesh Nair, chief executive of Tata Steel UK, told employees in a letter at the end of May that “neither the general election nor its outcome has any impact on the timings or our decision to proceed with the winding down of our heavy-end operation", the Financial Times reported.

The British daily also reported that the agreement between Tata Steel and the UK government is yet to be signed off by the UK’s department for business and trade.