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The EU, Not Brexit, Killed British Steel – OpEd

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By Justin Murray*

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.

European Overregulation

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 that the 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.

This is Just a Microcosm

This event is just one of many real world examples of the EU’s destructive centralization policies. The cap-and-trade program and a host of other micromanagement regulatory impositions are a key driver behind the EU’s poor economic performance and terrible employment conditions. Given how onerous the EU’s regulatory regime is, the UK ultimately made the right choice to exit the union. If the company didn’t have to pay the absurd £100 million cap-and-trade tax, British Steel would be able to more nimbly adjust pricing to factor in any punitive tariff backlash the EU would impose on the UK for daring to exit their political sphere of control. Imagine how many other millions of Pounds in wasted bureaucratic overhead British companies could shed should the UK elect to engage in a no-deal exit and refuse to impose those same rules and regulations the British public voted to abandon.

*About the author: Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

Source: This article was published by the MISES Institute



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MISES

MISES

The Mises Institute, founded in 1982, teaches the scholarship of Austrian economics, freedom, and peace. The liberal intellectual tradition of Ludwig von Mises (1881-1973) and Murray N. Rothbard (1926-1995) guides us. Accordingly, the Mises Institute seeks a profound and radical shift in the intellectual climate: away from statism and toward a private property order. The Mises Institute encourages critical historical research, and stands against political correctness.

3 thoughts on “The EU, Not Brexit, Killed British Steel – OpEd

  • Avatar
    May 30, 2019 at 4:14 am
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    Fake news. The company revenue went up through selling co2 emission vouchers that it did not need (yet). When the government decided to leave the EU emission market, the company did not receive vouchers that it had already sold. The company was not paying for co2 emissions but profiting from trading unneeded ones. In any case the government picked up that tab.
    Mises is a fake news generator. Stop publishing its articles.

    Reply
  • Avatar
    May 30, 2019 at 9:11 am
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    I’m afraid this article is factually wrong. Industrial companies including British Steel receive their carbon allowances for free. European Commission data show that British Steel received their free allocation for 2018 in February that year, as normal. Those free allowances would have covered them for CO2 emitted in 2018, had they chosen to keep them. So the question is, what did the company do with those allowances? Almost certainly, they used them to cover the previous year’s emissions (2017). This was probably a natural consequence of a decision taken years go to sell off allowances to raise capital instead of using them for that year’s compliance. This is a risky practice, akin to living off a credit card balance instead of earning the money first. Once a company starts doing this, it’s hard to stop. They no longer had their 2018 allowances due to their own decisions, and didn’t receive 2019 allocation because of Brexit, leaving them short. So the company’s problems are not due to the EU, as the article suggests. They are due to their own internal risk management strategy, political delays linked to Brexit, and wider oversupply in the steel sector.

    Reply
  • Avatar
    May 30, 2019 at 12:34 pm
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    Except the UK, like Germany and France, could have exempted heavy industry from the carbon credits scheme that the UK runs, aka the carbon floor price. This floor price is also set above what other EU countries have set it at as well. And the government have already stated that they would continue these scheme brexit or no. And the price spike has to do with the UK’s carbon floor price.

    Given that British steel have amassed 800m in debts, one has to wonder why a single on off cost much less than these debts is so important. It clearly pointed to a business with no cash that would have folded, bill or no bill.

    Reply

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