British Steel's successful rail business could entice Liberty to buy the Scunthorpe steelworks out of insolvency, but it is unlikely to purchase the rolling mills at Skinningrove and Teesside because of their poor performance.
Liberty is one of the most likely candidates to come forward as Scunthorpe is critical to its downstream assets. The semi-finished billet and bloom from Scunthorpe supplies Liberty's plate mill at Dalzell and its Hartlepool tube mill, while its Newport rolling mill also buys some material from the site.
British Steel's two rolling mills in Skinningrove are inefficient, with transport costs to truck billet from Scunthorpe adding around £15/t to already uncompetitive prices. Liberty's rolling mills are much further from Scunthorpe, meaning it could face the same problem.
Furnaces and feedstocks
The steelmaker is also pressed between stockholders demanding the same competitive prices they could obtain from electric arc steel from Europe, and steadily rising raw materials prices to feed its basic oxygen furnace. The price of iron ore is at five-year highs, with the Argus ICX 62pc seaborne fines index at $107.80/dmt yesterday.
Market participants agree that the company cannot continue operating two basic oxygen furnaces (BOF) as it is left to the mercy of raw materials availability. Conversion to an electric arc furnace (EAF) would cost a substantial sum, and it is unclear who would be willing to make such an investment. One market participant suggested this should be financed by the government to be repaid by the company over 100 years.
But others are not convinced that the Conservative government wants to get heavily involved. "If the government were willing to step in, it would have done so already," one market participant said.
Another suggestion is to convert just one furnace to an EAF and continue running the other as a a BOF, meaning the company could have greater flexibility in terms of feedstocks and would be able to better shoulder the impact of cost variation. But again it is unclear where the money would be found for the conversion.
Sections
Several market participants agree that the sections business is unlikely to return to profit, meaning the rolling mills at Teesside and Skinningrove are unlikely to be picked up as part of any deal to buy Scunthorpe. "It would be better to roll rail on a single shift and get rid of the sections business," a market participant said.
Some of the problems at Teesside and Skinningrove stem from Section 232, since the mills produce large sections for export to markets such as the US. Since the US market closed itself by implementing 25pc tariffs, Skinningrove lost a large contract with a large yellow goods producer.
Sections prices are also depressed in Europe by slack demand, and one Spanish manufacturer said even with news of the insolvency, the large mills are not experiencing increased demand and will be forced to export part of their production.
In the longer term, Celsa is expected to see benefits at its integrated steelworks in Cardiff. It produces 890,000 t/yr at its rod and bar mill and 350,000 t/yr of merchant bar and sections.
UK construction companies had already been looking to European producers over the past few months because of British Steel's issues, and it being uncompetitive on some products, one participant noted.
Wire Rod
Concerns abound in Europe regarding shortage of wire rod.
British Steel shipped 400,000 t/yr into Europe and was reportedly the only mill with extra capacity at times of high demand and stock shortage in Europe. As this is produced at Scunthorpe, a Liberty takeover would assuage concerns in the medium term. Should the company not be rescued, it would further crimp availability of a product that is using up its European tariff-free quota very quickly.
Rail
British Steel's rail business at Scunthorpe has long been considered the jewel in its crown, with minimum orders of 100,000 t/yr.
"We will continue to do whatever we can to support British Steel," Network Rail said. "We committed to a minimum annual order of 100,000t from the company and have also engaged with both British Steel and our two other existing European suppliers to enable us to stockpile rail." The company added that if British Steel, or any subsequent buyer, is able to produce the rail, Network Rail is willing to buy it.
Despite Network Rail reaffirming its commitment to British steel production, some participants believe it is also likely that ArcelorMittal's plant in Gijon will benefit in the short term as it is one of the only plants able to compete directly with British Steel for Network Rail's business.
Distribution
This may be the case if British Steel's distribution network is hit. One UK stockholder is owed over 8,000t of product and is concerned the insolvency process may create a "free-for-all" with massive stock sell-offs. This may cost British Steel dearly as the stockholder affirmed it would "walk away forever, regardless of who owns them" should it fail to receive its order.
Delivery in the next few weeks is already expected to be jeopardised by haulage shortages in light of the insolvency announcement.
Several market participants said the distribution business should be liquidated, especially given its vulnerability if Teesside were to close. One participant said the stockholders should be able to buy from the mill directly and compete on a level playing field without outsell prices.
