The real lesson from British Steel

Why the Scunthorpe scandal is unlikely a Chinese conspiracy – and why that's still a problem

The Chinese steel goliath, Jingye 敬业, dominated news in the UK this week. But little reported is the trouble they’re in back home. In 2023, the company saw a 24 per cent drop in year-on-year profits, according to Fortune. The entirety of the Chinese steel industry has been struggling since the real estate crisis and as previous overcapacity comes to a head. In light of this, Jingye’s desire to shut down the loss-making British Steel strikes me as a reasonable, if cold, application of business logic.

To recap for non-British readers: British Steel is one of the UK’s two remaining functional steel plants, and the only one with the capability to produce virgin steel. Jingye acquired the plant in 2020, but has struggled to turn a profit (reportedly losses of £700,000 each day and £350 million up to 2023 from the time of acquisition). Over the last 18 months, the British government has been engaged in talks with Jingye to offer more government help, not least in the plant’s transition to greener, electric arc furnaces. On Saturday last week, parliament was recalled to vote on a last minute bill to take over operations at British Steel. Talks had broken down, and business secretary Jonathan Reynolds took quick action to ensure that the plant remained open, thereby saving some 3,000 jobs.

The move has triggered another round of old resentments and fresh anxieties about Chinese investment in the UK. How did the former steel world leader get to a position of potentially becoming the only country in the G7 without its own virgin steel-making capacity? Did the Chinese – state or otherwise – intend to end things so acrimoniously? Were we – Brits – naive to think that Chinese companies can be trusted?

These are all real questions that have been posed by leading policymakers and media commentators over the last few days. Among the accusations is a suggestion of ‘sabotage’; that there was some ploy to quickly shut down British Steel in order to ‘stop Britain producing its own virgin steel and force it to rely on imports from China’ (The Times, April 14). Meanwhile, Nigel Farage, that veteran political disruptor, went further:

‘The Reform UK leader, Nigel Farage, accused Jingye of lying about the company’s accounts and said he was “100% certain” the Chinese government had ordered Jingye to buy British Steel in order to close the business. Farage offered no evidence for those accusations and said it was based on his “intuition”.’

(The Guardian, April 14).

You will probably not be surprised that his ‘intuition’ differs from mine:

Given the losses at British Steel (which no party disputes), Jingye’s drastically falling profits at home, and the slowdown of the Chinese steel industry, Jingye’s decision to sever a badly loss-making arm of its business strikes me as making good business sense. In particular, Jingye could not have foreseen the skyrocketing of Britain’s energy prices since the Russian invasion, with prices now approximately 40 per cent higher than France’s and four times more than the U.S.’s. The British government’s drive for net zero and ‘green steel’ has also already seen the introduction of the costly UK Emissions Trading Scheme (ETS), and the latest talks with Jingye involved, as mentioned, transitioning to electric arc furnaces. It’s unlikely that British steel-making will become a profitable venture anytime soon. One doesn’t need a conspiracy theory to understand why Jingye might want to jettison British Steel.

Of course, that’s not to justify the company’s actions. Chances are that it hasn’t behaved well – Reynolds complains that Jingye strung the government along for months without really intending to strike a deal, and we know that Jingye was trying to sell off of existing supplies, knowing that such sudden closure of the blast furnaces could render them permanently unusable. But sabotage, state-directed or not, is another accusation entirely.

[Sidenote: it has become popular for amateur China-watchers to trot out a pithy statement like ‘Chinese companies are not truly independent from the state’ to show off credentials. It’s important to break down what that really means: Beijing does not steer the day-to-day or even month-to-month decisions of tens of millions of Chinese companies. But if and when the government has a political agenda, companies, on the whole, are expected to follow suit in a whole-of-country approach. See the recent case of the Hong-Kong based company CK Hutchison for why this distinction is important: Beijing blocked the sale of the company’s assets in the Panama Canal and elsewhere to a consortium led by Blackrock; but if the government was behind every boardroom decision, the sale would never have even got so far. So while Chinese companies are not independent of the state in the way western companies can be, they shouldn’t be written off as merely corporate fronts of Chinese government organs.]

So what does this episode really teach us? For one, there is a dire need for long term industrial thinking – let’s not call it an industrial policy, but at least there could be more strategic thinking on the trade-offs of various political agenda. In recent years, the push for net-zero has made prospects for high-polluting industries like steel even harder, while the UK’s high energy prices remains a major challenge for British industry.

But British steel was already in decline. When Mao Zedong announced the Great Leap Forward, it was Britain and the U.S. he wanted to catch up to within decades in terms of steel making. How did the U.K. lose its steel-making edge? That is what many are wondering on Chinese social media, when they read this story, and it’s a question that policymakers would be better off asking if they really want a fix.

Most of all, this story to me again impresses the need for a proper audit of UK-China relations. The Labour government promised one but has already delayed it (now to ‘spring’ this year, however that might be defined). Nevertheless, it has still sent and received high level delegations to and from China. This is putting the cart before the horse – deciding to engage with China based on vibes rather than the results of an assessment it had commissioned.

Politicians need to seriously think about what is in the British national interest when it comes to engagement with China – above what level of Chinese investment, and in which industries, are unacceptable? Clearly, Chinese ownership of steel hadn’t been considered a problem before last week. So what other industries might similar stories unfold in the future? Or perhaps we decide there is a certain level of acceptable risk, in the name of economic growth and constructive diplomatic relations. Once again, all of these are trade-offs and tensions, which a well-done China audit could sort through and prioritise. But from the whispers on Whitehall, it doesn’t sound like that is what this audit will be even when it comes in the ‘spring’. Until then, we are doomed to only ever being reactionary to the next big China scandal.

I made many of these points on Sky News’s Sunday Morning with Trevor Phillips, which you can watch here: