Crisis Unveiled: Causes Behind British Steel's Woes

The two blast furnaces at British Steel's Scunthorpe plant in England are the last of their kind in the UK. The UK steel industry was once a world leader, powering the industrial revolution. But these days it is in crisis.

The Chinese owner of the plant, Jingye Group, stopped ordering the raw materials needed for steel production and recently announced the furnaces would close down for good. Around 2,700 jobs are at risk at the plant - which is reportedly losing £700,000 a day.

In response, the UK government introduced emergency powers to take control of production in a scramble to stop the furnaces from going cold. But its future remains uncertain.

So why couldn't the government just buy the raw materials needed to keep the furnaces burning? With steel, there are peculiarities around the production and supply chain.

Virgin steel is the strongest form of the material and is used in key industries like railways, construction and manufacturing. It will be vital for the government's ambitions to invest in UK infrastructure , from housing to green energy. Virgin steel is made using the extreme heat from a blast furnace, which must run 24 hours a day all year round.

Manufacturing in other industries can be paused when demand goes down and then resumed once products are needed again. But for blast furnaces, if paused, the molten iron inside solidifies. And once reheated, it expands and cracks the furnace.

To keep the blast furnaces running, it needs steady supplies (and "steady" is a key word here) of coking coal and iron ore. These are the two main raw materials needed for virgin steel.

Planning for a steady supply requires inventory management , a science that aims to avoid either over-supply or shortages in the production process.

Within inventory management, there are various models. For the steel industry, the "economic order quantity" model minimises the costs of ordering and holding raw materials to work out the best order size.

When ordering costs go up, for example, due to increased shipping costs, the model adjusts the order size by buying larger batches. This should eventually keep the total inventory cost to a minimum.

Ordering steel supplies builds on models like this, accompanied by other inventory management techniques. This ensures that costs are minimised while keeping enough iron ore and coking coal on hand to keep the furnaces burning.

This is opposite to the "just-in-time" model, which recommends smaller quantities are ordered only when and where needed. Models like just-in-time are a better fit further downstream in supply chains, closer to the end customers. Here there is more variability in demand as customers' tastes change.

Virgin steel, on the other hand, follows a much more stable demand pattern. It prioritises cost-efficiency over agility.

But problems arise when supply chains are distorted by external factors. The UK government has questioned whether Jingye was guilty of neglecting the plant . There is no doubt that if the furnaces in Scunthorpe went cold, the UK would become the only country in the G7 without the ability to produce its own virgin steel.

It would then have to turn to China, the single largest global producer of steel (subsidised by the Chinese state), for imports.

Where did it go wrong?

Research on geopolitical tensions in supply chains shows that larger firms often adopt a "wait and see" strategy, rather than a proactive one in the face of these tensions. And geopolitical risks are less damaging to firms that have planned their supply chain resilience better, and that have greater cash holdings.

Both of these were overlooked at British Steel, which has been struggling with financial problems and inefficient planning in recent years.

Research on supply chains also shows that in the face of disruptions, firms can reconfigure their supplier networks. They can adopt a more diversified base of suppliers, create parallel supply chains, and consider reshoring (moving operations back from overseas).

Again, the opposite is true for British Steel. It transitioned from domestic coking coal suppliers to international ones due to stricter UK environmental regulations and cheaper prices overseas.

Another factor is lead times - the time from when an order is placed until it reaches the plant's gate. Unlike the downstream of the supply chain, which is based on agile response to changing customer demands (the "pull" concept), the upstream of supply chains, where commodities like steel are manufactured, works in anticipation of demand ("push") for the weeks and even months to come.

Here, the lead times are long and cost-efficiency, not responsiveness, is the main objective. For steel production supplies, the lead time is around 45 days in normal times. The government has been able to secure emergency shipments from US, Australia and Sweden to tackle the supply shortage for now.

But there are other factors that exacerbate British Steel's problems. The 25% tariffs imposed by the US on steel imports and fears of a global trade war may drive down the already declining global demand for steel.

Second, producing virgin steel in blast furnaces is extremely energy-intensive compared to other methods of production like electric arc furnaces (although these cannot produce virgin steel). And the UK already has higher energy costs than rival steel-producing nations.

Third, after years of apparent neglect, the Scunthorpe furnaces are now near the end of their lives. They should retire soon, even without Jingye's decision to shut them down. All these elements have accelerated British Steel's loss of competitive edge, leading to it filing those huge daily losses.

Supply chain issues compounded by global tensions and an uncertain market create a perfect storm for the demise of British Steel. Government efforts to secure supplies are half measures that will merely keep the old furnaces operational for another few years. Whether it is eventually nationalised or acquired by a new parent company, the long-term sustainability of British Steel lies in investment in newer, greener virgin steel production methods - and getting a hold of the supply chain.

Hossein Zarei does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.