The UK will become a “defence industrial superpower”, said the chancellor, Rachel Reeves, in Wednesday’s spring statement, an ambition that will involve using much more steel, one assumes.
Now comes news that the Chinese owner of the UK’s second largest steel plant may close its two blast furnaces as early as June, which would further erode the UK’s already-thin steel-making capabilities. Indeed, closure of Scunthorpe would also mean an end to domestic steel-making from scratch using traditional carbon-intensive blast furnaces – the other two, at Tata’s Port Talbot site, closed last year.
To make the timing worse, the crisis at Scunthorpe has arrived while the government is still pondering its strategy for steel. A consultation, including an expert review of alternative technologies to make primary steel, closes next Monday. “The central mission of this government is growth. Steel can, and will, have an enormous role to play in driving that growth,” wrote Jonathan Reynolds, the business secretary, in his introduction. Fine, but what are you going to do about Scunthorpe?
There are probably three broad options. None will look attractive.
First, the government could offer Jingye, the Chinese owner, a bigger support package than the reported £500m to underwrite the intended switch to an electric arc furnace (EAF) – the greener tech that is being adopted at Port Talbot and uses mostly recycled steel. The problem with that idea is that talks with Jingye have already been running for two years and the funding gap is said to be enormous. US tariffs on steel imports have compounded existing problems, such as high energy prices.
Second, the government could allow the blast furnaces to close and hope another steelmaker would accept a support package to build an EAF facility. That sounds risky. The only guaranteed outcome would be that the blast versions would close permanently (these things never reopen) and any newcomer might also want more than £500m.
The fall-back option is nationalisation. Sheffield Forgemasters was nationalised by the last government in 2021 because it is a critical supplier of parts to the Royal Navy’s ships and submarines. But the aim of the steel consultation was to attract “new private investment” to expand UK steelmaking capability. A detour via temporary nationalisation, as happened after 2019’s insolvency at British Steel at a cost of more than £600m to the taxpayer, is not meant to be part of the script.
The stakes are even higher when you take a step back and ask whether spending more on defence is compatible with another of the government’s big ambitions – the one to be a “clean energy superpower”. Sir Dieter Helm, leading energy economist and former adviser to previous Labour and Conservative governments, asked the question in a lively paper (and accompanying podcast) last week and its title – Defence and the Retreat from Net Zero – gives away his conclusion.
Spending more on defence inevitably involves investing in heavy stuff that explodes, uses chemicals or is made in carbon-intensive ways. “Think steel, shells, fighter planes and support ships,” said Helm.
One of his examples of the strategic challenges is worth quoting at length.
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“To defend Britain, we need a lot of kit that relies on primary steel (not the weaker recycled form). Imagine, then, that, as a defence policy, we close Port Talbot and the rest of the primary steel production in the UK. We still need the steel. Where will we get it from? Step forward China.
“Now remember that the PM wants to keep very close to the US. Now imagine China invades Taiwan, and the US calls on Britain to support it – as it did in Afghanistan and Iraq. Perhaps the PM will follow Harold Wilson’s brave rejection of participation in Vietnam. Perhaps not. If the PM does want to stand ‘shoulder to shoulder’ with the US over Taiwan, it is hardly a safe assumption that the supply chain for defence, including the steel from China, is going to stand up.”
His point is that a serious defence policy needs secure supply chains and energy- and carbon-intensive industries that don’t pass the green test. The Scunthorpe plant itself may be destined for a cleaner furnace eventually, but the mix of steel, defence and net zero ambitions raises deep questions. Setting aside £2.5bn to revive steelmaking in the UK may be easy bit. If Helm is right, there will also be policy compromises.