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Challenges facing British Steel and its supply chain

The challenges facing British Steel have been well documented over recent weeks as the impact of the Brexit impasse has bitten. A material repair to its main blast furnace, the delay of carbon credit allocations and a reluctance of overseas customers to place orders without a known outcome of Brexit negotiations have all contributed to British Steel’s demise.  

Allan Graham, MD at the global valuation and corporate finance advisor Duff & Phelps, commented: “As the UK’s second largest steel manufacturer, the effect of British Steel’s potential failure could have significant and far-reaching implications for its stakeholders and employees, the local community and its vast supply chain. With negotiations between British Steel and the Government failing to deliver a solvent solution, others look on in fear of a similar fate to that of SSI in Teesside during 2015, when the Official Receiver was appointed to wind-down and close operations.

“British Steel’s collapse will result in real uncertainty within its supply chain and in many cases a critical trading position requiring immediate operational support. Businesses within the supply chain with unpaid debts who are small to medium-sized enterprises may not have the financial resources to absorb the impact of its collapse without external support.

“Coupled with this, the Special Manager working alongside the Official Receiver may require subcontractors and suppliers to continue to work and provide goods and services as normal, under existing contracts, with a promise of payment for supplies delivered post their appointment. This could lead to even greater concern for many suppliers and their respective stakeholders, asking questions such as: Should I remain onsite? Who am I supplying to/contracting with? When will I get paid? Who is underwriting the payment? What will happen to any outstanding debt, including liquidated damages and how should that impact commercial negotiations with respect to future works or supply?”

Inevitably, future supply contracts will be uncertain whilst the Official Receiver’s strategy is established, whether that be a sale or a wind-down and closure.

In the event of a closure, suppliers will be faced with a critical period within which they may have to win work to replace that lost and/or rationalise their own cost base and overheads.

In times of financial instability or crisis management, companies invariably rely upon external advice to ensure they not only make informed decisions but comply with their own fiduciary responsibilities to ensure that subjective judgements cannot be challenged at a later date. 

Graham concluded: “Businesses at risk from the ‘contagion’ of British Steel’s potential collapse need to focus on the fundamental areas that will help them survive during periods of uncertainty and operational difficulty. Negotiating "time to pay" arrangements with HMRC, raising new working capital, managing key stakeholders to stabilise current arrangements with lenders, creditors or shareholders, assisting management to prepare financial models and operational proposals and managing cashflow, which is often time sensitive in these situations, are all critical steps that must be taken in the fight for survival.”

Ashleigh Smith
Article by Ashleigh Smith
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