British Steel May Face $130 Million Hit From Brexit Carbon Hitch

(Bloomberg) -- British Steel Ltd. may face a financial hit of 100 million pounds ($130 million) or more in three weeks if Prime Minister Theresa May is unable to secure a Brexit deal, two people familiar with the matter said.

The costs relate to the private equity-owned steelmaker’s carbon pollution bill for 2018, which is due by March 15, according to the people, who declined to be identified discussing a commercially sensitive matter. British Steel is the most prominent name on an official analysis detailing U.K. companies affected by a European Union decision to freeze the allocation of free carbon permits that can be used to comply with the rules.

The steelmaker’s financial headache highlights the difficulties that Brexit uncertainty is causing British industry. British regional airline flybmi went into administration last weekend, blaming Brexit and increased carbon costs. On Tuesday, Honda Motor Co. said it would close its U.K. factory. While they didn’t publicly cite Brexit, executives of the Japanese automaker had privately expressed concerns to government officials.

British Steel and its owner Greybull Capital LLP said the steelmaker is prepared for a range of different Brexit scenarios.

‘Robust Plans’

“We have robust plans in place to deal with the various Brexit scenarios including the change in carbon credit regime,” British Steel Chief Financial Officer Gerald Reichmann said in an email. “We do not expect any interruption to our operations, particularly if we are able to continue trading with Europe.”

In a typical year, the company could have expected its annual free allocation of carbon permits in February, which it could then put toward its payment obligations. But EU officials suspended Britain’s free carbon permits from Jan. 1 as part of no-deal Brexit contingency planning. The decision means British Steel would be unable to use this year’s permits to achieve 2018 compliance unless progress in Brexit talks leads to the suspension being lifted in time.

Last year’s allocation to British Steel of just under 6 million tons of carbon would cost more than 95 million pounds to buy on the open market at current prices, according to Bloomberg calculations. Prices have more than doubled in the past year, increasing the potential costs for polluting companies.

May’s Quest

With five weeks to go, Prime Minister Theresa May is still trying to secure an exit deal that can win the support of both the EU and U.K. lawmakers. If she can’t, the default is for Britain to crash out of the bloc on March 29 without a deal. On Sunday she said she would give parliament a binding vote on her divorce deal by March 12.

On Saturday, three members of May’s Cabinet wrote an open letter urging May to rule out no deal. Amber Rudd, the work and pensions secretary; David Gauke, the justice minister; and Greg Clark, said they were prepared to defy the prime minister and join a cross-party effort to delay Brexit if there is no significant progress next week.

Under May’s deal, Britain would leave the EU on March 29, but the commercial relationship, including participation in the EU Emissions Trading System, would be largely unchanged during a transition period through December 2020. If she gets the deal through, the EU would be able to unfreeze Britain’s carbon permits.

‘Significant Uncertainty’

"Whether we’re still in the scheme or not in the scheme at the end of March does create significant uncertainty with potentially major cost impacts for companies in the industry," Gareth Stace, Director General of U.K. Steel, the industry’s main lobby group said in a phone interview.

Both an end to the suspension of free allowances or a deferral of the compliance deadline would help British Steel as well as companies ranging from airlines to power producers and heavy manufacturers, all of which must comply with EU climate regulations and surrender carbon permits by mid-March to cover their 2018 emissions.

The EU in December said it would temporarily suspend Britain’s allocation for 2019 until it had clarity on whether a Brexit deal would be struck. While the permits would nominally be for 2019 compliance, the system’s rules allow for companies to use one year’s permits to pay for the previous year’s emissions, or trade them to raise money.

“These are assets which have value,” Stephen Phipson, Chief Executive Officer of MakeUK, which represents manufacturers, said in an interview. “Some are saying to government that they would like to have the registry unfrozen as soon as possible.”

Typically, allowances are sold at government auctions throughout the year and permits given for free are handed to emitters around February each year. The European Commission, the EU’s regulatory arm, originally proposed restricting U.K. allowances from the start of 2018, but the U.K. secured an extension to this year, by bringing forward the compliance deadline from April 30 to March 15.

The European Commission is unlikely to agree to lift the ban at this stage, as companies were given advance warning of the suspension, according to a person familiar with the thinking in the EU. The suspension would be lifted one day after the U.K. and the EU ratify a Brexit deal.

©2019 Bloomberg L.P.