Written evidence submitted by GFG Alliance (LS0008)

GFG Alliance Evidence Submission to BEIS Select Committee

LIBERTY Steel and UK Steel Industry inquiry

July 2021

GFG Alliance (“GFG”) and LIBERTY Steel UK (“LSUK”) welcome this inquiry and are committed to supporting the Committee’s work in every way we can. We believe in steel. We believe in its people, the contribution they have made in the past and the contribution they will make in the future. We believe in the industry and the fact that it can be part of the backbone of the UK’s economic infrastructure. Crucial for growth out of the pandemic crisis, steel in this country is well placed to adapt to play a leading part in the decarbonisation of industry, innovating and playing a key part in a value chain that promotes sustainable economic and social growth while minimising the environmental impact on the planet.

Our faith in steel is part of a global story. It has not always been shared by others, including the financial markets, which has led to serious challenges in raising the capital needed to invest and deliver modernisation. Recent events have been difficult for the stakeholders of LSUK and GFG Alliance. But we are systematically working our way through our challenges, with a sustained programme to restructure and refinance. These developments are happening in real time and we will work to keep the Committee abreast of them. There has been progress, but there is much more to do.

Introduction to LIBERTY STEEL UK (LSUK)

LSUK is the third largest steel manufacturer in the country, with a footprint that covers 12 sites across England, Scotland and Wales. Nearly 3,000 people in LSUK are directly employed in well-paid, highly skilled jobs, with additional numbers employed in supply chains [1] and in local businesses dependent on trade from sites. LSUK currently has an annual steel rolling capacity of circa three million tonnes per annum (mtpa).

Capabilities include Electric Arc Furnace (EAF) steelmaking, vacuum induction melting, mill processing, powder metal applications and other value-added services. The business makes, processes and distributes steel products mainly into the automotive, aerospace, infrastructure, oil & gas, power generation and defence industries domestically and to over 60 countries globally.

LSUK has pledged to become carbon neutral by 2030 (CN30) through its “GREENSTEEL” strategy that involves greater use of steel recycling, development and application of low carbon technologies and renewable energy to power processes and, eventually, the application of breakthrough and emerging technologies such as hydrogen steelmaking. Although it is worth noting that LSUK believes until energy prices drop significantly in the UK hydrogen will not be viable and hence resources in the short to medium term are better deployed in other areas such as recycling. GFG is willing to submit a substantive paper on this thesis if of interest to the Committee.

LSUK is part of LIBERTY Steel Group (“LIBERTY”) which employees 30,000 people worldwide with major operations across Europe, United States, India and Australia. LIBERTY is a core pillar within the GFG Alliance, an alliance of global businesses structured into three industry brands: LIBERTY Steel Group, ALVANCE Aluminium Group and SIMEC Energy Group.

GFG Alliance economic contribution to the UK economy since 2016

Total direct investment is close to £1bn and broader contribution to the UK economy is over £2.1bn
GFG Alliance has acquired steel, aluminium and engineering companies in the UK, investing over £430m in the process
GFG’s companies employee over 4,300 highly skilled people full time in the UK, while creating many more upstream and downstream jobs in the wider economy
GFG employees have received £627m in salary from the time of acquisition by GFG, and GFG has made PAYE / Pension contributions of £134m
Over the last 5 years GFG’s steel and aluminium companies have made operating losses of over £300m which have been supported by GFG, ensuring jobs have been protected
In the same period, GFG has supported these businesses to meet their finance costs and other obligations while working with the management teams to help them transition their businesses to economic, social and environmental sustainability

This submission is structured in three parts given the different elements of the committee’s inquiry. Part A focuses on LSUK, Part B on the challenges and opportunities for the future of the steel industry in the UK, and Part C on the wider issues raised concerning GFG Alliance as set out by the Committee’s terms of reference.

PART A – LIBERTY Steel UK

The development of LIBERTY Steel in the UK

LIBERTY Steel UK’s GREENSTEEL model

The UK steel industry has been in decline for several decades. According to the Office of National Statistics (ONS)[2] employment in the UK steel industry has fallen by 90% since 1970, while its contribution to the UK’s gross domestic product (GDP) fell from 0.5% in 1990s to just 0.1%[3]. In the past decade alone, UK steel production has fallen by 20%[4], with one of the UK’s largest blast furnaces in Teesside shut down and closed permanently. Most of the remaining major steel operations in the UK – including at Port Talbot, Scunthorpe and Rotherham – have faced major financial difficulties, been put up for sale at various times or faced administration. When LIBERTY entered the UK steel sector in 2013, it was clear that the predominate model for producing steel via blast furnaces in the UK was unsustainable. However, LIBERTY committed to change, to securing a sustainable future for the sector, in terms of its economic viability and decarbonisation. This motivated LIBERTY’s decision to enter the UK market. That vision of the future is unchanged by recent events and, if anything, the opportunities and the need for transformation have been intensified in the current and near-term economic, social and environmental context.

According to a Cambridge University report [5] commissioned by BEIS, UK steel demand stands at 15mtpa with much of that demand being satisfied by steel imports, or steel contained in imported goods. However, the UK generates 10mtpa of steel scrap of which 80% is exported to other countries for recycling, when it could be used to meet demand in the UK through domestic production. Recycling UK steel scrap domestically could result in huge added value for UK manufacturers. According to the same report, use of electric arc furnaces to recycle steel scrap could lead to a 50% reduction in the UK steel industry’s greenhouse gas emissions. Future decarbonisation of the UK’s electricity grid would make emissions fall by 75% in this scenario. Co-located direct wire renewable energy projects at steel sites could bring the carbon footprint of such recycled steel to near zero.

LIBERTY’s strategy sought to capitalise on these dynamics and create a competitive advantage by applying its GREENSTEEL production model to create a more economically and environmentally sustainable steel industry in the UK. Under this model, the UK would reduce its reliance on imported raw materials (such as coal and iron ore) used in traditional blast furnaces to make steel, and instead fully utilise domestic steel scrap to recycle steel through electric arc furnaces which would, over time, be produced using low carbon and renewable sources of power. LIBERTY made bids to acquire the whole of Tata steel UK and British Steel Scunthorpe with the model to convert these blast furnace sites to arc furnace recycling. The model is now considered [6] fundamental to the future of steel and manufacturing in the UK and pivotal to the UK’s potential position as a global leader on industrial decarbonisation.

Development of GREENSTEEL was a significant part of the driving force behind LIBERTY’s acquisition of steel (and renewable and low carbon energy) businesses in the UK. LIBERTY identified underperforming or distressed assets that had latent value which could be acquired counter-cyclically, and which could be transformed over time to produce or process GREENSTEEL. LIBERTY also developed a number of brownfield development proposals for new steel recycling capacity in Newport and Teesside named projects “Beacon” and “Endeavour” submitted to BEIS but did not get support. LIBERTY continues to pursue these and other projects to be a market leader in GREENSTEEL in the UK and other countries it operates in.

Acquisitions and investment

LSUK’s businesses were purchased in distressed, mothballed and loss-making states. These businesses were symptomatic of the lack of a long-term, realisable, strategic vision for the industry in the UK, a seeming inability to align and capitalise on future market and social trends and, significantly, a long-term lack of investment in steelmaking capacity and capability. LIBERTY’s view was that the history of ‘pass-the-parcel’ in the sector had to stop. A line had to be drawn, and a new and positive vision of the role of UK steel was needed from public and private sector players.

Recognising the potential to turnaround these businesses and invest for growth, counter-cyclical acquisitions were made by LIBERTY of a number of strategically important steel businesses in the UK over the last eight years. The approach was to rebuild and reinvigorate these businesses, set them on a journey towards GREENSTEEL while protecting, and enhancing, well-paid local employment and supporting local economies and communities in less-advantaged regions of the UK.

In Newport, a site which had been mothballed was taken over in 2013 and steel production later restarted. To retain the skills of former employees, and the local economy, LSUK paid half of those employees’ previous salaries during the time it took for the assets to be brought back to life. During this time employees were free to do other work as long as they returned to Newport once the plant was ready for restart. Newport was eventually restarted in 2015, every employee returned to work (baring one that had passed away in the interim).

The Dalzell plate mill in Motherwell, acquired in 2016, was also restarted after being mothballed by Tata Steel. LSUK has invested around £18m in enhancing the plant’s capability and the product portfolio. Transformed from a loss-making business, the site has shown consistent growth in its order book and has established a key position as a supplier to UK infrastructure, such as onshore windfarms. Since restarting, over £130m has been paid out in employment and supplier costs, benefiting the local and national economies.

In Hartlepool, employment has grown by over 50% to around 210, and up to 260 depending on project demand, from 140 at the time of its purchase by LSUK in 2017. Production has grown five-fold during LSUK’s ownership and 2020 saw the plant’s best orderbook for almost a decade.

LSUK’s major acquisition was the purchase of Specialty Steel UK from Tata Steel in 2017. Investment in the Rotherham plant, since its acquisition in 2017, led to a restart of its biggest electric arc furnaces in 2018 which had been previously idled. Production doubled and the product range of its Thrybergh Bar Mill expanded to include the production of construction rebar to feed into essential infrastructure projects like HS2 and to take advantage of rising demand. Plans are being finalized to double production again with addition of new product lines.

Even in the midst of the impacts of the Covid-19 pandemic, commercial production was initiated at the new, high-tech, powder metals facility in Middlesbrough in late 2020.

LSUK’s business strategy and market specialists have worked with technical management at a local level to investigate ways to establish a better and more sustainable operating position for the purchased businesses and identify the investment required to help realise their potential. The business model was validated with some of the businesses in the UK beginning to generate positive cash flows.

However, the industry has faced huge challenges in accessing long term finance and so LIBERTY used a range of financing tools, including asset-based financing, factoring and receivables to fund these transformation programmes. The funding agreements we put in place, which included numerous as well as Greensill Capital, reflected that strategy.

External factors leading up to the collapse of Greensill

However, in addition to the structural challenges that persist in the UK for steelmakers (as discussed below), and other heavy industries, LSUK businesses in the UK have also faced other strategic challenges over the last few years driven by external factors – Chinse dumping, Brexit uncertainty, Covid-19 and the collapse of Greensill.

To illustrate, a severe downturn in the aerospace sector due to Covid-19 resulted in a fall in demand of up to 60% for some products and put immense pressure on those businesses, which produce what is more commonly referred to as speciality steels at LSUK’s site at Stocksbridge and associated downstream units. With a turnaround strategy for some of those businesses incomplete prior to Covid-19, their pre-existing need for additional financial support – to avert the compounding cyclical decline described below – was further exacerbated by the significant drop in market demand. This was a combination of factors which placed severe stress on what was already an ambitious plan to make these assets sustainable and economically viable.

These structural challenges in some of LSUK’s markets impacted a mixture of demand, headroom (margins v fixed operating costs), working capital (raw materials or cash to purchase raw materials) and, therefore, production volume and sales. A reduction in production volume and sales creates a compounding cyclical decline in headroom and working capital and, ultimately, has a negative impact on growth trajectory and profitability and the ability to invest in assets to expand capacity or capability. Maintaining a flow of working capital is critical to averting terminal decline but also critical to creating funds which can be used for investment.

As a result of the turnaround condition of some businesses, pre-existing market challenges and a reliance on working capital support from the parent, typically available through Greensill derived lending, LIBERTY Steel operations in the UK have been more impacted by the consequences of the Greensill collapse more than those in some other countries.

Managing the collapse of Greensill Capital

The collapse of Greensill Capital, together with the impact of the covid-19 pandemic, significantly reduced working capital available for the LSUK businesses. While GFG Alliance seeks new financing to replace Greensill, LSUK businesses have undertaken a range of self-help measures with the support of their customers and suppliers to ensure cash is carefully managed and they can continue to operate. The customer and supplier support, has enabled LSUK to implement measures such as matching stock to customer orders, and agreeing terms that will bring in cash earlier. At the same time, LSUK has made use of the Government furlough scheme. This package of measures enabled LSUK to resume partial production at the Rotherham plant following a period of intermittent operations and to agree manufacturing campaigns in other units, including the Stocksbridge furnace and the Stocksbridge, Thrybergh and Brinsworth rolling mills.

LIBERTY’s Restructuring and Transformation Committee (RTC) was established by Sanjeev Gupta on 5 May 2021 to restructure LIBERTY’s operations (the RTC’s scope does not include ALVANCE or SIMEC) to focus on core profitable units, with a brief to either fix or look at the option of selling underperforming units. Four new appointments were made to the LIBERTY board, including two independent directors: Jeffery Stein, Chief Restructuring Officer (CRO), and Jeffrey Kabel, Chief Transformation Officer. Making up the rest of the RTC is LIBERTY’s newly appointed Chief Financial Officer, Deepak Sagani, and newly appointed Chief Governance Officer, Iain Hunter. The team is already making significant progress as has been reported in recent announcements [7].

The RTC has worked closely with LSUK to develop new business plans, asset strategy and management structure for the business. LIBERTY remains committed to developing its Rotherham plant, including its low carbon emitting electric arc furnaces, into a competitive two million tonnes GREENSTEEL plant, one of the largest in Europe. The plant will make use of some of the millions of tons of steel scrap currently exported by the UK to make more of the quality steel needed in the UK, which is currently being imported.

On 2 July the current Managing Director of LSUK, Jon Ferriman, stepped down. LSUK’s new Chief Executive Officer (CEO) is Roy Chowdhury, who brings with him thirty years of industry and turnaround experience. Roy is joined by Anton Krull, LSUK’s newly appointed Chief Financial Officer (CFO), who brings with him twenty years of corporate finance and restructuring experience and who gave evidence to the Committee on 22 June. A new management structure to support LSUK’s revised business plan will be shared with the Committee.

The revised business plan, asset strategy and management structure divides LSUK into two clear areas:

A high-volume commoditised product - the Rotherham N-Furnace, the Thyrbergh Mill and the Merchant Bar Mill in Scunthorpe and any associated services and support.
A specialised steel business - the Stocksbridge aerospace and special alloys steel business, as well as the Narrow Strip and Performance Steel supply chain.

This structure will enable LSUK to achieve a better return on investment; create centres of excellence in areas such as commercial, finance, HR, procurement, project development and planning; manage its stakeholders more effectively; respond to market dynamics more quickly; and integrate automation through the business.

The RTC has also been exploring strategic options regarding the future of the UK Engineering business (which sits outside LSUK), which incorporates Liberty Aluminium Technologies Ltd and Liberty Pressing Solutions. The process, which is being supported by LIBERTY’s advisers Alvarez & Marsal, is focused on identifying new owners which would provide a sustainable future for the business serving automotive OEMs. GFG and the business’s key customers will continue to work together to provide adequate cash flow to keep the business solvent until the sale process is completed.

Part B: The future of the UK steel industry, challenges & opportunities

Challenges

Structural challenges

The global steel industry is flourishing, supported by record prices and strong demand as countries rebuild their economies after the pandemic. Therefore, investment in the UK steel industry, under a ‘GREENSTEEL’ model, is an attractive proposition for the development of LSUK’s asset base, especially as customers look to secure sustainable decarbonised supplies of this strategic material. Even so, there is a number of structural challenges that need to be addressed to ensure GREENSTEEL can be competitive in the UK over the long term.

Steel is a globally produced and globally traded commodity. The significant costs of maintenance, renewals and capability or capacity enhancements in steelmaking in addition to high comparative operating costs, such as electricity and business rates, act as a disincentive to long term investment in UK operations and has a detrimental effect on the international competitiveness of UK-based businesses3.

As an electric arc furnace operator, with a number of downstream operations, a significant proportion of fixed costs associated with GREENSTEEL production and products are attributable to electricity costs. Those costs are already shown [8] to place UK steelmakers at a competitive disadvantage in international markets and, again, act as a disincentive to investment in UK operations.

There is also significant flux and prejudicial competitive disadvantage in the area of state aids. In some countries, the steel sector is supported directly by government as a matter of national security of supply and planned economic policy. Elsewhere, subsidy arrangements are sometimes effectively concealed through forms of indirect support. The UK’s own state aid regulatory environment is shifting.

One example of how the UK Government’s absence of intervention could significantly damage the industry, by increasing competitive disadvantage and investment disincentive in the UK is its current acceptance of the final proposals of transmission demand residual (TDR) charging, emanating from OFGEM’s recent Targeted Charge Review [9].

LIBERTY’s impact modelling predicts exponential increases in costs, ranging from 83% to 1440% from April 23 onwards, for some of its sites from just this single component of electricity costs with one site seeing an increase in multiple millions.

Government should look again at the impact of the Targeted Charge Review reforms and establish a network cost relief package of exemption/compensation schemes for green levies and carbon costs.

The current business rates regime in the UK not only reduces the monies available for investment but also acts as a disincentive to investment in new technologies and additional capacity or capability as the facilities would be considered to add to the value of the business and would therefore be subject to inclusion in the rateable value calculations.

In the report of its inquiry into the Impact of Business Rates on Business [10], the Treasury Select Committee noted that, as a result of the current business rates system, the UK has the highest level of recurrent property tax, as a proportion of GDP, compared to the G7 and the OECD. This puts UK business at a significant competitive disadvantage in comparison with countries in Europe and the rest of the world.

HM Treasury is currently considering what reforms it will introduce following a fundamental review of Business Rates in the UK [11]. As part of any package of reforms, plant and machinery should be excluded from rateable value. Its inclusion effectively raises the price for manufacturers of acquiring capital and disincentivises investment in new technologies and in enhancing capacity or capability, thus limiting productivity and growth. The current system also fails to incentivise business investment in environmental improvements and decarbonisation – key public policy priorities of this government.

Opportunities

Steel provides the foundations on which an economy and a country is built and rebuilt. It is the world’s most recycled material, with scrap-based recycling accounting for ~30% of current global production [12], and demand for it continues to increase, projected to reach two billion tonnes globally per year, an increase of 10%, by 2030.[13]

A Department for Business, Energy & Industrial Strategy (BEIS) Capacity and Capability study into the future of steel demand and production in the UK shows that UK consumption will climb from 9.5 million tonnes of steel (2017) to 11 million tonnes by 2030 -– a ~£4bn a year opportunity to UK producers if the right measures are in place to help facilitate transformation, expand capacity and capability and improve productivity [14].

The UK has an opportunity to be a global leader in low-carbon steel production and industrial decarbonisation – revitalising domestic manufacturing, “levelling up” and advancing self-resilience [15] through the ‘Green Industrial Revolution’[16] and driving global trade in products made from decarbonised steel.

A Department for Environment, Food & Rural Affairs (DEFRA) commissioned study [17] identifies significant opportunities to produce more GREENSTEEL in the UK, with only ~20% of the country’s 10 million tonnes of scrap steel currently retained and recycled in the UK.

CO2 emissions from scrap-based electric arc furnace steelmaking process account for only about 12% (0.24tCO2/t) of the emissions produced from blast furnace steel-making process (1.96tCO2/t). Electric arc furnace steel making combined with renewable energy and recycling of domestic scrap presents a real opportunity to produce steel with low or zero carbon output [18]. The opportunities of transition to electric arc furnace production offer the dual benefits of commercial advantage – in the products and in the emerging and breakthrough technologies, especially in clean energy, which would contribute to their production – and significant contribution to the UK’s net zero ambitions.

Despite the challenges that have confronted LSUK, the businesses are well positioned for growth now that markets are recovering and steel prices across Europe are reaching record highs. LSUK has been at the forefront of the GREENSTEEL agenda in the UK and in supporting broader policy innovations which can bring benefit, such as Freeports.

With new policy frameworks being developed for public procurement and state aid, following the UK’s exit from the EU, this is an opportune moment for government to embrace, invest in, and incentivise transformation to a modern, competitive, carbon neutral future for steelmaking and processing in the UK.

In addition, steel production is located in parts of the UK, which merit favourable consideration under the broad terms set for the levelling-up agenda. Plants are located away from the south-east of England in areas where employment opportunities are sometimes hard to find, where industrial transition has taken time, and where local communities question whether Whitehall and Westminster understand their needs.

Sustainable steel is as much part of our future as battery-powered automotive technology. Whatever powers transportation, cars, planes and trains will, in large part, be made of specialist metals, and our capacity to participate in a low-carbon supply for those products will be critical to the UK economy’s future.

A number of policy and fiscal measures – including those mentioned earlier in relation to Business Rates and electricity costs – could support the competitive environment for steel producers in the UK, for example;

A green procurement strategy for public expenditure that includes:
enforceable measurement of social value;
a requirement to publish supply chain plans;
identification and implementation of measures to stimulate markets for GREENSTEEL and other low-carbon products.
Incentives for the retention, utilisation and segregation of scrap steel.
Consideration of whether the decarbonisation transition will necessitate further measures, such as carbon border mechanisms, to avert carbon leakage to jurisdictions with less climate ambition and lower environmental standards.
Mechanisms to ignite a market for low carbon industrial products in the UK and low carbon manufacturing.

Recommendations on UK carbon policy for steel transformation

While the measures above will help, there needs to be a more fundamental rethink on how policy in the UK supports the very significant transformation required for steel. This is particularly the case if the UK is to meet the Climate Change Committee’s recommendation that primary steel production is near carbon free by 2035.

GFG would therefore like to make the following new and specific recommendations to the Committee for their consideration. GFG would be pleased to provide a more detailed white paper on these recommendations expressing our views in more detail on how these may work in practice.

Reformed Carbon Trading Policy: Brexit presents a real once in a lifetime opportunity for a reformed UK carbon trading scheme that rewards low carbon steel producers and incentivises investment in low carbon technology such as electric arc furnaces, and coupling of on-site renewable energy generation to power steel production. This would require a significant change in the way emissions benchmarks and allowances are set for UK steel producers. Instead of setting a process benchmark (eg for blast furnaces, direct reduced iron and electric arc furnaces separately), the system should work on a sector level benchmark which would dramatically improve the incentive and hence expedite the decarbonisation of the UK steel sector as a whole.

Remove Subsidy on Coal for Steel Production: Consistent with this approach, government should remove the policy anomaly which effectively subsidises coal use in steel production. There is a significant carbon tax on coal for independent power plants, but it is not widely known that coal for steel production is exempt even though it is more carbon intensive that coal fired power. Instead, government should reallocate support toward on-site private wire, renewable energy generation to power steel recycling. The UK must accept that old-fashioned blast furnaces can’t be the basis of the industry long term and instead embrace GREENSTEEL (recycling with low carbon power) as the only viable means to decarbonising the UK steel sector in the short term.

If 1 and 2 are adopted GFG would also recommend that the rebates on energy prices provided to energy intensive users be removed as this is an inefficient system that does not encourage energy intensive users to take mitigating actions to reduce carbon intensity.

Create an Industrial Development Bank: The fundamental issue preventing the UK steel sector from decarbonising is access to finance. The investments required are large (although investment in steel recycling capacity is modest vs hydrogen steel making) and long term. The UK should set up its own Industrial Development Bank with the sole purpose of financing transformation projects for steel and other foundation industries in the UK. Without affordable and patient capital to transition to GREENSTEEL, the UK will continue to deindustrialise rather than decarbonise.

PART C - GFG Alliance and role of audit, corporate governance, supply chain finance and other financing methods

GFG Alliance overview

GFG Alliance (“GFG”) is a collection of businesses and investments owned by Sanjeev Gupta and his family. It is not a consolidated group but an alliance of businesses. GFG has grown very quickly through counter cyclical investments driven by a number of trends; increasing demand for steel and aluminium, the urgent need to decarbonise these sectors; the decline of traditional manufacturing industries in developed economies; and the need to be competitive in a changing world. GFG’s approach, not least in the UK, has successfully enabled it to identify opportunity and drive positive change in the businesses it has acquired, saving tens of thousands of jobs which may otherwise have been lost.

Since 2019 GFG has been structured into three core industry brands: LIBERTY Steel Group, ALVANCE Aluminium Group and SIMEC Energy Group, independent of each other yet united through shared strategy, values and purpose to create a sustainable future for industry and society [19]. GFG Alliance employs approximately 35,000 people across 30 countries and has revenues of USD $20bn. GFG champions sustainable industry with a mission to become Carbon Neutral by 2030. Besides its core industry brands, GFG Alliance holds investments in financial services, property and other specialist businesses within a Family Office. The Family Office also contains the GFG Foundation – a registered charity founded by Sanjeev and his wife Nicola that primarily aims to develop industrial skills among young people aiming to address the perception and consequences on the next generation due to deindustrialization in the UK and other countries.

Corporate Governance

GFG’s structure and organisation is not unusual for family-owned groups, particularly those that are fast growing and have a variety of assets within a portfolio spread across a range of sectors, with businesses at different stages of maturity and performance levels. As GFG grew, its structure allowed its individual businesses to operate flexibly and develop at different paces according to their need – for example, GFG’s InfraBuild business in Australia is a mature and profitable business with very different needs to assets, such as the Australian Whyalla steel works or the Dalzell plate mill in Motherwell, which were distressed and in need of rapid turnaround. This decentralised and differentiated approach allowed the businesses in GFG to adopt the right financial, governance, operations and commercial strategies to suit their needs. For example, the management team at LIBERTY Galati, our large integrated steelworks in Romania, has been given significant autonomy to make its own operational and commercial decisions which, in June, contributed to it reporting its best set of quarterly financial results since 2008.

GFG’s businesses have used a range of auditors around the world appropriate to their size. Smaller businesses, for example in the UK, have historically had smaller auditors commensurate to their scale. Most of GFG’s major businesses, which forms bulk of our group, use top auditing firms. In common with most private, family-owned companies, GFG has applied the accounting and reporting standards relevant to the particular scale of the business concerned. The pace and scale of its acquisition programme, and the poor or bankrupt condition of many businesses whose accounts were inherited, means that work continues to enhance and clarify reporting arrangements to provide the most faithful possible picture of the performances of the relevant businesses.

Between 2015 and 2018 GFG grew from approximately a few hundred people to nearly 15,000 people by 2019. GFG had made some very significant acquisitions including the acquisition of Specialty Steels UK from Tata Steel, the former Arrium and One Steel businesses in Australia in 2017, and the acquisition of Europe’s largest aluminium smelter in Dunkerque from Rio Tinto in 2018. Then in July 2019 GFG made its most significant acquisition yet with the purchase of seven steel businesses in Europe from ArcelorMittal, including two major integrated steelworks in Ostrava (Czech Republic) and Galati(Romania). These acquisitions doubled the size of GFG and propelled it to becoming one of the largest steel companies in the world.

At that size and scale, with responsibility for nearly 35,000 employees, the governance of GFG needed to evolve accordingly. Therefore, October 2019, GFG announced the consolidation of its core global steel operations into a single entity LIBERTY Steel Group (“LIBERTY”) which would bring together those businesses under one management structure, one board including independent directors, with a single financial year end, single auditor, and consolidated accounts to improve transparency and potential access to capital markets.

In April 2020, LIBERTY announced the formation of the board for the consolidated group which included the appointment of two independent non-executive directors (as of July 2021 there are now five independent directors on the board following the formation of the Restructuring & Transformation Committee – see Part A and further below). At the same time, LIBERTY announced that Baker Tilly MKM would prepare special purpose consolidated accounts for LIBERTY, to be followed in the following years by consolidated statutory audits also. The consolidation of LIBERTY and the preparation of those accounts was a very significant task and was complicated by the onset of the Covid-19 pandemic, which made it all but impossible for the audit team to visit sites. The consolidation was therefore significantly delayed but was complete in 2020. LIBERTY intends to publish consolidated accounts for the year ending March 2021.

The consolidation of GFG’s steel businesses under LIBERTY continued the process of simplifying GFG and the establishment of three industry brands which form the current organisation structure. Whereas previously businesses were run separately, GFG started to group together and integrate assets under its three core industry brands: LIBERTY Steel Group; ALVANCE Aluminium Group, which was created in January 2020 and contains GFG’s major aluminium businesses; and SIMEC Energy Group, which focusses on renewable energy developments worldwide. Under this model, group-wide processes were developed in areas such as Health & Safety, HR and procurement to drive greater standardisation and synergies across GFG’s businesses. These steps are significant developments for the way GFG operates, and it is committed to continuing to improve governance and transparency as the group moves forward.

As part of GFG’s drive to improve governance, transparency and independent advisory structures across the group in October 2020 it created a Global Advisory Board (GAB). The board comprised a range of senior, independent experts from industry, politics, economics and law, who could provide advice and guidance to support the GFG’s environmental, social and governance commitments, including its goal of becoming carbon neutral by 2030. The GAB met regularly after its creation, although its development was hampered by Covid-19 travel restrictions, and it was temporarily suspended on 7 April 2021 to allow the GFG management team focus on immediate business priorities related to refinancing and restructuring.

Greensill relationship

As laid out in Part A the steel industry in the UK had been under very significant pressure when GFG began its acquisitions in 2013. The steel sector had not fully recovered from the impact of the financial crisis in 2008 and had suffered from a number of restructurings which resulted in significant job losses. GFG came to the UK market with a strategy it believed could create a competitive advantage through its GREENSTEEL model, whereby the UK would reduce its reliance on imported raw materials and fully utilise its domestic scrap to recycle steel which could, over time, be produced using low carbon and renewable sources of power. GFG still believes this approach is even more relevant today in particular with UK’s commitment to decarbonisation.

GFG’s strategy in the UK was to identify underperforming or distressed assets that had latent value which could be acquired counter cyclically, and which could be transformed over time to produce or process GREENSTEEL. In 2013, when GFG acquired its first steel mill, the mothballed MIR steel mill in Newport, there were very few options available in terms of traditional finance to support its vision. At this time Greensill Capital had innovative ways of raising finance and they were essential to financing the restart and the growth of many of GFG’s UK acquisitions.

Over time, as GFG continued to grow through acquisition, GFG’s relationship with Greensill Capital deepened to the point where Greensill became GFG’s most significant financial backer. The type of facilities provided by Greensill to GFG Alliance businesses included asset-backed and receivables financing.

Many of Greensill’s financing arrangements with its clients, including with some of the companies in the GFG Alliance, were Prospective Receivables programmes, sometimes described as future receivables. As part of those programmes, Greensill employees identified companies with whom its counterparties could potentially do business in the future. Greensill then determined, at its discretion and based on insurance capacity it had, the amount of each Prospective Receivables purchase and its maturity.

By 2020 GFG had recognised the need to further diversify its lender base to reduce its reliance on Greensill Capital. This process was underway but became a greater challenge as the covid-19 pandemic swept across the world and the businesses focussed on managing the impact of the pandemic which caused high degrees of financial uncertainty. Ultimately, no material refinancing of GFG’s debt to Greensill took place before Greensill Capital collapsed in early March 2021. The over reliance on Greensill as GFG’s core financier created a very significant challenge for the business as its main source of working capital finance was cut off. For some businesses that were already challenged by the pandemic or structural changes in their markets and were reliant on group support for working capital for a variety of reasons, the group has had to make difficult decisions to divest or otherwise liquidate assets. However, steel and aluminium markets have boomed in 2021 which has meant many of GFG’s core businesses, which were able to manage production effectively through the worst months of the pandemic, have continued to perform well and present an attractive refinancing proposition.

Although some GFG businesses were not exposed to Greensill financing, such as the Dunkerque aluminium smelter in France or the Duffel aluminium mill in Belgium, or our US steel business, the vast majority have been impacted by Greensill’s collapse.

With hindsight, GFG’s concentration on one financial provider risked instability. It is not something GFG would repeat, and it now has a policy of seeking, wherever possible, to diversify its capital base as it goes through the current period of refinancing.

Circular trading

There have been some misleading media reports relating to alleged circular trading by LIBERTY Steel Newport which may be helpful to address. Raising finance through a temporary sale of inventory not needed immediately, with an agreement to buy it back later when needed, using a bilateral or tripartite Repurchase agreement (REPO) structure is common not only in commodities but even more so in financial markets. It is especially popular as it is a more secure form of financing compared to other unsecured loans or overdrafts. This is the main business of many traders around the world and many plants rely on such funding mechanisms to augment their working capital. Once repurchased the inventory will eventually be sold on to a final consumer and again raising finance against that sale would be normal. LIBERTY Steel Newport abided by all the normal rules that apply to such inventory-based financing and did so in full knowledge of all parties involved. All such funding was at LIBERTY Steel Newport was repaid in full with financial gains for the investors.

Wyelands Bank

Wyelands Bank is run on an arms-length basis from GFG, with an independent board and management team. It is true that GFG has introduced new clients to the bank – that was a core part of the original business plan in purchasing Wyelands and was made clear and specifically approved by the regulator within Wyeland’s regulated business plan. As noted by others in the media and in the Bank’s own annual reports, this has always been a fundamental part of the business plan. GFG is confident that it has abided by all relevant legislation with regard to related party transactions.

Sanjeev Gupta, as the bank’s main shareholder, recently capitalised the bank with a cash injection of £75m. The result of this action is that Wyelands Bank was able to pay back its retail depositors in full as part of a plan it agreed with regulators.

On 13 May, Wyelands Bank announced that Sanjeev Gupta had indicated that given his need to focus on the restructure and refinancing of GFG he would not be providing further funds to finance a new strategy for the Bank. Following several enquiries from independent third parties the bank’s Board authorised the CEO to engage with potential new investors to assess the potential to take Wyelands forward under new ownership. In the absence of a sale to new investors, the board stated that it expected that the Bank would be wound up on a solvent basis, i.e. with no loss to any creditor.

Political relationships in the UK

GFG is a significant employer and investor in the UK and as part of its normal course of doing business we engage with a range of stakeholders, including politicians, on a number of topics that relate to our businesses. We have strong links with the Scottish and Welsh governments because of the plants and jobs in Scotland and Wales. GFG has made political donations, which have been recorded and registered in the proper way. GFG is writing to the committee with a detailed overview of the government support GFG companies have received since the start of the Covid-19 pandemic.

Conclusion

Mr Gupta and the GFG remains fully committed to LIBERTY Steel UK and to the future of the UK steel industry. GFG has made significant progress in a restructuring and refinancing plan that will enable GFG to pay back creditors following the collapse of its main lender Greensill Capital. This in turn will allow GFG to protect LIBERTY Steel UK’s businesses and safeguard jobs. Much has already been achieved and GFG will continue to publish regular updates for the benefit of all of its employees and stakeholders, including the Committee. GFG is ready to engage further and provide detailed analysis on its models and recommendations.

(July 2021)