Ministers blocked Sheffield Forgemasters, the troubled steelmaker, from reaching a rescue deal with Chinese investors on national security grounds.
The company, which announced on Wednesday it was shedding up to 100 jobs, had been in talks with an unnamed Chinese state-owned group when it was informed before Christmas that the government would oppose the deal.
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The Ministry of Defence, in particular, was against it because Sheffield Forgemasters makes parts for the submarines that carry the Trident nuclear missiles: its pressure cylinders surround the reactors on the vessels.
The revelation illustrates the limits to the UK’s “access all areas” policy towards China even as George Osborne has enthusiastically pursued Chinese investment into British infrastructure. For instance, the chancellor has welcomed a multibillion-pound investment into a proposed nuclear power station at Hinkley Point.
Mr Osborne has also raised hopes of Chinese involvement in an array of projects including the High Speed 2 rail link, saying there is a “powerful free trade doctrine” underpinning relations between the UK and Beijing.
Sheffield Forgemasters revealed on Wednesday that it was laying off workers as it recorded its first loss for more than a decade, blaming a slowdown in the oil and gas sector and the global collapse in steel prices.
The announcement is the latest bad news for the British steel industry, which is shedding thousands of jobs as amid a global supply glut.
The group told the FT that it was still seeking external investment but could not comment further.
“Seeking external investment to restructure the business has always been fundamental to securing Forgemasters’ future and is part of a long-term strategy,” said Graham Honeyman, chief executive.
“This process will continue and until any talks with potential investors have reached a conclusion, all details of those discussions will remain confidential.”
One person familiar with the talks said that any agreement with the Chinese had been more likely to be a “technology transfer deal” than an equity sale.
Sheffield Forgemasters, whose history goes back to 1805, is one of the best-known industrial groups in Britain. Anna Soubry, business minister, said on Wednesday that the government was monitoring the situation closely and would offer help to the ailing company.
“We will do whatever we can to support the company. We won’t let it go under,” she told the Financial Times.
Angela Eagle, shadow business secretary, said the new job losses were devastating. “There is also a loss to the wider economy due the high-quality and specialist nature of the steel produced at the plant which is of strategic importance to our national security,” she added.
“The government must take faster and more decisive action to assist especially on relief for business rates and high energy costs.”
Forgemasters’ accounts for the 18 months to the end of 2014 showed a loss of £9.4m on turnover of £122m. That represented the first loss since Mr Honeyman led a management buyout of the group in 2005.
The company employs about 700 people, having shed 80 last year.
The Sheffield company was promised a £80m loan by the last Labour government in 2010, a decision that was reversed by the coalition.
Nick Clegg, MP for Sheffield Hallam, later offered a £36m government loan through the Regional Growth Fund scheme but this was never taken up.
During prime minister’s questions on Wednesday David Cameron was pressed over the job losses. Harry Harpham, a Labour Sheffield MP, accused the prime minister of “crocodile tears”, saying: “Can he tell me when he is actually going to do something?”
Mr Cameron replied that 35,000 steel jobs were lost while Labour was in power between 1997 and 2010: “He might want to have a little word with his leader about something called the Trident submarine,” he added, a reference to Jeremy Corbyn’s anti-Trident stance.
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