Even if British Steel is saved, the problems won't go away

ArcelorMittal (MT.AS), the world's largest steelmaker, cut European steel production figures citing weak demand.

The move, announced Wednesday, underscores the challenges that British Steel faces, even if the white knight does save a collapsed industrial business.

British Steel collapsed into administration last week, putting 5,000 jobs in the UK at risk and questioning 20,000 jobs in its supply chain. This came three years after the struggling company was sold to a private joint stock company for just £ 1.

The government said this week it is in discussions with 80 possible bidders who could buy it out from the administration.

However, ArcelorMittal's announcement highlights that job and production cuts may be inevitable, even if British Steel avoids a total collapse. The announcement from the Luxembourg-based steel giant marks the second production cut in just a month.

ArcelorMittal referred to “weak market demand and high level of imports in Europe”.

“This is again a difficult decision for us,” said European CEO Gert van Poelvoorde. "But given the level of market weakness, we think this is a reasonable course of action."

ArcelorMittal shares fell 7% in Amsterdam in response to the news.

Why are ArcelorMittal and British Steel in trouble? Most of the problems stem from China, which has been pumping out huge quantities of steel at discounted prices for years. The incredible figure that went around the corner after the collapse of British Steel was that over the past two years, China has produced more steel than Britain since 1870.

Faced with such an oversupply, Europe is fighting to compete. Add to that the higher cost of powering European factories and US steel tariffs in the EU, and you begin to realize just how difficult it is to turn British Steel around.

All these problems will not go away either. Deutsche Bank's Bastian Sinagowitz said in a note to clients earlier this month that he does not expect steel prices to recover until at least the third quarter of 2019, "as macroeconomic risk has increased and we are heading towards a seasonally weaker period." (Macro risks are analysts who talk about the fact that the trade war between the US and China has no signs of ending.) Sinagowitz added that he also sees "a decline in demand from last year's levels."

Overall, the outlook for the European steel industry is bleak. Even if British Steel finds a buyer, don't expect the crash last week to be the last bad news about the company.