China-owned British Steel said to have requested £600m of taxpayer support

British Steel plans to close its two blast furnaces at Scunthorpe and replace them with much cleaner electric arc furnaces in Scunthorpe and Redcar. Photograph: Gary Calton/The Observer

Chinese-owned British Steel has reportedly submitted a request for a package of taxpayer support worth £600m as it looks for assistance from the next government to upgrade to less polluting technology.

Government officials are due to review plans that set out the costs of switching from blast furnaces to electric arc furnaces at the company’s steelworks in Scunthorpe, Lincolnshire, the Sunday Times reported.

The steel industry is one of the UK industries that could be most affected by a change of government at the general election. The Labour leader, Keir Starmer, who is heavily favoured in polls to be the next prime minister, has stuck to a pledge to invest £3bn in decarbonising the steel industry despite rowing back on other environmental spending plans.

Ministers will have the final say over any support for British Steel after the election. Any deal is likely to receive close scrutiny because of the Chinese ownership. China produces more than half of global steel, and has previously been accused of dumping steel in other countries to win market share.

Ministers in the new government would also have final say on whether an already agreed £500m subsidy for Indian-owned Tata Steel would go ahead. Rishi Sunak’s government agreed the deal with Tata to switch production at Port Talbot in south Wales from two blast furnaces to a single electric arc furnace.

If Labour wins power, it is understood the UK’s ability to make steel from iron ore, known as primary steelmaking, would be an important consideration when deciding support for individual companies, although it is also keen for private sector companies to invest alongside.

The shadow business minister, Jonathan Reynolds, has described primary steelmaking as a “sovereign capability” because of its role in building nuclear submarines and wind turbines.

British Steel has struggled financially since being rescued from collapse in March 2020 by China’s Jingye. Auditors for the company in January warned the business, which employs 4,500 workers, faced “material uncertainty” over its future.

British Steel in November announced plans to close its two blast furnaces at Scunthorpe and replace them with much cleaner electric arc furnaces at Scunthorpe and Redcar, in North Yorkshire. The plans could eventually mean 2,000 job losses, because electric arc furnaces require far fewer workers.

Tata is also planning to make as many as 2,800 workers redundant in the switch to electric technology. It has claimed that any attempt by Labour to renegotiate the terms of the deal could put steelmaking in Port Talbot at risk.

Alasdair McDiarmid, the assistant general secretary of Community, a steelworkers’ union, said Labour’s £3bn investment could be a “gamechanger” for the industry.

“We need the next government to recognise the vital importance of the steel industry to our economy and national security, and to show ambition for the future of the sector,” he said. “That’s something which has been dismally lacking over recent years, as epitomised by the bargain basement plan Rishi Sunak signed off with Tata – a proposal which would remove Britain’s primary steelmaking capacity and leave the country reliant on dirty steel imports from overseas.”

Neither the plans from Tata Steel nor British Steel would, as they stand, preserve the UK’s ability to produce steel from iron ore, as now happens in Britain’s remaining blast furnaces. The companies plan to feed scrap steel into electric arc furnaces to melt the metal down.

One option for producing near-zero-emissions steel is making direct reduced iron (DRI). The DRI process removes oxygen from iron ore using gas. If green hydrogen is used no carbon is released into the atmosphere, and the iron can be used in an electric arc furnace.

However, neither Tata nor British Steel are thought likely to consider investing in a DRI plant without major government support. The companies have previously argued that their loss-making operations make it difficult to invest without this. A DRI plant could cost as much as £1bn to build, according to some industry estimates.

British Steel declined to comment.