Sanjeev Gupta is now arguing that tolling contracts would be of use to Liberty Steel. He’s entirely correct too, it’s a very sensible idea. If you’re short of working capital – which is why Liberty was using Greensill in the first place – then tolling is indeed a useful answer. The thing is there’s no need for government here. In fact, if government is the only possible source of the necessary financing then this means that we don’t in fact want to do it.
We even have good historical evidence for this, that mess after the collapse of the Soviet Union. If the Reuben brothers, or Glencore, won’t step in now, as they did then, then it’s not something that should be done.
Sanjeev Gupta asked ministers to fund the purchase of scrap metal with taxpayer money so his steel business could recycle it as part of a desperate effort to keep the empire afloat.
In a letter seen by the Telegraph, Mr Gupta urged officials to set up a complicated investment structure using a so-called “tolling” arrangement, which would rescue his company through the purchase of scrap that its electric arc furnaces could convert into finished products.
The tycoon said that his firm needed £170m to plug operating losses and stay open in the letter, which was sent on March 24.
Well, no, it’s not so much to plug operating losses, it’s to provide working capital.
To explain tolling – this is not uncommon in the metals industry. So, you need to have a plant that can do the work. Say, produce actual copper out of copper concentrate. Or convert alumina into aluminium. The plant itself costs a lot of money, you need to be able to sell the stuff once it has been made and all that. But another chunk of money is required to buy that raw material that can be processed into what is going to be sold – that working capital rather than fixed.
If you’re short of capital you might, therefore, own the salesforce, the contracts to the end users, the workforce – or their labour at least – and the plant. But you still need the $hoevermanyhundredsofmillions to buy the raw materials that will take 120 days to move through the digestive system of the plant and the invoicing process. You need working capital.
That invoice factoring, reverse and forward, that Greensill provided is one way to do this. Tolling is another way. You bring in an investor who agrees to buy that raw material. Your plant then processes it. It gets sold, everyone gets their money, huzzah. The distinctive piece of tolling being that the investor owns the raw material and the processed material. The price for the processing is fixed – it’s a toll, d’ye see, for passing through the process?
This solves Gupta’s problem of not enough working capital, again Huzzah. It also means that he gains a simple fee for doing the work, not any mixture of price uplifts, market prices, extraspecial ability to move cashflow around or anything. It’s also a well known technique. Back when the Soviete Union fell apart there were all these massive factories out in weird corners of Siberia etc. They had no working capital. So, they had plant, workforces, they could process stuff, they just had nothing to press.
Up step the Reuben brothers and Glencore – just to use two whose names I can recall – who buy the alumina from the likely tropical sources and ship it to the aluminium smelters by those big Siberian damns. Which turn the alumina into aluminium, for a flat fee, and the Reubens and Glencore get the metal which they then sell.
It is entirely possible to do the same for Gupta and Liberty. Buy the scrap, get the plants to process it, pay Gupta a fee for having done so and sell the steel. In fact, with interest rates as low as they are today this should be a fairly easy thing to organise. You know, little bond fund issuing 180 day notes or summat, possibly run by someone like Credit Suisse or the like, issue the notes out to the market of investors desperate for yield and Bob’s your ancestral sibling of choice.
There’s no need for government in here. Markets know how to do this, have been doing it for a long time.
Hmm, what’s that? Markets refuse to apply a known and useful technique where it will obviously work in theory? They refuse because the risk is so damn high?
Ah, well, then we don’t want to be doing it at all then, do we?
Or, to put this another way. The current market thinking is that Sanjeev has so screwed the pooch that it won’t work. So, well, umm, there’s no point in government arriving to sort out the well shagged dog, is there?