Britain’s second-biggest steel producer is kicking off a consultation that could lead to the closure of its two blast furnaces and more than half of its workforce losing their jobs – a move that will pile pressure on the government to improve an offer of taxpayer aid to the company.

Sky News has learnt that British Steel was on Thursday morning in discussions with trade unions about a redundancy process that could result in between 2,000 and 2,500 employees being axed out of a workforce of 3,500.

One trade union source said that meetings were taking place on Thursday morning, with a public statement about plans to accelerate the closure of Scunthorpe’s two blast furnaces emerging soon after.

The company said the consultations related to the closure of the blast furnaces, steelmaking operations and a reduction of steel rolling mill capacity in Scunthorpe.

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The launch of the redundancy consultation comes amid an impasse between Jingye Group, British Steel’s Chinese owner, over a government subsidy package to aid the company’s transition to greener steel production.

Sky News revealed on Wednesday that Jingye had this week rejected a £500m offer from the government.

Sarah Jones, the industry minister, told MPs that talks were continuing, while an urgent question is expected to be answered in the House of Commons on Thursday.

The £500m proposal – aimed at facilitating the Scunthorpe-based group’s transition to green steel production – follows years of talks aimed at salvaging the future of the UK’s second-biggest producer.

Its scale is equivalent to the sum awarded to the larger Tata Steel as part of a £1.25bn package finalised last year.

Whitehall sources said that Jingye’s business plan would involve a smaller number of jobs being cut if a switch to electric arc furnaces took place, with the redundancies also staggered over a longer period.

However, the Chinese group has argued that that transition would only be possible with a larger sum of government funding, they added.

In a statement sent to Sky News, the Community union’s general secretary, Roy Rickhuss, said: “This is a dark day for our steel industry and for our country.

“We urge Jingye and the UK Government to get back around the table to resume negotiations before it is too late.

“Cruciallly, Jingye have not ruled out retaining the blast furnaces during a transition to low carbon steelmaking if they can secure the backing of the Government.

“The closures at Scunthorpe would represent a hammer blow to communities which were built on steel, and where the industry still supports thousands of jobs directly and thousands more through extensive supply chains.

“Given that we are now on the cusp of becoming the only G7 country without domestic primary steelmaking capacity, it is no exaggeration to say that our national security is gravely threatened.

“This would be catastrophic at any time, let alone in the current era of geopolitical instability and volatility. Steel is an essential component of defensive infrastructure, just as it is to wider plans to invest in growth across the country.

The rejection of the £500m offer leaves Scunthorpe’s future on a knife-edge, although Whitehall sources said that all parties involved in the negotiations were hopeful that a deal could yet be struck.

However, the package offered so far falls well short of the sum that Jingye has been seeking from the government during several rounds of talks since Labour won last summer’s general election.

The Chinese-owned group is thought to have requested £1bn or more from ministers – double the amount handed to Tata Steel, owner of the Port Talbot steelworks in South Wales, last autumn.

British Steel, which was taken over by Jingye in 2020 after a spell in public ownership, employs several thousand people at its sites in Scunthorpe, Teesside and elsewhere.

It has been pushing for taxpayer funding to support a transition to green steelmaking by replacing Scunthorpe’s two blast furnaces with cleaner electric arc furnaces.

Reports late last year suggested that nationalisation was an option being explored by ministers.

The government’s proposal comes at a deeply sensitive time for Britain’s steel industry, with fears of swingeing US tariffs exacerbating concerns that the sector’s viability will be put at risk.

Last month, Mr Reynolds published the government’s Plan for Steel consultation, which will include up to £2.5bn in funding for the industry, in line with a commitment in last year’s Labour election manifesto.

“The UK steel industry has a long-term future under this government,” he said.

“Britain is open for business, and this government has committed up to £2.5bn to the future of steel to protect our industrial heartlands, maintain jobs, and drive growth as part of our Plan for Change.”

During the same month, Mr Reynolds held further talks with Jingye Group’s boss, Li Huiming, in the latest chapter of a negotiation which has been dragging on for more than two years.

British Steel was bought by Jingye the year after it was placed into compulsory liquidation.

The company had been owned by private investment firm Greybull Capital.

British Steel CEO, Mr Zengwei An, said: “We understand this is an extremely difficult day for our staff, their families, and everyone associated with British Steel.

“But we believe this is a necessary decision given the hugely challenging circumstances the business faces.

“We remain committed to engaging with our workforce and unions, as well as our suppliers and customers during this time.”

Business and Trade Secretary Jonathan Reynolds responded: “I know this will be a deeply worrying time for staff and, while this is British Steel’s decision, we will continue working tirelessly to reach an agreement with the company’s owners to secure its future and protect taxpayers’ money.

“We’ve been clear there’s a bright future for steelmaking in the UK. We’ve committed up to £2.5bn to rebuild the sector and will soon publish a Plan for Steel setting out how we can achieve a sustainable future for the workforce, industry and local communities.”

Unite general secretary Sharon Graham described the company’s move as a “disgrace”

She said: “British Steel is guilty of trying to hold the government to ransom, while using its dedicated workforce as pawns… British Steel must now withdraw its job threats and work with the government and Unite on a sustainable way forward which is in the best interests of the workers, their communities and the wider economy.”

Ben Houchen, the Tees Valley Mayor, said of the impact: “This is devastating for Britain. Losing our ability to make steel in a world as insecure as this is not just short-sighted, it’s dangerous.

“We had a serious deal on the table to bring an electric arc furnace to Teesside. It would have secured jobs, attracted investment, and delivered a long-term future for green steelmaking in the UK. For whatever reason, that deal was quietly dropped. Instead, we ended up with unworkable proposals in Scunthorpe that were politically convenient but strategically and economically flawed.

“I’ve worked constructively with the Labour Government throughout, but I warned them repeatedly: the path they were on would end in collapse. Today, we’ve seen the result.”