How Tata Steel's Europe ordeal has encouraged it to re-focus on India ops

It is an acquisition. They (Tata Steel) are the ruler but it’s not like the (Normans and) Anglo-Saxons, Philippe Varin, then chief executive officer of Corus Group, had said in response to a question on how the relationship between the companies could be defined after the £6.2 billion acquisition. 

The year was 2007 and Varin was in Jamshedpur for Tata Steel’s centenary celebrations. Months before, Tata Steel had won the bid for Corus, making it, in one stroke, the world’s fifth-largest steel company. 
 

But 13 years and two black swan events — the global financial crisis and Covid-19 pandemic — later, the steelmaker is struggling with the takeover. 

In fact, in their June 24, 2020 report for FY20, the auditors referred to the material uncertainty related to Tata Steel Europe as a going concern, which, they said, was dependent on measures taken and availability of future funding requirements. 

In the first quarter of FY21, Tata Steel Europe’s EBITDA loss was at Rs 626 crore, owing to a weak European market. 

Even if the quarter is discounted on account of the pandemic, Tata Steel Europe has mostly been on shaky ground, except for the first two years when it reported an EBITDA of £1 billion. Then the financial crisis hit the world; in Europe, it impacted steel demand by 25-30 per cent and sent Tata Steel’s assumptions about the acquisition into a tailspin. 

 

 

At the company’s AGM last week, Tata Steel Chairman Natarajan Chandrasekaran faced a barrage of questions from shareholders on European operations’ viability. Perhaps, those questions were anticipated because of a recent Financial Times report that rescue talks with the UK government had ended. This meant rising uncertainty over operations in Europe, particularly the UK, where the company employs around 8,000 people. 

Chandrasekaran, however, told shareholders that discussions with the UK government were still on for a sustainable, structural solution (they have been in discussions for two months). 

Tata Steel Europe has two primary steelmaking units: Ijmuiden, Netherlands, and Port Talbot, Wales. It’s the high-cost UK operations that has mostly been a drag. 

In 2016, while reviewing the European portfolio, Tata Steel had said the group had extended substantial financial support to the UK business and suffered asset impairment of more than £2 billion in the last five years.

But over the years, the unprofitable side has shrunk from around 10 million tonne to 3.2 million tonne. Meanwhile, a number of units in the UK have been sold. In 2011, Tata Steel sold Teesside Cast Products to Sahaviriya Steel of Thailand for $467 million; in 2016, Scunthorpe was sold to Greybull Capital, reportedly for a token amount; in 2017, the specialty steel business was sold to Liberty House for £100 million. Off and on, Port Talbot has been on the block.

Since 2007, Tata Steel has incurred a £2 billion capital expenditure, but it has fallen short of making up for the legacy of decades of under-investment. 

The Corus Group was formed from a merger between British Steel and Koninklijke Hoogovens in 1999. At the time, investments were made to modernise the Dutch facilities even as the British side was stuck in a time warp.

A desire to grow had pushed Tata Steel to make the acquisition. A number of memoranda of understanding for steel plants — in India, Iran, Bangladesh and Vietnam —had made little headway. Pre-financial crisis, Europe was a steady market and Corus was one of the few available options. 

Though costs have been reduced in the UK, structural problems at existing facilities remain. For instance, Port Talbot lacks sufficient coke oven capacity and environmental reasons don’t allow building one anymore. Nor does it have a pellet plant that enhances blast furnace productivity or the full cogeneration balance of a power plant.

“It doesn’t have a port, which adds to the cost,” a steel industry expert said. 

In contrast, the Ijmuiden plant has all facilities that are lacking in Port Talbot, making it the most competitive plant in Europe. It is one of the lowest cost producers and save for some operating issues in the last two years, the plant has been cash flow positive.

Moreover, Port Talbot’s downstream units are scattered, unlike in Ijmuiden, or elsewhere in India, where Tata Steel operates.

Tata Steel is running out of options to resolve its European woes. In 2018, it had signed a definitive agreement with thyssenkrupp to create a 50:50 joint venture that would have created Europe’s largest steelmaker after ArcelorMittal. But the proposal did not receive European Commission approval. 

Meanwhile, demand has been shrinking steadily and raw material and finished steel spreads have now narrowed to about ^200  a tonne with iron ore prices rising. For profitability, Tata Steel Europe needs a spread in excess of ^260.

Commenting on the outlook for Europe, ICRA Senior Vice President Jayanta Roy, said, “Steel consumption reportedly declined by over 5 per cent in EU in 2019 and by almost 12 per cent YoY in the first quarter of 2020. Construction, automobile and engineering sectors account for close to two-third of steel consumption in the region, and near term demand outlook from these sectors is not positive.”

The UK steel industry, however, has been on a decline for a while now. High energy and manpower cost, coupled with cheap imports from China, have taken a toll. Last year, Tata Steel’s Scunthorpe facility, which was sold to Greybull, and rechristened British Steel, went into bankruptcy. The UK government kept it going till it was sold to China’s Jingye earlier this year.

As Europe’s challenges got bigger, Tata Steel changed gears and started growing its operations in India. As Chandrasekaran said at the AGM, in FY16, the geographic composition of Tata Steel was one-third India and two-third international. One-third was profitable, and two-third was unprofitable. 

In changing the mix, Tata Steel has spent Rs 75,000 crore in the last four years in organic growth in Kalinganagar and the acquisitions of Bhushan Steel, Usha Martin and other facilities. Clearly, the future of Tata Steel lies in India. 

As far as Europe is concerned, the option on hand right now appears to be to continue knocking on the UK government’s door.