Tata Steel Europe has no option, but to cut jobs to curtail costs: Analyst

Tata Steel cutting nearly 3,000 jobs across its European operations may appear a strict measure but more lay-offs are needed in the current market conditions, given there are few options available to the company, analysts said.

“Tata Steel’s UK plant is Ebitda (earnings before interest, taxes, depreciation, and amortisation) negative. It certainly makes sense to have deep jobs cut rounds to reduce the employee cost at this plant, and eventually idle the unit,” said an analyst with a foreign brokerage.

Though the size of the recent job cut is not a confirmed figure, brokerages were of the view that further job cuts need to be around these levels for a meaningful reduction in costs, the analysts said. 

Tata Steel Europe’s current production capacity stands at 12.5 million tonne and it has 21,000 employees. Of this, Port Talbot (UK) has a capacity of 5 million tonne, employing 8,500 people, while Ijmuiden (the Netherlands) has a capacity of 7.5 million tonne. The Netherlands operations have 10,000 employees at present.

According to the European Steel Association's latest reports, steel production fell 8.7 per cent in the European Union region in October; companies have announced production cuts of at least 15 million tonne this year.

Also, global crude steel production has declined 2.8 per cent year-on-year in October as weak economic growth damped output of the alloy.

In the Europe region, Tata Steel competes with large players, such as ArcelorMittal and ThyssenKrupp. “Tata Steel’s competition is also battling a tough market condition but continues to be ebitda positive. Therefore, in comparison, if Tata Steel looks like it is taking stricter measures to rein in cost, let it be. What needs to be done, needs to be done,” said the foreign brokerage analyst.

European steel producers are currently witnessing a weak manufacturing sector, including a decline in auto consumption in the region.

Even for ArcelorMittal, the world's largest steel player, business has been tough. The company has idled series of plants across Europe, cut production in others, and slowed a planned ramp-up of production at Ilva, Europe's largest steel plant that was acquired by it last year.

Tata Steel's overseas employee cost as a per cent of its total expenses has been quite erratic since the acquisition of erstwhile Corus. This parameter showed the highest contribution to total expenses at 20.5 per cent in FY18, from the lowest 13.5 per cent in FY09. 

Analysts are of the view that such is the market condition in Europe that Tata Steel could not have escaped job cuts even if its planned merger with Thyssenkrupp would have been a success.

Both companies had released statements to this effect in 2017 when the merger talks were initiated. 

Thyssenkrupp stated: “The two joint venture partners expect that leveraging the cost synergies across the entire entity will require a reduction in the workforce over the years ahead by up to 2,000 jobs in administration and potentially up to 2,000 jobs in production.”

Among the top steel producers in India, such as Sajjan Jindal-led JSW Steel and Naveen Jindal-led Jindal Steel & Power, Tata Steel is the only primary producer with a presence in Europe over a decade.

“Apart from job cuts, there is hardly any option for the company in the current situation to curtail costs. Even the process improvement or technological enhancement that the company talks about will come at a cost,” said Hitesh Avchat, group head-corporate ratings at CARE Ratings.

Tata Steel in its recent release said it is focused on four areas to improve financial performance - increasing sales of higher-value steels by improving product mix and customer focus, efficiency gains by optimising production processes, supported by the application of big data and advanced analytics, and lowering employment costs.