 "Tata Steel")
Tata Steel’s European operations may be improving though global headwinds could make things difficult for the steel industry. At a recent investor call, the company announced a major reorganisation of its Netherlands operations (Tata Steel Netherlands) targeting cost savings to the tune of €500 million for 2025-26 (FY26) and incremental savings of €50-60 million in 2026-27 (FY27).
This includes plans to downsize its workforce by 1,600 (base of 9,000 employees) for the Ijmuiden plant leading to cost savings of €160 million in FY26 and €50 million in FY27. The restructuring will not involve discontinuation of downstream operations in the region. The redundancy costs associated with employee reduction will come in FY26, and have not been finalised yet.
Tata Steel doesn’t see more than a minimal impact of 25 per cent tariffs on steel imports by the US given modest exposures of about 88,000 tonnes out of 3 million tonnes for UK operations and another 670,000 tonnes of exports to US from the Netherlands (out of 6.8 million tonnes) and negligible exposures from India. However, there may be indirect costs and headwinds from the tariffs which have not been quantified.
The management hopes UK operations will hit cash breakeven by the second quarter (Q2) of FY26. In the UK, a significant portion of the 100 pounds/tonne cost takeout initiative has been achieved by Q3FY25. The company has also signed contracts with suppliers for a cutting-edge pickling line for a key component of steel making.
The greening plan involves a targeted reduction of 5 million tonnes per annum of carbon dioxide emissions. Funding support for decarbonisation will involve a tripartite arrangement. Following tripartite discussions between Tata Steel, the Dutch government and the European Union (EU) for a subsidy package, Tata Steel will release a joint letter of intent in the next few months, followed by detailed negotiations. Hence, Tata Steel Netherlands is on course to deliver $48 operating profit/tonne which exceeds earlier consensus.
Domestic operations in India look capable of outperforming peers with a strong margin. Hence, improvement in Europe will have a positive impact. India will see near term benefits from a ramp-up at its Kalinganagar plant and a proposed 12 per cent safeguard duty on flat steel products should prop up domestic prices.
Tata Steel has also reiterated its long-term plan to transition to green steel at Tata Steel Netherlands and one of the two blast furnaces will be replaced by a new direct reduced iron furnace and an electric arc furnace by the end of this decade.
Demand slowdown, which is very likely globally given tariffs, delayed ramp-up in recently-added capacity, and a possible rise in coking coal prices are key risks to the bull case. European steel spreads have declined due to geopolitical tensions, trade, supply-chain disruptions, and high energy costs. Spreads were at multi-year low in Q3FY25 at €170/tonne versus historical average levels of €240/tonne.
Escalating trade tensions are likely to pose near-term challenges for all commodities. Developments related to tariffs will obviously remain a key monitorable. However, Europe may see higher demand on the basis of significant increase in defence spending across EU and UK.
Right now, the consolidated entity is trading at valuations 5-6 times the enterprise value/operating profit and despite the global demand uncertainty, analysts are generally positive on Tata Steel due to strong domestic demand, and the likely European turnaround, backed by defence spending.
