Tata seeks a way out of Euro steel woes

It would take 1,087 steel drinks cans stacked end to end to reach the top of the London Eye, or 2,818 to attain the summit of the Eiffel Tower.

Such references to famous European landmarks used to pepper the website of Tata Steel, reflecting the Indian company’s lofty ambition to become the world’s second-largest steel producer.

But the facts and figures section is no longer there — a telling sign perhaps of how Tata has scaled back its aspirations following a collapse in steel prices stemming from a supply glut driven by a torrent of cheap Chinese exports. Confirmation of Tata’s retrenchment came in March, when it put its lossmaking UK operations up for sale.

Then, in a change of tack after struggling to attract acceptable bids for the British business, Tata revealed this month it was in “preliminary” talks with Thyssenkrupp, its German rival, over a possible European steelmaking joint venture.

A tie-up between the European steel operations of Tata and Thyssenkrupp would create EU’s second-largest producer after ArcelorMittal, with three large works spread across Germany, the Netherlands and the UK, and estimated annual revenues of €18bn based on 2014-15 results.

A combination would amount to the biggest shake-up of the sector for a decade and might go some way towards solving the European steel industry’s longstanding problem of excess production capacity by closing unneeded plants. This could boost the pricing power of the remaining industry players, and therefore their ability to generate sustained profits.

Europe is consuming about 25 per cent less steel now than it did in 2007, according to Eurofer, a trade association that represents European steelmakers.

“If you’re looking for sustainable operations in Europe you will need closures,” says Mike Shillaker of Credit Suisse.

Cyrus Mistry, chairman of Tata Steel, says in the company’s new annual report that consolidation of the global steel industry is important amid oversupply, low commodity prices and reduced economic growth.

“Consolidation of businesses would provide an opportunity to the steel industry to remain relevant and competitive in terms of costs and value to the customers and enable investments in product innovation, technology and supply chain efficiencies,” he adds.

A joint venture involving Tata and Thyssenkrupp would have a 25 per cent share of capacity in the European market for flat steel, which is used in cars, packaging, engineering and household appliances, according to Jefferies analysts.

Both companies are under pressure from ArcelorMittal, whose share of this market would increase from 33 per cent to 40 if it succeeds in a joint bid with Marcegaglia group to acquire Ilva, the Italian steelmaker.

“A [joint venture involving Tata and Thyssenkrupp] skips a lot of procedural difficulties in implementing a full M&A [deal],” says Alessandro Abate, analyst at Berenberg.

For Tata, forging a tie-up with Thyssenkrupp would be a way for the Indian company to hive off its troubled UK arm, which was secured in a £6.7bn deal to buy Corus, the Anglo-Dutch steelmaker, in 2007.

At the time it was the largest foreign acquisition by an Indian company, propelling Tata from the world’s 56th largest steelmaker to the number six spot. But the deal, which came at a hefty premium, is now seen as ill-timed, and has dragged on the profits of Tata’s domestic steel operations.

For Thyssenkrupp, a joint venture with Tata could be a first significant step to focusing on its more profitable and stable capital goods business, which makes elevators, escalators, and supplies components to various industries, including those making cars and wind turbines.

As it shifts from steelmaking to technology, Thyssen is “desperate for a deal”, says Carsten Riek, analyst at UBS. “If they manage a 50/50 joint venture, they could take the steel [division] off the balance sheet.”

The German company has long coveted Tata’s Ijmuiden plant in the Netherlands, regarded as one of the most efficient in Europe. It is located about 200km from Thyssenkrupp’s German steelmaking site at Duisburg, and therefore could lead to cost savings through joint working.

“Duisburg has scale, Ijmuiden is a 7m tonne deepwater [port] facility and effectively has scale,” says Mr Shillaker. “Both are located within decent road and rail network of the industrial heartland of Europe.”

Industry figures draw some comfort from the EU’s hardened stance against the dumping of steel by countries led by China, which is grappling with significant excess capacity following the country’s economic slowdown. They can also be encouraged by a rebound in steel prices this year.

Less obvious is how Tata’s persistently lossmaking British operations — which Thyssen had previously shunned — fit into any European joint venture. In the year ending March 2016, the UK operations made a post-tax loss of £568m.

Tata has described the UK business as almost worthless and estimated £2bn of new investment is required to turn Port Talbot in south Wales, Britain’s largest steel plant, into a high-quality producer.

Tata Steel’s Port Talbot plant © Getty

Overshadowing Tata’s UK business is a large pension scheme with liabilities of £14bn, an estimated deficit of £700m and 130,000 members — more than 10 times the active workforce.

“The idea that anybody would willingly take on a difficult business, and one with a big pensions scheme, just doesn’t make any sense,” says John Ralfe, a pensions consultant. “Thyssenkrupp would be bonkers.”

To try to assuage these concerns, the UK government has offered a significant financial package to any future owner of Tata’s British operations, including a proposal to detach the pension scheme.

But many analysts see as inevitable the closure of the Port Talbot plant because it is viewed as uncompetitive. Shutting down one or both of Port Talbot’s blast furnaces in the event of a European tie-up between Tata and Thyssenkrupp could prevent it falling into the hands of a new entrant who might simply add to the supply glut, says Seth Rosenfeld of Jefferies.

Yet closing part or all of Port Talbot would be politically fraught for the UK government — there is a clear risk of a backlash against ministers because the British steel industry has a rich heritage.

Whatever the outcome of the talks between Tata and Thyssenkrupp, a reshaping of the sector now appears likely as Europe’s steelmakers grasp the nettle that has stung them since the financial crisis.

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