Tata Steel retools to save its Corus business

Company hopes to survive the slowdown in Europe by focusing on high-grade steel; a huge order from Network Rail in the UK may help

Tata Steel Europe (formerly Corus), a subsidiary of Tata Steel, last fortnight announced that it is restructuring its construction steel business, which will affect 500 jobs. This sent out another signal that Tata Steel is grappling with an acquisition which -at $13 billion- was too expensive and came at the wrong time. In 2007, the demand for steel was at its peak in Europe. A little over a year later, it plummeted, thanks to the economic meltdown triggered by the collapse of Lehman Borthers. Tata Steel Europe catered to Europe. It wasn't possible for the company to make steel there and ship it to China, the largest consumer of steel in the world, because it was adding fresh capacity at a feverish pace.

In the last few years, Tata Steel has undertaken several initiatives to save costs and to align supply with the falling demand. While these initiatives have resulted in thousands of job cuts, the worsening demand in Europe has far outpaced the benefits on the cost side. The latest restructuring will affect management and administrative functions at its plants in Scunthorpe, Teesside and Workington in the United Kingdom. "The proposals come amid a prolonged downturn in demand for some of the key products made by the Scunthorpe-based business, including the UK market for construction steel, which is about half of 2007 levels," the company said in a release. Earlier this year, Tata Steel announced a $1.6 billion write-down, primarily on account of its European business.

But the recent downsizing is also a part of the plan to save the business. Some analysts see it as Tata Steel Europe shuttering businesses that are no longer competitive and reallocating resources to specialty, higher-grade and value-added steel. Thus, the company has announced that it will build a new £15-million furnace at its Stocksbridge site in the UK, which it expects to commission in early 2015. The new furnace will enable Tata Steel Europe to address demand from the aerospace and oil & gas industries. The steel maker recently opened a new heat-treatment plant at its Hayange plant in the Lorraine region of France, which will more than double its annual output to 125,000 tonnes.

Experts say a slowdown is a good time for capital expenditure because equipment can be bought at low prices. For the company, these capacity additions, which are all in high-grade steel, mean higher profit margins. "In the year ending March 2014, we expect Tata Steel UK Holdings, which generates around 55 per cent of Tata Steel's revenue, to show better operating margins," says a recent report by Moody's Credit Outlook. Last month, Network Rail, which owns and operates UK's rail infrastructure, chose to source more than 95 per cent of its rail from Tata Steel Europe until 2019, with the option to extend it to 2024. According to Moody's, the deal could mean several hundred million pounds in revenue for Tata Steel.

Tata Steel Europe's focus on high-grade steel makes sense because demand for this category is still strong. In its outlook published October 25, the European Steel Federation, or Eurofer, forecast that demand for non-auto transport material, a sub-segment of the high-grade steel that composes 2 per cent of the European Union's steel consumption and includes railway and aerospace material, would grow 2.6 per cent in 2013 and 4.2 per cent in 2014. Meanwhile, Eurofer has forecast that overall steel demand would fall 2.3 per cent in 2013 and grow 2.2 per cent in 2014, the Moody's report mentioned.

While most analysts point out that, apart from paying too much and getting the timing wrong, the problems facing Tata Steel Europe relate to operational integration, these challenges are no different from other European steel makers. The world's largest steel maker, ArcelorMittal, has also undertaken several restructuring exercises. The company has shut some assets and is concentrating production at competitive sites. "We are mothballing four blast furnaces in Western Europe as well as idling a number of electric arc furnaces. The challenge in Europe has been that steel demand today is 30 per cent below the pre-crisis levels. In that context, there were some operations that were no longer competitive," says an ArcelorMittal spokesperson.

A senior Jindal Steel & Power executive insists that steel making in Europe has become totally uncompetitive. He says that he regularly gets offers to buy out steel factories there but, because of this reason, turns all such requests down. "With the depreciation of the rupee vis-à-vis the pound, it works out more economical to make steel in India and ship it to the UK," he says.

So, is it the beginning of the end of European steel making? Tata Steel did not respond to a questionnaire sent by Business Standard as its quarterly results are due shortly and the company is in the silent period. ArcelorMittal, however, stands firmly by its European business. "It is important to remember that Europe has the technological capability to produce some of the most sophisticated steel in the world for the most discerning customers," says the spokesperson.

But not everyone is convinced about Europe's superiority any more. "Many years back, it was predicted, on the basis of long-term trade data between those who export primary materials and countries which export manufactured products, the terms of trade will continuously deteriorate for the countries exporting primary goods in favour of those exporting manufactured goods. The developed countries assumed this to be a gospel truth. It was sheer arrogance to think that countries like China and India will not grow. China decided to produce steel and achieved a production of 700 million tonnes from less than 50 million tonnes in a span of 25-30 years," Tridibesh Mukherjee, former group director of technology and integration of Tata Steel, says.

Led by the Japanese steel makers, blast-furnace productivity was raised to high levels, while new technologies were developed. The European steel plants cut a contrasting picture. Many did not invest enough to keep pace with the changing technology. "In the developing world, steel plants are no longer run just by people. New technologies, advanced mechanisation and automation has reduced the number of workers in steel plants. The steel units have to be run with knowledge," Mukherjee says. The world around is changing, new grades of steel are being developed to fulfil the demands for new industries. For instance, the Japanese steel companies exerted pressure on steel makers to come up with highly formable grades of steel, or high-strength steel. All steel makers in Japan responded. In Europe, only a few did.

Clearly, the knowledge gap between the developed and developing Asian countries has narrowed. Countries with growth ambitions have taken charge.