Tata Steel UK restructuring helped us save £200 mn: Koushik Chatterjee

Interview with Koushik Chatterjee, Executive Director, (Finance, Corporate & Europe), Tata Steel

The Tata Steel Group has recorded a consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) in excess of Rs 17,000 crore, the highest in the past six years. But, perhaps the most part is the quarterly Ebitda for European operations which was the highest since 2008. In an interview with Ishita Ayan Dutt, Tata Steel’s Group Executive Director (finance, corporate & Europe), Koushik Chatterjee, talks about the initiatives that led to the recovery of European operations, particularly the UK, and the complex restructuring of the pension settlement. Edited excerpts:

Is the worst over for European operations?

You have to map it with what happens in the external world. If you compared (with) 2015-16, we had conversions of all the negative aspects. If you look at the spread between raw material prices and hot-rolled coil (HRC) in 2007, it was in the region of 350 euros per tonne. In 2015-16, it was at 196 euros per tonne. That’s a very severe squeeze. So, we had a huge issue as far as the UK was concerned. The Netherlands was still holding itself. But, the  UK really dragged the rest of the group. 

That is why there was a strategic call in changing the portfolio. We exited from long products in a structured responsible manner and we were working on the turnaround of long products till the day we handed over the assets. We completed the speciality steel sale. We closed some of the mills that were making negative contribution. We did manpower rightsizing. We focused on supply chain, invested in capital expenditure. We also made a big change in our product mix and cost improvements. There was a separate project called Cost of Liquid Steel. 

And, then there was the issue of pensions. It’s the most complicated and complex part of this restructuring. But, it’s all to make the UK business more sustainable. 

Could you elaborate on the UK restructuring and the capex that you undertook in 2016-17?

In the UK, we spent about £100 million in capex, we shut the Llanwern mills which was about three million tonnes in capacity. We have taken about 1,300 people from the Port Talbot supply chain. So, there was a lot of impact on that. The UK business had an Ebitda loss of £300 million in 2015-16; in 2016-17, we were close to three-digit positive on an underlying basis. That’s a massive turnaround in 12 months. There was a market impact, the spreads have increased. 

But, the journey is not over, there is a still lot to do. And, we are working hard. 

What kind of cost savings has the restructuring led to?

If you look at the results last year of the UK only, we have had a result of plus £300 million of which we had portfolios which we have now sold off. Of the retained portfolios, we had structural performance improvements of £200 million that focused primarily on cost without market impact. With market impact, it would be more.

So, the UK was apparently losing £1 million a day and now the restructuring has led to cost savings of £200 million?

Yes, we were losing £1 million  a day in 2015-16. That’s the kind of recovery that has happened. 

At one point you were looking at divesting the UK operations. Is that option now closed?

Last year, when the board decided, we ran a process. But, there was no meaningful buyer. We did divest long products and speciality businesses and said we wanted to be in strip business between Ijmuiden and the UK. So, we have reached an optimal configuration as far as the strip products is concerned in the UK and Europe and we are working to make it improve. Now, it’s not a question of divestment, but improving it. If there is anything strategic to be looked at in the future, we will look at it. 

The volume guidance for Tata Steel India this year is 12.5 million tonnes. What would it be for the group?

Around 24 million tonnes.

Is the pensions settlement a done deal?

The closure of the pensions is a done deal. This is a multi-stakeholder process. The first step was to undertake intense consultations with the unions and employees. There was a ballot and they voted very strongly in favour of the closure and the pension scheme has got closed from April 1. Then, we are working on a regulator-run process which is called Regulated Apportionment Arrangement (RAA) and that process is currently underway. We are in a very positive and constructive conversation with the regulator, and the Pension Protection Fund and the trustees. We have an in-principle approval between Tata Steel UK and the British Pension Scheme Trustee. 

When is it likely to go through?

Should not take too much time. Regulators go through their own processes.

This £550 million is a one-time settlement. But what about the new scheme?

According to the published principles of RAA, the scheme gets separated from the RAA. The old scheme typically gets wound up. A new scheme comes in. The new scheme’s certainty depends on its funding position. Members of the old scheme are given an option to go to the new scheme or to go to the PPF. The new scheme is a significantly de-risked scheme. The benefits are lower so if members agree to the new scheme that would create a surplus which is used for de-risking and if the regulator approves the scheme, then the scheme will continue. 

Will there be any gains from the closure of the current scheme in terms of cash flow?

Fundamentally, it is a de-risking to Tata Steel UK. When we form this new scheme, we want to structure it in a manner that it doesn’t go into deficit. And, if it doesn’t go into deficit, it doesn’t burden the company. If it doesn’t burden the company, the company remains more sustainable. That’s the benefit. I don’t see a gain, but a benefit. The business is significantly less impacted by creation of this new scheme. 

Accounting-wise, there will be some pluses and minuses but those are largely non-cash in nature. But, it’s only till the formation of the new scheme. 

When we closed the scheme we took a curtailment loss; when we pay £550 million, there will be some impact. When the member consent comes through, there will be some impact. 

These adjustments are over and above the £550 million?

There are two-three adjustments. One we have taken, the other one is the £550 million. And in future, after the member consent is reached, we will know the matching between the liability and the asset. So, we will have to do some adjustment.

You are in talks with ThyssenKrupp for consolidation but ThyssenKrupp Works Council is not particularly happy with the pension settlement. 

First of all, they don’t have a stake in this settlement. Consolidation in the European steel industry is an important direction for the future because Europe’s not going to grow like India. And, there is scope for consolidation between some people where the opportunities are creating significant synergies. But, it all depends on how it rolls out in the future. Just now, our focus is clearly on the pensions because that is a very complicated and complex subject. 

Will the pension settlement help dovetail the UK operations into the broader consolidation of Europe? 

When you have a footprint, it’s important that all your businesses are robust and sustainable. Having seen what happened in 2015-16, it was important for us to create a more sustainable business in the UK. And, there were some structural decisions to implement which we have done. You can’t have piecemeal solutions.

Is consolidation a make or break thing for Tata Steel Europe?

My first target is to ensure that we have a business that is sustainable and profitable. In the Netherlands, we are already at that level. That’s one of the best facilities in Europe. The UK, we have done deep restructuring and structural changes. 

What’s next? There is always potential for consolidation in the European steel market because the growth is not going to be very significant but the value of product profile and customers is high. So, it’s a strategic opportunity. 

When would you take up the second phase of Kalinganagar? 

We are working on it. Kalinganagar has got the land and capacity to go well into double digits but that would depend on the pace at which it wants to grow. We will pace in a proper manner. 

Would you look at stressed assets?

I’m looking forward to how the non-performing asset (NPA) ordinance rolls out in practice. If the lenders and the banking community come out with a transparent process, which also calibrates the realistic economic value of the assets, we will look at it. When you do an NPA resolution, it has to be on the realistic economic value. If I am willing to do a multi-million tonne expansion at Kalinganagar, I will be happy to do the same in an inorganic process.