Two recent developments will underscore the frightful state of the UK steel industry where Tata Steel, following its 2007 Corus acquisition, has a dominant profile. First, as part of its attempted restructuring of the UK business, Tata Steel was engaged in long negotiations with Anglo-American businessman Gary Klesch, chairman of the eponymously named group, headquartered in Switzerland, for disposal of its Scunthrope-based rails and plates business. Klesch apparently abandoned the year-long negotiations, as he did not find anything positive in the country's "industrial policy when it comes to energy or when it comes to massive dumping of cheap Chinese steel".
He thought the deteriorating situation would condemn UK steelworkers to the "slaughter house". Second, production at the UK's second largest blast furnace, Redcar, which Thailand's Sahaviriya Steel Industries (SSI) bought from Tata Steel in 2011, had to be 'paused' a few days ago to spare it incurring further losses. At Redcar acquisition time, it was thought 1,000 new jobs would be created once re-lighting of the blast furnace was done. As it would happen, instead of any new jobs, with the combination of falling steel prices on global oversupply and poor demand growth, Redcar production suspension has actually put nearly 3,000 jobs at risk.
It is unlikely that the Conservative government will bail out SSI-owned Redcar ,since subsidy will not easily pass the European Union (EU) muster. SSI has, however, wisely decided to keep mill facilities in a condition whereby it can be brought back into production easily. This could happen in case SSI, as lenders have agreed, could find a buyer or buyers for Redcar assets or arrange a share sale or forge a partnership with a new entity. Success in exercising any of the three options will help SSI reduce its debt burden amounting to $1.4 billion, of which the UK subsidiary alone has a share of $790 million. But, if Redcar remains in a limbo, that will amount to another bitter blow to the standing of the Teesside region, incubator of the country's once glorious steel industry, now reduced to a minnow. Last year, the UK had a share of only 12.065 million tonnes (mt) in the total EU steel production of 169.243 mt.
Corus for Tata Steel is an example of hopes turning into dust. Referring to a good number of big-ticket takeovers in metals and minerals that have turned sour, Caparo Group chairman Lord Swraj Paul says, "Who could have seen ahead of the 2008 global financial crisis that steel misfortune of the present kind would arise? An acquisition is to be judged in the context of the time it happens. Nobody will buy a thing without doing due-diligence. Businessmen are not astrologers. But, they will have much to regret if sacrificing reason to ego- they get engaged in a bidding war and pay unjustifiably high prices for assets." Paul has quite a few 'acquisition trophies' to show. But he, too, had some regrets.
Forget his complaints about government policy. What must have unnerved Klesch to take negotiations with Tata Steel to denouement is the UK steel industry's "yearly disadvantage of nearly $660 million" due to exchange rate issues, energy policy costs, air pollution targets and business rates. Klesch was not unaware that despite SSI investing nearly $600 million to put Redcar in shape, losses mounted. UK mills are now dreading the prospect of China becoming a more determined exporter of steel as its manufacturing purchasing managers' index for September is down to a 78-month low.
He thought the deteriorating situation would condemn UK steelworkers to the "slaughter house". Second, production at the UK's second largest blast furnace, Redcar, which Thailand's Sahaviriya Steel Industries (SSI) bought from Tata Steel in 2011, had to be 'paused' a few days ago to spare it incurring further losses. At Redcar acquisition time, it was thought 1,000 new jobs would be created once re-lighting of the blast furnace was done. As it would happen, instead of any new jobs, with the combination of falling steel prices on global oversupply and poor demand growth, Redcar production suspension has actually put nearly 3,000 jobs at risk.
It is unlikely that the Conservative government will bail out SSI-owned Redcar ,since subsidy will not easily pass the European Union (EU) muster. SSI has, however, wisely decided to keep mill facilities in a condition whereby it can be brought back into production easily. This could happen in case SSI, as lenders have agreed, could find a buyer or buyers for Redcar assets or arrange a share sale or forge a partnership with a new entity. Success in exercising any of the three options will help SSI reduce its debt burden amounting to $1.4 billion, of which the UK subsidiary alone has a share of $790 million. But, if Redcar remains in a limbo, that will amount to another bitter blow to the standing of the Teesside region, incubator of the country's once glorious steel industry, now reduced to a minnow. Last year, the UK had a share of only 12.065 million tonnes (mt) in the total EU steel production of 169.243 mt.
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Over the years, the environment for making steel in the UK has become adversarial, not the least because the cost of energy there is considerably more than in the rest of the EU and an appreciating pound erodes competitiveness of British steel. All these infirmities have made it easier for China to export growing quantities to the UK. Why only China, UK manufacturing and construction industries are using more and more steel procured from multiple foreign sources, including the EU. According to industry association UK Steel, the country's market share of imports was up to 60 per cent in 2014 from 56 per cent the previous year. Import pressure from the EU is to rise further, as steel demand growth in Europe is slowing to 1.5 per cent this year from 3.9 per cent last year. No wonder, Tata Steel has suffered major impairment charges and losses in its UK long products business.
Corus for Tata Steel is an example of hopes turning into dust. Referring to a good number of big-ticket takeovers in metals and minerals that have turned sour, Caparo Group chairman Lord Swraj Paul says, "Who could have seen ahead of the 2008 global financial crisis that steel misfortune of the present kind would arise? An acquisition is to be judged in the context of the time it happens. Nobody will buy a thing without doing due-diligence. Businessmen are not astrologers. But, they will have much to regret if sacrificing reason to ego- they get engaged in a bidding war and pay unjustifiably high prices for assets." Paul has quite a few 'acquisition trophies' to show. But he, too, had some regrets.
Forget his complaints about government policy. What must have unnerved Klesch to take negotiations with Tata Steel to denouement is the UK steel industry's "yearly disadvantage of nearly $660 million" due to exchange rate issues, energy policy costs, air pollution targets and business rates. Klesch was not unaware that despite SSI investing nearly $600 million to put Redcar in shape, losses mounted. UK mills are now dreading the prospect of China becoming a more determined exporter of steel as its manufacturing purchasing managers' index for September is down to a 78-month low.