 "Tata Steel takes a U-turn, but problems remain")
A few days after the United Kingdom decided to leave the European Union, Tata Steel announced after a marathon board meeting that it had entered into discussions with strategic players in the sector, including ThyssenKrupp AG, to look at “alternative and more sustainable portfolio solutions” for its European businesses.
This was a U turn. Tata Steel had announced in March it would explore strategic alternatives for its UK business, including potential sale of the business as a whole or in parts, after a nine-year struggle.
Investment analysts had for long pinned their hopes on this sale: it would have helped Tata Steel to cut its losses.
The company’s operations in Europe, especially in the UK, were hamstrung by a combination of factors: cheap imports from China and Russia, a weak European market and cross-cultural undercurrents.
Tata Steel’s European operations reported revenues of Rs 67,400 crore and underlying EBIDTA loss of Rs 696 crore, down 16 per cent and 115 per cent, respectively, for 2015-16.
This had set the stage for the sale of Tata Steel UK to which the Tata Steel Group had extended substantial financial support and had still suffered asset impairment of more than £2 billion in the last five years.
Around 200 potential financial and industrial investors from around the world were tapped and finally seven expressions of interest were taken forward to the next stage.
But in light of the uncertainties caused by the UK referendum and the government’s consultation on the British Steel Pension Scheme, the sale process was called off.
Tata Steel will now pursue strategic collaborations through a potential joint venture for its European business (that’s the Ijmuiden plant in the Netherlands) and, going forward, may include its plant at Port Talbot (Wales) in the discussions.
The rider is a suitable outcome for the British Steel Pension Scheme, successful discussions with the UK trade unions and support from the governments of the UK and Wales.
A bigger question is, what will another merger mean for people integration?
When Tata Steel acquired Corus in 2007, the fight between the British and the Dutch sides was at its peak. At least two persons who were involved in the integration process of Tata Steel with Corus at the time of the acquisition say it was complicated.
The downturn has brought to the surface the rivalries between Port Talbot and Ijmuiden once more.
Dutch trade union leaders were quoted recently in a report saying that Ijmuiden’s performance was affected by the investment made by the Tatas in Britain to correct a history of poor performance.
The sense of belonging is evident from a recent report which said the motto of the Dutch workers at Ijmuiden is: “We won’t let them wreck our plant”. “Them” here is Tata Steel.
The blame for gaps in the integration process can’t be pinned on Tata Steel, though. The baggage of a failed merger dates back to 1999. The Corus group was born out of a deal between British Steel and Koninklijke Hoogovens.
Kwintessential, which helps businesses wade through the challenges of globalisation, listed the company’s problems as: absence of clear leadership, severe lack of communication between departments, low morale of labour force, poor productivity and poor organisation.
Still, consolidation seems the only way to take on cheap imports.
ThyssenKrupp said in an email to Business Standard: “We believe consolidation of the European steel industry is necessary, and we have outlined that in this situation everyone is talking to one another in the industry. Among others, we also are in talks with Tata Steel.”
ThyssenKrupp is no stranger to Tata Steel. From 1989 to 2001, ThyssenKrupp had a technical collaboration with Tata Steel after which Nippon Steel stepped in.
Today, in the European market, Tata Steel and ThyssenKrupp are competitors. But together they would have a bigger market share and a bigger say in pricing, possibly.
“Dovetailing Port Talbot into this discussion also makes sense. Had Port Talbot been sold, it would start competing with the proposed joint venture entity,” a former Tata Steel official says.
“Ever since the decision to sell was taken in March, world steel prices have risen, reportedly limiting losses at Tata Steel UK (some reports even state that it made a profit in the last quarter),” a briefing paper of the House of Commons briefing paper dated July 11 on the UK steel industry. “This improvement in market conditions may have lessened the urgency for the company to divest itself of its UK operations.”
Looking positive
The main fallout of Brexit so far has been the fall in the pound. Since the June 23 EU referendum, the pound has fallen by around 10 per cent (on a trade-weighted basis) and by 13 per cent against the US dollar.
“A lower pound makes steel made in the UK cheaper to foreign buyers, potentially boosting demand for UK steel. However, a lower pound makes imports more expensive, meaning imported coal and iron ore, used in the production process in some of Tata’s UK operations will cost more,” the report notes while adding the higher cost of imports will also make imported steel more expensive to UK buyers, potentially lowering demand for foreign-made steel and increasing demand for steel made in the UK.
This was a U turn. Tata Steel had announced in March it would explore strategic alternatives for its UK business, including potential sale of the business as a whole or in parts, after a nine-year struggle.
Investment analysts had for long pinned their hopes on this sale: it would have helped Tata Steel to cut its losses.
| THE JOURNEY SINCE CORUS BUYOUT |
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The company’s operations in Europe, especially in the UK, were hamstrung by a combination of factors: cheap imports from China and Russia, a weak European market and cross-cultural undercurrents.
Tata Steel’s European operations reported revenues of Rs 67,400 crore and underlying EBIDTA loss of Rs 696 crore, down 16 per cent and 115 per cent, respectively, for 2015-16.
This had set the stage for the sale of Tata Steel UK to which the Tata Steel Group had extended substantial financial support and had still suffered asset impairment of more than £2 billion in the last five years.
Around 200 potential financial and industrial investors from around the world were tapped and finally seven expressions of interest were taken forward to the next stage.
But in light of the uncertainties caused by the UK referendum and the government’s consultation on the British Steel Pension Scheme, the sale process was called off.
Tata Steel will now pursue strategic collaborations through a potential joint venture for its European business (that’s the Ijmuiden plant in the Netherlands) and, going forward, may include its plant at Port Talbot (Wales) in the discussions.
The rider is a suitable outcome for the British Steel Pension Scheme, successful discussions with the UK trade unions and support from the governments of the UK and Wales.
A bigger question is, what will another merger mean for people integration?
When Tata Steel acquired Corus in 2007, the fight between the British and the Dutch sides was at its peak. At least two persons who were involved in the integration process of Tata Steel with Corus at the time of the acquisition say it was complicated.
The downturn has brought to the surface the rivalries between Port Talbot and Ijmuiden once more.
Dutch trade union leaders were quoted recently in a report saying that Ijmuiden’s performance was affected by the investment made by the Tatas in Britain to correct a history of poor performance.
The sense of belonging is evident from a recent report which said the motto of the Dutch workers at Ijmuiden is: “We won’t let them wreck our plant”. “Them” here is Tata Steel.
The blame for gaps in the integration process can’t be pinned on Tata Steel, though. The baggage of a failed merger dates back to 1999. The Corus group was born out of a deal between British Steel and Koninklijke Hoogovens.
Kwintessential, which helps businesses wade through the challenges of globalisation, listed the company’s problems as: absence of clear leadership, severe lack of communication between departments, low morale of labour force, poor productivity and poor organisation.
Still, consolidation seems the only way to take on cheap imports.
ThyssenKrupp said in an email to Business Standard: “We believe consolidation of the European steel industry is necessary, and we have outlined that in this situation everyone is talking to one another in the industry. Among others, we also are in talks with Tata Steel.”
ThyssenKrupp is no stranger to Tata Steel. From 1989 to 2001, ThyssenKrupp had a technical collaboration with Tata Steel after which Nippon Steel stepped in.
Today, in the European market, Tata Steel and ThyssenKrupp are competitors. But together they would have a bigger market share and a bigger say in pricing, possibly.
“Dovetailing Port Talbot into this discussion also makes sense. Had Port Talbot been sold, it would start competing with the proposed joint venture entity,” a former Tata Steel official says.
“Ever since the decision to sell was taken in March, world steel prices have risen, reportedly limiting losses at Tata Steel UK (some reports even state that it made a profit in the last quarter),” a briefing paper of the House of Commons briefing paper dated July 11 on the UK steel industry. “This improvement in market conditions may have lessened the urgency for the company to divest itself of its UK operations.”
Looking positive
The main fallout of Brexit so far has been the fall in the pound. Since the June 23 EU referendum, the pound has fallen by around 10 per cent (on a trade-weighted basis) and by 13 per cent against the US dollar.
“A lower pound makes steel made in the UK cheaper to foreign buyers, potentially boosting demand for UK steel. However, a lower pound makes imports more expensive, meaning imported coal and iron ore, used in the production process in some of Tata’s UK operations will cost more,” the report notes while adding the higher cost of imports will also make imported steel more expensive to UK buyers, potentially lowering demand for foreign-made steel and increasing demand for steel made in the UK.