Truly a turning point in resetting competitiveness: Tata Steel ED & CFO

Tata Steel ED & CFO, Koushik Chatterjee, discusses how the structural issues of the plant are going to be fixed and impact of carbon border adjustment mechanism

Tata Steel and the UK government on Friday announced a £1.25 billion investment proposal, which included a government grant of £500 million for decarbonising Port Talbot (south Wales), the primary steelmaking site in the UK, which has largely been a drag the past 16 years. In a video conference, Tata Steel Executive Director and Chief Financial Officer Koushik Chatterjee discusses with Ishita Ayan Dutt the next steps in the process, how the structural issues of the plant are going to be fixed, and the impact of the carbon border adjustment mechanism. Edited excerpts:

Is the grant from the UK government lower than what you had asked for?

When we engaged with the government three years ago, the project configuration was different -- the project and capex were larger. Then, in the early part of the year, the government responded with a lower capex grant. So we took a fresh look at the configuration and made it more capital-efficient and fit for purpose. The project cost was brought down to £1.25 billion.

The government, in that context, increased its earlier offer of £300 million to £500 million, which was significant.

To secure the grant, did you have to give the government an assurance that there would be no exit or divestment of Tata Steel UK?

That’s something we will discuss more. Our promise is to do the project.

The unions are apprehensive that the switch from blast furnace to EAF (electric arc furnace) is going to cost 3,000 jobs. What is the likely level of redundancies from this transition?

We will first engage meaningfully with the unions on a formal consultation as required by law and any numbers will be determined based on the same. In the consultation, we will demonstrate to them the risks and opportunities that lie ahead for Tata Steel UK -- what this means not only for Tata Steel but for the steel industry and the whole ecosystem in south Wales.

We have had multiple consultations on restructuring. We will continue to do that this time also.

There is an inevitability to the deep restructuring we will have to go through. That inevitability is based on the fact that the heavy end of the assets has come to end of life and is materially carbon-intensive, and hence the operating costs are very high. We will do the consultation based on these considerations and in a couple of months there will be an outcome.

The UK is headed for elections next year. Is there any risk to the proposal in the event of a change in government?

The next engagement with the UK government is to convert the understanding into a definitive grant-funding agreement. That will take some months to happen. It then becomes a contract. Once it is a contract, there are no other risks from a grant perspective.

But every stakeholder across the spectrum understands the need to have strong domestic manufacturing. That’s where the importance of the jobs and the criticality of the real economy come in. We have been one of the largest steel producers in the UK and this proposal will make us the most competitive. As we go along with the consultation process, I believe all stakeholders will support the idea and its execution.

Would the restructuring result in a significant cash outflow?

We have done enough restructuring in the past 15 years in the UK and the trends will be similar as they were then.

The UK operation has structural issues. The downstream units are scattered and the operating costs are high. How will this investment fix them?

The fundamental issues with the UK asset were two -- the heavy end is not structurally competitive. We run two blast furnaces and we are not coke self-sufficient. So the cost increases immediately.

We have been spending £80-90 million on capex on a yearly basis for sustenance in the heavy end. But if an asset reaches end of life, you can’t keep doing that. And you can’t reinvest in a similar asset because it is financially and environmentally unviable.

In the UK, as in the European Union (EU), there is a cost to carbon. This project effectively looks at changing the blast furnace route into an EAF, which is state-of-the-art, much lower in cost and simpler in configuration. It ensures that the cost of hot-rolled coil (HRC) is £100-150 per tonne lower than where we are today in Port Talbot.

The market is also moving towards lower carbon products. In the European Union, we have the carbon border adjustment tax starting. And the UK’s primary market has been domestic, as also Western Europe. This project will be a truly turning point for Tata Steel UK in resetting its competitiveness and the UK steel industry in the global map.

What has been the carbon cost and how does it get eliminated?

We will cut emission from about 2.16 tonnes of carbon dioxide to about 0.4 tonnes after the implementation. On average it’s about £70 million per year. And that’s a lot of cost.

You were in discussion with the UK government on policy measures – like energy, scrap. What is the status?

The UK government has started the consultation process on the carbon border adjustment mechanism (CBAM) and we expect it will be legislated in good time.

The CBAM will ensure the demand for low-carbon products gets priced effectively because it is an equalisation mechanism. It’s not a trade defence mechanism.

On energy, the government in the last one year has been moving significantly on a policy on energy-intensive industries where the landed price and the wholesale price differential comes down significantly especially for high-energy consuming industries. We are already seeing prices coming down and hopefully in the future the renewable portfolio in the UK is going to become much larger. A few years ago, the cost of energy in the UK was significantly higher than in mainland Europe, but that bridge will be reversed with the commissioning of more renewable power like offshore wind power in the next few years.

On scrap, the UK produces a very significant amount of steel scrap, which is largely not value-added. And it gets exported. We will also look at facilitating the development of a good scrap ecosystem in the country and facilitate value addition.

What is the status of your talks with the Netherlands government for support?

We are in very active conversation, not just for support but the entire framework as in the UK.