Tata Steel flags risk to UK operations' status as a going concern

Discussions with the UK government on support for the transition had been on for almost three years now

Tata Steel on Tuesday flagged concerns about the financial situation of its operations in the UK, in light of a potential economic downturn in Europe.

The company mentioned in the notes to its results that Tata Steel Europe, a wholly-owned subsidiary, had assessed the potential impact of an economic downturn in Europe caused by factors like higher inflation, higher interest rates, and supply chain disruption caused by the Ukraine war on the business outlook for the UK and Mainland Europe (MLE) value chains.

The board, it said, had considered reasonably possible scenarios to stress test the financial position of both the businesses, including the impact of lower steel margins against the annual plan and actions the group could take to limit any adverse impact on liquidity in the annual impairment assessments.

Based on the assessment, the MLE business was expected to have adequate liquidity under all the reasonably possible scenarios considered. “The outlook for Tata Steel UK (TSUK), a wholly-owned indirect subsidiary of TSE, however, is expected to be adversely impacted towards meeting its liquidity requirements and accordingly with respect to its ability to continue as a going concern,” the company said.

However, the company also said the financial statements of TSE had been prepared on a going concern basis, recognising the material uncertainty in relation to TSUK.

TSE has two primary steelmaking sites – the Netherlands and the UK. An organisational change followed in October 2021, creating two businesses – one centred in the UK and the other in the Netherlands.

Tata Steel said in response to the challenging conditions, TSUK continues to implement measures aimed at improving business performance and conserving cash. These include but are not limited to ensuring adequate liquidity, if required, through available financing options, managing working capital, implementing cost reduction measures, and discussions with the UK government for support for transition to green steel as part of its decarbonisation strategy.

The company also said the progress of discussions with the UK government was being monitored closely, as it remains uncertain whether adequate support for decarbonisation would be agreed.

“Given the risks and challenges associated with the underlying market and business conditions, the uncommitted nature of available financing options and the uncertainty with respect to whether adequate government support would be agreed, there exists a material uncertainty surrounding the impact of such adversities on the financial situation of TSUK,” Tata Steel said.

Discussions with the UK government on support for the transition have gone on for about three years. The UK is believed to have offered about £300 million earlier this year, but this fell short of the requirement.

Independent auditor Price Waterhouse & Co mentioned in its report that T S Global Procurement Company Pte has provided a letter of support to the UK business for access to £300 million of additional working capital, which is more than what is estimated to be required under a severe but plausible downside scenario over the next 12 months.

It said that the letters state that they represent present policy, are given by way of comfort only and are not to be construed as constituting a promise as to the future conduct of the entities or Tata Steel.