 "The Tata Steel logo is seen at the Tata Steel rails factory in Hayange, Eastern France")
Steel sector is passing through some interesting times, both in the domestic as well as global markets. Jump in iron ore and steel prices globally led to expectations that steel sector is turning around, but that does not seem to be the case. The fast changing dynamics will have an impact on how companies play their cards going forward.
The board of Tata Steel is meeting this week to decide on the fate of two of its plant in UK, Scunthorpe and Port Talbot. The meeting will decide whether to retain or sell these units. For Tata Steel, it is a choice of investing good money in assets that are bleeding and might continue to do in the foreseeable future.
Post-introduction of safeguard duty and ‘minimum import price’ (MIP), Tata Steel’s Indian operation is on a much better footing. Deutsche Bank in a note on the Indian steel sector has pointed out that 14% recovery in HRC prices since MIP imposition bodes well for the profitability outlook for Indian steel makers. While it should see an improving profitability trajectory in Mar’16 quarter, the full impact of recent price hikes will be reflected in the Jun’16 quarter as significant portion of price hikes have been implemented only in the current month (Mar’16). Deutsche remains optimistic on further pricing recovery in the domestic steel market though domestic demand recovery will remain critical to support the pricing momentum.
JSW Steel is the preferred bet for Deutsche Bank in comparison to Tata Steel. While the broking firm is positive on Tata Steel’s domestic business, it has retained its ‘Hold’ rating on the company on account of weakness in its European Business.
While the Indian government has protected the industry by imposing duties, other governments are slow to act. Almost all countries are impacted by dumping from Asian majors like China, Japan, South Korea or Russia. But the biggest on the industry is from China and thus it is important to keep an eye on the development in China to get an idea of how the sector will perform.
The Chinese government have made a series of announcements in an attempt to revive the steel sector. Production cuts to the extent of 100-150 million tonnes over the next five years have been announced. However, analysts do not think this is enough. In a report on the industry, HSBC says the cut announced is equivalent to around 8-12.5% of China’s capacity. But this will fail to make a dent on the market as Chinese steel plants are currently operating at record low utilisation rate of 67%. Further, there are some more capacities that will go on-stream by 2018. With demand expected to go down by 3% in 2016, HSBC feels the cut is too small to have an impact.
Further, China experts think that it would not be easy to shut down units and find new jobs for the labour. Jobs are available in the services sector but these are for younger and tech savvy personnel, hardly a description for a worker who has sharpened his skills in a steel plant.
Problems of steel industry in China have spilled over to other countries. Various governments have introduced their version of anti-dumping duties. But clearly more is needed, especially in the UK where Tata Steel’s board is contemplating on future action of its plant. Tata Steel has cited cheap dumping as the main reason for the re-think on the running of these plants.
UK politicians and local British media want the Tatas to continue funding the plant. In fact, Roy Rickhuss, general secretary of Community, the steelworkers’ union, and Stephen Kinnock, the local MP, are in India to convince the board not to take such a decision, which is expected to affect 9,000 direct and indirect jobs in the region.
Governments in UK are desperate to save jobs in their state. In a deal brokered by the Scottish government, Tata Steel has recently sold two Lanarkshire steel mills to the metals group Liberty House. The two units on which a decision has to be taken will impact 18,000 jobs, not something that an economy which is barely growing and facing deflation can afford.
As for Tata Steel’s board, its loyalty is first to the shareholders of the company. The company is being offered a sick steel company by bankers – Essar Steel in an environment which is clearly improving for the sector. The call is between running a bleeding unit in a market vulnerable to cheaper imports and acquiring a unit that in one of the few strong steel markets in the world. Even if it does not acquire the Essar Steel unit, closing the UK unit will stop the haemorrhage. Only if the UK government imposes strict import duties will these units be viable and will make sense for Tata Steel to run them.
