Steel yourself

ThyssenKrupp could break steel's first-mover issue

Germany plus India equals a possible answer to the European steel industry's first-mover problem. Tata Steel, which has put its ailing British operations up for sale, is talking with Germany's ThyssenKrupp about pooling its remaining European steel assets into a joint venture, German newspaper Rheinische Post reported on April 1, citing government sources in Berlin.

With overcapacity of around 25 per cent and a glut of cheap Chinese output, Europe's steel sector needs consolidation. Yet closing steel mills is costly and politically fraught. A rational steelmaker might do nothing but wait for a rival to take the requisite painful steps. The restructuring pain is individual, but the benefits of consolidation - less downward pressure on prices - are shared with everyone.
 
ThyssenKrupp is best placed to break the mould. It is already the most cost-efficient large European steelmaker. Its Steel Europe division in 2015 increased its operating profit before one-offs by 56 per cent to euro 492 million. A joint venture that excluded Tata's less competitive UK steel operations would be a European cost-leader - Tata's Dutch steel plant in IJmuiden is at least as efficient as Thyssen's operations in Duisburg, according to a person familiar with the situation.

ThyssenKrupp has shown in the past that it has the necessary restructuring mettle. Since 1999, when the company was created in a domestic merger, it cut annual steel production in Europe by a quarter and halved the number of steelmaking jobs to less than 28,000 without causing too much political turmoil. At the same time, Thyssen has expanded its non-steel business in elevators, automotive parts and plant construction - the highly cyclical steelmaking today only accounts for a quarter of the group's revenue and a fifth of the operating profit before one-offs.

There are other ways the sector could adjust to reality. Sources told Reuters that everyone in the European steel industry is talking with each other at the moment. For ThyssenKrupp's Chief Executive Heinrich Hiesinger, a tie-up with Tata should make a lot of sense. It would also put pressure on other steelmakers to start crunching out their own inefficiencies.