Why saying ‘Tata’ to steel in Europe was Cyrus Mistry’s only option

What began with a bang is ending in a whimper. Those who have keenly observed Tata's $12 billion acquisition of Corus Plc in January 2007 would remember the nail-biting finish to a bidding war that went on for months before Tata snatched the British steelmaker from rival bidder CSN of Brazil in a marathon, quick-fire auction. The Tata point man behind the acquisition, B Muthuraman, then Tata Steel's MD, was hailed a visionary and Ratan Tata, the then Chairman of the Group, a saviour of UK jobs.

Less than ten years since the much-hyped acquisition, Tata has put the UK steel business, rechristened later as Tata Steel Europe, on the block, throwing tens of thousands of UK jobs in jeopardy. The reason? The "deteriorating financial performance of the UK subsidiary in the last twelve months", as the Tata Group said in a media release on March 30.

Global steel demand, especially in developed markets such as Europe, has remained muted following the financial crisis of 2008. Trading conditions in the UK and Europe have rapidly deteriorated more recently, due to structural factors including global oversupply of steel, significant increase in third country exports into Europe, high manufacturing costs, continued weakness in domestic market demand in steel and a volatile currency, the company said. Since it estimated these conditions to continue into the future, it sees its business no longer viable, and doesn’t want it to bleed further.

That’s grim stuff. Much in contrast to the optimism India’s largest diversified Group had a decade back when it went on a shopping spree, snapping up companies that it felt would transform its fortunes in the international arena, including Corus and Ford’s Jaguar and Land Rover, which Tata Motors acquired in 2008. Tata’s Corus buy made it the fifth largest steel company in the world, with a capacity of 25 million tonnes.

The acquisition was expected to give Tata Steel an entry into the high value steel market of Europe, while low-cost manufacturing back at home would give it an added advantage. That was a time when large steel companies were battling for size and scale of operations. Companies such as CSN and the Luxembourg-based ArcelorMittal, run by UK-based tycoon LN Mittal, were scanning far and wide for suitable acquisitions. Tata Steel could not but join the bandwagon.

But the dreams went sour in less than a year. Tata Steel Europe could never recover from the financial meltdown that struck global markets soon after. Demand for steel in Europe slumped, while China, one of the world’s largest consumers of steel, began dumping the product into European markets, and elsewhere too, to protect its own industry.

Eurostat, the EU's statistics agency, says steel imports from China into Europe cost just 583 euros a tonne, compared to 897 euros for steel imported from the EU.

That's a huge difference. Of course, the EU has battled this unfair practice by imposing anti-dumping duties on Chinese steel, but this hasn't helped much. In 2015, Chinese steel shipments into Europe leapt more than 50 per cent, while imports from Russia and South Korea jumped 25 per cent and 30 per cent, respectively. Also to blame are high energy costs and green taxes imposed by the UK, making steel production by domestic industry much costlier compared to other countries.

The failure of the European business caused a big drag for the parent firm. For the quarter ended December 2015, Tata Steel incurred a net loss of Rs 2,127 crore, partly due the losses in Europe. The company, the biggest steel maker in the UK, employed around 17,000, but began axing jobs since last year to contain losses, apart from mothballing some of its operations. In January this year, the company cut more than 1,000 UK jobs, including 750 at Port Talbot where it produces slab, hot rolled, cold rolled and galvanised coil and employs 4,000. Its other UK sites are at Scunthorpe, in north-east England, and in Rotherham, South Yorkshire, in northern England.

It is not known whether Tata Steel will keep the UK units alive till it finds a new buyer, something that is of big concern to its staff as well as labour unions and UK politicians. Getting a suitor for its units may take time, especially since it will be difficult to get buyers for the entire facilities. In the interim, there would be continuing pain, for both the company as well as its staff.

But at some point, the Tata Group had to take this decision to let go of the bleeding European operations. Already, Tata Steel has booked impairment and restructuring charges of Rs 687 crore in the December 2015 quarter, just as it has in the past, too, eroding its net worth. The company said it has incurred an asset impairment of more than 2 billion pounds in the last five years.

Despite several rounds of job cuts, restructuring, asset sales and modernisation, the company could not bring about a turnaround. Reports say that Tata Steel Europe had a negative net worth of 1,335 million pounds as on March 31, 2015. That called for an urgent redressal. Also, a sell off would help Tata Steel Europe pare its huge debt of Rs 21,820 crore, as on March 31, 2015.

None could have foreseen the financial meltdown or the global slump, that cast a shadow on many businesses, including steel. But with the downturn expected to continue, Tata officials would argue that there wouldn’t have been a better option than to exit the business. It sure is a hard decision for the Tata Group and Cyrus Mistry, who completed three years as the group’s chairman in 2015, but expect more such pain as companies grapple with a continuing tough business environment.