BackTata Steel bites the bullet in Europe
If Tata Steel is firm on its resolve to sell its UK business, what remains to be seen is what parts are sold and at what price
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Tata Steel Ltd’s European misadventure—or at least a large part of it—may be coming to an end. Its board has said no to an expensive restructuring plan for the UK strip products business and instead asked the management to consider selling part or all of the UK business.
In FY16, the company’s European operations produced 10 million tonnes of steel till December 2015, compared to 6.8 million tonnes in India. But it incurred a loss of ₹ 338 crore compared to a profit of ₹ 8,707 crore in India, at the Ebitda (earnings before interest, tax, depreciation and amortisation) level. Exiting UK is a decision that is not difficult to take from this standpoint.
What happens next? The UK government and trade unions may attempt to persuade Tata Steel to change its mind. It may even do so, if they agree to all its demands, either in the form of financial support or agreeing to its restructuring proposals. If Tata Steel gets a deal it can sell to its board, the UK business may yet continue. But this looks difficult.
Tata Steel has already started the process of selling its long products business. Now, it will add the strip products and anything else it may need to make the package saleable. It has several processing units to process steel for specialised applications. But it is not going to be easy to recover its investment in the business. Some impairment in the value of its European assets has already been charged to profits, but more may be forthcoming.
Some of Tata Steel’s problems are external. These include the continuing economic slowdown of the Euro zone economies, unfavourable currency rate movements especially the pound affecting the competitiveness of its UK business and the dumping of Chinese steel into Europe in the past few years. The restructuring it has been doing is to resolve its internal problems, to lower wage costs, pension liabilities and to produce steel more efficiently. That has worked but the external problems have negated those benefits.
Tata Steel’s Europe business had a hard time in FY16, with losses in two out of three quarters so far, and the March quarter is unlikely to be different. But lower profitability is true for its Indian business as well, since steel dumping by China led to lower price realizations. However, the Indian government’s support, in the form of anti-dumping duties, minimum import price and new quality standards for steel, should help improve profitability. That kind of support is missing in the European Union.
If Tata Steel is firm on its resolve to sell its UK business, what remains to be seen is what parts are sold and at what price. The residual part and its more efficient Netherlands steel-making operations will remain. The proceeds from the sale will be used to pay down debt taken for the Corus acquisition. That should lower its interest costs.
The sale could lead to booking of one-time losses. But continuing losses from the European business will end and boost its consolidated results. Tata Steel’s profitability will improve to that extent. There will also be a reduction in its sales, however, which depends on how much of the UK business is sold. Better to lose sales than to lose profits. Also, its Indian business has expanded in capacity and FY17 will see another 1.5 million tonnes added from its Orissa plant. That should help boost sales growth.
Investors are already celebrating, marking its share up by 6.4%. That seems a bit premature. Tata Steel may reconsider its decision, if circumstances change. Even if it does not, the sale process will take a long time, as seen in even smaller asset disposals. There are consultations to be held with unions and the government and due diligence needs to be done. Tata Steel may have to wait to find a buyer at the right price too. The decision marks resolve to end losses from Europe, which is good, but there may be several twists and turns before this story reaches its end.
The writer does not own shares in the above-mentioned companies.
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