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Business News/ Industry / Manufacturing/  Tata’s pain is ThyssenKrupp’s gain
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Tata’s pain is ThyssenKrupp’s gain

ThyssenKrupp has made no secret of the fact that it would like to be involved in steel industry consolidation, but it lacked a dance partner

Tata, which is trying to find a buyer for its struggling UK steel business, is in advanced talks with ThyssenKrupp about forming a joint venture of the two companies’ assets in Europe. Photo: ReutersPremium
Tata, which is trying to find a buyer for its struggling UK steel business, is in advanced talks with ThyssenKrupp about forming a joint venture of the two companies’ assets in Europe. Photo: Reuters

Frankfurt: As Britain’s steel industry moves a step closer toward extinction, German steel maker ThyssenKrupp looks set to profit handsomely.

Tata, which is trying to find a buyer for its struggling UK steel business, is in advanced talks with ThyssenKrupp about forming a joint venture of the two companies’ assets in the rest of Europe, according to newspaper Rheinische Post.

The German steel maker has made no secret of the fact that it would like to be involved in steel industry consolidation—but it lacked a dance partner. Until now.

While the details remain hazy, the logic of a combination is hard to fault: Tata’s British business is loss-making, will require huge investment to turn around, and has massive pension liabilities—all of which have put the future of its giant plant at Port Talbot, south Wales, in jeopardy. However, its Dutch flat steel plant is viewed by analysts as a jewel.

Combining that with ThyssenKrupp’s Duisburg steel plant—which is only about 200 kilometers away as the crow flies—would create cost savings in logistics and procurement. More than half of ThyssenKrupp’s European steel sales are within a 500 kilometer radius of the Duisburg plant.

Commerzbank estimates a joint venture would create about €300 million savings annually. That equates to a net present value of €2 a share—more than 10% of ThyssenKrupp’s current share price.The combined company would also have greater clout in price negotiations with key customers in the auto industry, as Alessandro Abate, an analyst at Berenberg, notes.

Moving on Mittal

The business would have about 22 million tonnes of capacity, making it a stronger competitor to ArcelorMittal Europe which has about twice that amount.

Cost cuts have helped ThyssenKrupp’s European steel business remain profitable even as Chinese imports dramatically drove down prices in Europe.

Technology tops steel

In the long term, it makes sense for ThyssenKrupp to focus on its capital goods businesses. Those operations make things from elevators to industrial components, tend to have higher margins and account for about three-fourths of operating profit.

Of course, there are hurdles to a deal. German politicians could push ThyssenKrupp to partner instead with domestic peer Salzgitter to create a national steel champion (rather than risk leaving the smaller rival out in the cold). And it would be complicated to wring cost savings from a Salzgitter tie-up: the state of Lower Saxony holds a 27% stake and would presumably oppose job cuts.

ThyssenKrupp’s steel business also has a massive unfunded pension liability, as Gadfly noted on Sunday, so Tata and ThyssenKrupp will need to sort out how that will be funded. The German company isn’t in a position to take on the British business’s pension obligations.Yet even if a deal doesn’t happen immediately, ThyssenKrupp should benefit from Tata’s UK woes.

With so many jobs at risk, pressure is growing on the EU to levy more punitive tariffs on Chinese steel imports. That should support pricing for the industry that remains.Regardless of the outcome of the talks with Tata, the German steelmaker therefore looks set to emerge a winner. Bloomberg

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Published: 04 Apr 2016, 02:15 PM IST
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