Brexit will play an instrumental role in Tata Steel Europe-Thyssenkrupp JV

Tata Steel has come out with a fair deal in the 50:50 JV between its European unit and Thyssenkrupp’s steel operations in the continent. Though the German company will eventually end up with a higher equity  — the JV will issue warrants worth 10 percent of equity capital to Thyssenkrupp — Tata’s equity value in the venture is now higher by $540 million (Rs 30/share).

Not just that. The JV has envisaged that 4,000 jobs will be cut, but only 1,000 of that will fall in Tata’s UK business, whose below-par performance has been a matter of concern, and contention.

But the Port Talbot facility in Wales remains the weak link in the JV, which also includes Tata Steel Europe’s operations in the Netherlands.

“Much would depend on how UK’s exit from the European Union takes shape. If Brexit leads to duties on export and import of steel, this will have a huge impact on the UK steel industry,” said a senior executive from the industry who has worked in the Europe.

“While it’s too early to say, the UK operations can’t afford to remain uncompetitive for long. The repercussions could be bad,” added another executive from a private steel company.

The Brexit cut-off date is March 29, 2019.

UK steel industry

The domestic steel industry hasn’t really recovered from the jolt it suffered from the 2008 financial crisis. And the rot had started setting in even before.

In the last 20 years, crude steel production in the UK has declined by 39 percent and the domestic market has become a net importer from a net exporter.

“It’s not that the local demand hasn’t recovered since the crisis. While demand has grown by 7 percent a year, the local industry hasn’t benefited from this. In fact, over the last decade and a half, demand for steel made in the UK has reduced by over 30 percent,” said the industry executive quoted first.

That the UK industry exports over 40 percent of its production shows that it hasn’t evolved as per the needs of its local consumers, most prominently the auto ones, who now import.

Port Talbot

Tata Steel's Europe facility in Port Talbot, Wales, is by far the largest steelmaker in the UK. But it continues to suffer from structural issues.

“All the raw materials are imported and energy costs are high in the UK,” said the executive.

Moreover, the facility doesn’t produce some of the products such as high strength grades used by the auto industry, or steel used in the construction, earth moving equipment and agricultural equipment.

Earlier reports had surfaced saying that the UK operations of Tata Steel loses 1 million pounds a day.

It also doesn’t help that Port Talbot is the smallest site in the JV with Tata Steel Europe’s Ijmuiden facility in Netherlands producing twice that of the Wales plant, which rolls out 3.5 million tons of steel a year. Thyssenkrupp’s Duisburg plant has a capacity of 12 million tonne a year. Interestingly, Ijmuiden and Duisburg are connected via waterways and are just 125 milles from each other.

Structurally stronger

A Credit Suisse report says the deal implies that Tata Steel Europe's EBITDA will improve to much higher levels than forecasted.

Does it mean that Port Talbot will benefit under the new structure? Tata Steel Managing Director TV Narendran would surely think so.

Commenting on the JV,  Narendran told a daily that the deal brings about a structural change.

Till now, while its Indian operations were small but stronger structurally (given its low cost of production because of captive mines), the situation was opposite in the UK.

“If I look at Tata Steel Europe, we are 10 million (tonne) and 3 million in the UK so that is less than 30 per cent of production. If you look at the joint venture, we have 22 million, 3 million of which is in the UK, so the joint venture is less vulnerable to what happens in the UK. Structurally, you become stronger as a joint venture than as Tata Steel Europe,” Narendran told The Hindu.

The Tata Steel top executive will be hoping that Port Talbot stabilizes as part of a larger organization. But if economic conditions, including Brexit, become adverse for the UK operations, Port Talbot could re-emerge as a bone of contention for the two partners.