Tata Steel investment in UK steel capacity missed opportunity to cut exposure to high cost: Jefferies

Tata Steel and the UK government have jointly announced a monumental agreement to invest £1.25 billion in electric arc furnace steelmaking at the Port Talbot site. Of this substantial project cost, Tata will commit 60 percent, or £750 million, while the UK government will provide 40 percent, equivalent to £500 million, in support. Pending the receipt of all necessary approvals, the project is expected to be commissioned in approximately 36 months.

Crucially, this agreement includes a grant from the UK Government of up to £500 million. The proposed project is poised to be a transformative step towards the decarbonization goals of the UK business, owing to the significantly lower carbon footprint associated with EAF-based plants compared to the existing blast furnace-based facility. Notably, the Port Talbot project is projected to reduce direct emissions by 50 million tonnes over a 10-year period. Furthermore, the undertaking will necessitate a comprehensive restructuring of Tata Steel's balance sheet, potentially leading to the elimination of current cash losses in the UK operations and non-cash impairment of legacy investments.

Tata has made it clear that it will engage in consultations with the unions regarding the proposed project, as it involves a potentially profound restructuring of the existing carbon-intensive steel-making facilities at Port Talbot, which could result in related cash outflows. The company aims to finalize the details and obtain necessary approvals over the next three months. Subsequently, it expects the new project to be commissioned over the following three years. Throughout this transitional period, Tata is committed to ensuring the uninterrupted supply of products to fulfill customer commitments, which may include the import of additional steel substrate to feed its downstream units.

Foreign brokerage firm Jefferies has issued a "Buy" rating on the stock with a target price of Rs 145. According to Jefferies, "Tata expects the new facility to yield £150-170 per tonne, equivalent to $185-210 per tonne, in higher spreads compared to the existing setup, thereby paving the way for decarbonization. On the flip side, the investment, in our view, represents a missed opportunity to reduce exposure to historically high-cost, low-margin geography."