After delivering negative returns to shareholders over the past year, Tata Steel shareholders could face further challenges due to operational issues plaguing its international business. The company faces a €27 million fine for environmental violations imposed by the Netherlands government on its operations at IJmuiden. Additionally, the Dutch government has threatened to potentially shut down operations if the company fails to undertake the necessary capital expenditure to address the violations.
The expense, which will be the company’s next significant overseas capital expenditure after the United Kingdom, involves restructuring the 7 million tonne per annum-IJmuiden plant to produce green steel through direct reduced iron (DRI) and electric arc furnace (EAF) processes. The restructuring could require up to $5 billion, some analysts say. These analysts spoke on condition of anonymity.
However, weak steel demand in Europe remains a key impediment, with demand expected to stay flat in the near term, thereby shrinking earnings further even as interest expenses from potential borrowings mount.
The analysts cited say that the $5-billion restructuring bill is expected to cover restructuring costs such as closing blast furnaces, replacing them with DRI and EAF steelmaking processes, potential redundancy costs, and putting in place extensive anti-pollution measures.
Tata Steel Netherlands has been in regulatory crosshairs due to frequent environmental violations at the IJmuiden plant, with the recent fine being the latest iteration.
In June, a Bloomberg report quoted a Dutch government spokesperson saying that the government subsidies to restructure the IJmuiden plant for the production of green steel may reach nearly $3.3 billion, partly in response to environmental issues as a result of emissions at the plant. In response, Tata Steel said in a regulatory filing that it was in negotiations with the government after the latter was given a mandate by the Parliament, but no final figure regarding financial support was agreed with the government.
Tata Steel’s stock has delivered for investors in the longer term, but has been a disappointment over the past year, according to analysts.
Over the past year, the steelmaker's shares have traded lower by 1.24 percent on the National Stock Exchange, trading at Rs 138.14 in the early hours of trading on December 30. On the other hand, the company’s listed peers and competitors, Jindal Steel and Power and JSW Steel, have delivered positive returns to investors. While Jindal Steel and Power’s stock has risen by nearly 23 percent over the past year, JSW Steel’s returns have been more modest, at around 3.5 percent over the same period.
The €27 million (approximately Rs 240 crore) fine is nearly equivalent to Tata Steel Netherlands' EBITDA for the July-September quarter, which stood at Rs 243 crore. Among Tata Steel's two main overseas operations, the Netherlands remains profitable at the EBITDA level, while the United Kingdom operations are undergoing a long-standing and controversial restructuring process that has resulted in the closure of heavy-end assets.
The IJmuiden plant, along with Tata Steel’s Indian operations, is expected to supply material to Tata Steel UK’s downstream operations, which serve clients such as Tata Group firm Jaguar Land Rover.
Fine Imposed by Local Authorities
The fine was imposed by local authorities due to emissions of volatile organic compounds and heavy metals exceeding limits in the North Sea Canal region, where the plant is located, according to a Reuters report. Dutch authorities have previously fined the company, and in 2023, a government health monitoring agency linked the plant's emissions to reduced life expectancy, lung cancer, asthma in children, and other health issues among residents in Wijk aan Zee, a nearby seaside village.
The report noted that if Tata Steel fails to present an action plan within six weeks and implement measures over the following two months, the fine will be enforced, and the environmental license for one of the plants may be revoked, potentially forcing the closure of the coke factory.
In response, Tata Steel told Reuters that it disagreed with the decisions regarding the fine and described the eight-week recovery period as "completely unrealistic and impossible." An email sent to Tata Steel seeking comment about the company's Netherlands operations, including its response to the fine imposed by the Dutch government, and its capital expenditure plans in the country, remained unanswered till the time of publishing.
In 2020, the company presented an ambitious plan to "capture" carbon emissions at its IJmuiden plant and transport it through a network of pipelines to empty gas fields under the North Sea, in order to achieve a 30 percent reduction in carbon dioxide emissions at the plant. However, recent investor presentations have not made any references to that project.
According to its Q2FY25 investor presentation, Tata Steel committed to reducing carbon emissions by up to 40% by 2030 compared to 2019 levels for the Dutch operations. The company plans to achieve this by utilising DRI and EAF-based steel manufacturing and phasing out blast furnaces at the site in two stages. However, Tata Steel indicated it would require significant support from the Dutch government, similar to the UK, where the government is covering £500 million of the £1.2 billion restructuring cost at the Port Talbot steelworks in Wales.
The company has long been aware of the potential ramifications of the alleged violations, but analysts suggest it has failed to take remedial action. Last week, Tata Steel Netherlands submitted a draft environmental impact assessment (EIA) to local authorities, describing it as the "next step" in its green steel initiative to phase out coal from the steelmaking process. This aligns with the European Union's goal of reducing carbon emissions by 55% by 2030 (compared to 1990 levels) and achieving carbon neutrality by 2050.
Flat Steel Demand in Europe
However, Tata Steel Netherlands and other European steelmakers face uncertainty due to flat steel demand. Since the financial crisis in 2008 and subsequently in the Eurozone , steel demand has been sluggish. Any post-pandemic recovery hopes were dampened by the ongoing Russia-Ukraine conflict, soaring energy prices, and competition from low-cost Chinese steel imports.
A PwC report estimates steel demand in the EU will reach 162 million tonnes in 2025, 2% lower than in 2024, indicating persistent overcapacity in the sector.
"The European steel market will continue to face structural overcapacity and competition from imports from Eastern Europe and Asia. This will keep the sector under pressure in the foreseeable future," the PwC report stated.
Analysts suggest that the market views the Dutch government’s fine as a one-off event. "The impact on Tata Steel's valuation may be limited to around 1x the fine amount," said Ravi Sodah, equity analyst at Elara Securities.
However, broader concerns about weak steel demand in Europe and rising imports into India have kept investors cautious about the ferrous sector. Analysts noted that while restructuring is necessary for Tata Steel’s Netherlands operations, uncertain demand complicates the outlook.
"European steelmakers face near-term headwinds due to weak demand and high working capital requirements during the transition to green steel. While there is a long-term business case for decarbonization, the risk lies in prolonged weak demand and the unfavorable economics of green alternatives," said Satyadeep Jain, lead metals analyst at Ambit Capital.
(with inputs from Aishwarya Nair)
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