Dear Reader,
The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.
Tata Steel’s investors may be keenly watching for the outcome of UK’s steel industry bailout. While the UK government being called to rescue businesses in the name of protecting employment may seem like a replay of an old movie, this time it’s a bit different. These UK steel makers need to invest in greener steel-making facilities to make low-carbon steel, requiring huge investments.
Since their existing financial condition is precarious, due to legacy issues, higher energy costs and a slump in steel prices, they have threatened to shut operations if they don’t receive support. The government is being forced to act to protect employment and to retain some primary steel making capacity within the UK.
The Financial Times reported that the UK government will come out with a £600 million package that will be divided between Tata Steel UK and British Steel. They will invest in greener technology, with the main option being to switch blast furnaces to the electric arc furnace (EAF) route to use scrap steel. But the UK government is offering them less than the estimated 2 billion pounds sought by both companies to shift to the EAF route.
The government has its own fiscal pressures. It also does not want to underwrite investments to such a large extent. The companies know they can push the government for support, since it wants them to shift to cleaner technology but it does not want to shut them down either. It’s a game of give and take that’s playing out. The government wants commitments on investments and maintaining manpower at current levels for a certain period, in return.
Since the government’s proposed investments are less than expected, it appears to be offering another sop in the form of a carbon border tax. This is similar to the one cleared by the EU where any steel imported into the UK should be as green as the ones produced within EU. But, if the amount of carbon or other emissions generated in producing a tonne of steel is more than specified limits, then a tax will be levied on the imported steel as an equalisation levy. This will work as a price support mechanism for domestic steel companies, ensuring that producing green steel does not result in a cost disadvantage.
But this will not be an easy decision, as steel buyers such as those making automobiles will see their costs increase. Therefore, a carbon levy will have to take both sides into consideration, as the government also gives more priority to the value-added sectors. However, what seems clear is that at least in the near term, the cost of producing greener steel will lead to some increase in the cost of steel for buyers.
If a suitable package is approved, then it will give Tata Steel shareholders some relief that the UK unit could remain viable for some more time to come. High energy costs are still a bugbear for UK steel plants and they have sought more relief on this front too, on par with protection given to EU steel companies. But the energy crisis in Europe appears to have peaked and unless some new crisis occurs, energy costs don’t seem to be as potent a risk as earlier.
While these moves in Europe may seem far away for Indian steel-makers, that’s not the case. If the EU and UK implement a carbon border tax, then that will affect exports globally. The inking of climate goals by world leaders will also put more pressure on companies to invest in greening of steel technology, even if domestic policy does not impose such constraints. More countries may impose limits on the carbon content in imported steel.
Since EU/UK steel buyers will find their costs increase, they may insist that imports of finished goods—such as cars or consumer durables—should also be subject to a carbon tax adjustment. Other countries may retaliate with tit-for-tat measures to protect their own steel industry’s green investments.
This will pose a challenge for steel producers that will play out in the coming years. Massive investments may be required to change their production systems to meet these new global norms or suffer a carbon tax that makes exports unviable. Initially, facilities using low-carbon technology may be earmarked for exports, with the old carbon-emitting plants supplying the domestic market.
But eventually they would need to shift all plants to deploying green technology, as India’s own climate goals too will require less carbon-intensive manufacturing. While the roadmap may not be very clear now, the writing on the wall is clear. Decisions taken in countries such as UK and in the EU and even the US will see major producers such as China effect changes in their steel industry, and that will spill over to India as well.
In today's Budget Snapshots, we highlight that the spotlight would be on infrastructure capital expenditure. As fears of COVID-19 abate, the need for higher expenditure on health, food and other social welfare measures taken in the past two years would reduce. This leaves headroom for push in infrastructure capex.
Investing insights from our research team
What else are we reading?
Technical Picks: Tata Communications, Tata Motors, Guar seed and Petronet LNG (These are published every trading day before markets open and can be read on the app).
Ravi Ananthanarayanan
Moneycontrol Pro
