Tata Steel Europe shows its mettle

ANALYSIS
Tata Steel Europe shows its mettle
Tata Steel’s European operations is no longer on the auction block. The company reported an EBIDTA of $207 million in the April-June quarter against an operating loss of $84.3 million in the previous corresponding period.Courtesy: Getty Images

Higher steel output, operating profits in the April-June quarter and renewal of existing contracts at higher prices augur well for the future of Tata Steel’s till recently beleaguered operations in the UK and the Netherlands. Result: The Tatas are no longer scouting for a buyer for the unit they acquired in 2006 for $12 billion.

After a long and tortuous journey of 15 years, Tata Steel’s European operations could be turning around. There’s more: The business is no longer on the auction block.

Speaking to news agency PTI, Tata Steel Managing Director & CEO TV Narendran said: “We are not actively looking for any buyer. If you make the business stronger, that helps with the value of the business… For (financial year) 2022, we have guided that our capex will be... Rs 3,000 crore ($400 million) for Europe. It is more for sustenance capex, environment related capex, capex on the product mix, enhancement that we are doing particularly in the Netherlands.”

Operating profits of $207 million in April-June quarter

In a clear indication of a turnaround in its fortunes, Tata Steel Europe’s sales rose 17.4 per cent year-on-year to 2.33 million tonnes in the April-June quarter. The company, which has operations in the UK and the Netherlands, will be cash positive in terms of EBIDTA and PAT as well. It reported an EBIDTA of $207 million in the April-June quarter against an operating loss of $84.3 million in the previous corresponding period. This contributed to Tata Steel’s operating profit of $2.18 billion, a 25-fold increase.

Tata Steel Europe’s sales rose 17.4 per cent year-on-year to 2.33 million tonnes in the April-June quarter. It reported an EBIDTA of $207 million in the April-June quarter against an operating loss of $84.3 million in the previous corresponding period. This contributed to Tata Steel’s operating profit of $2.18 billion, a 25-fold increase.

To increase cost efficiencies, the company’s operations in the UK and the Netherlands will be separated into two different subsidiaries, Narendran said.

The acquisition of Corus Steel did not pay off for Tata Steel. Its plant in Teesside, UK, had to be mothballed and sold within 3-4 years of the takeover.
The acquisition of Corus Steel did not pay off for Tata Steel. Its plant in Teesside, UK, had to be mothballed and sold within 3-4 years of the takeover.Courtesy: Getty Images

Corus had dragged down Tata Steel

Since Tata Steel’s acquisition of Corus Steel, which was renamed Tata Steel Europe in 2010, for $12 billion in 2006, the operations of the company have been a drag on the Indian parent. The commodity cycle turned weak and the global financial crisis of 2007-08 caused by the sub-prime meltdown in the US, hit its operations very badly.

Tata Steel had been on the lookout for the buyer for the unit for several years. Its plant in Teesside, UK, had to be mothballed and sold within 3-4 years of the takeover. Then, it also sold its steelworks in Scunthorpe to Greybull Capital in 2016.

The turnaround at Tata Steel Europe will remove what many had considered an albatross around the neck of the parent company in India and enable it to focus more on its domestic expansion without having to worry too much about its overseas operations weighing it down.

Proposed ThyssenKrupp deal fell through in 2017

The following year, the Tatas finalised a deal to merge Tata Steel Europe with Germany’s ThyssenKrupp to form a 50-50 joint venture headquartered in Amsterdam. This transaction fell through because the European Commission would not approve it on the grounds that it would be anti-competitive.

Then, talks with Swedish steelmaker SSAB to sell its IJmuiden plant and related downstream assets in the Netherlands fell through in January this year when the former withdrew from the deal.

According to TV Narendran, Tata Steel MD & CEO, the European operations is looking to make the business strong, so it can sustain even in a downcycle. There is no longer the need to look for a buyer.
According to TV Narendran, Tata Steel MD & CEO, the European operations is looking to make the business strong, so it can sustain even in a downcycle. There is no longer the need to look for a buyer.Courtesy: Getty Images

European business can now stand on its own

Narendran said Tata Steel had not initiated the sales talks. “We had not gone looking for them. The only time when we were actively working on it was when the Thyssenkrupp proposal was there,” he said, adding: “We are not in a hurry to look for buyers…our first objective was to make the European business stand on its own. The Dutch business was always strong enough to stand on their own, and now the UK is also getting better.”

Narendran told ET, India’s leading financial daily, in an interview: “We are not driven to divest Europe to deleverage because we are deleveraging as it is. We are working on making the business strong, so it can sustain even in a downcycle. We are not actively looking for anyone.”

A view of the Tata Steel plant in the Netherlands. The turnaround at Tata Steel Europe will remove what many had considered an albatross around the neck of the parent company in India and enable it to focus more on its domestic expansion.
A view of the Tata Steel plant in the Netherlands. The turnaround at Tata Steel Europe will remove what many had considered an albatross around the neck of the parent company in India and enable it to focus more on its domestic expansion.Courtesy: Getty Images

Company to gain from rising steel prices

Tata Steel Europe is set to gain from higher steel prices as several long-term contracts are coming up for renewal.

“Long-term contracts are expiring and are being renegotiated at higher prices in Europe. The benefit of high prices has not fully come in. So, all this will start flowing through to the bottom line from the next quarter,” Narendran said, adding: “Both in the UK and Netherlands, we are having conversations with the government to develop a long-term sustainable industry, where the government will play a role through policy and financial support. And that's one of the reasons why we are separating the businesses.”

The turnaround at Tata Steel Europe will remove what many had considered an albatross around the neck of the parent company in India and enable it to focus more on its domestic expansion without having to worry too much about its overseas operations weighing it down.

It also removes the possibility of labour troubles at the company’s operations in Britain casting a shadow over economic ties between India and the UK.

The Tata bet on Corus could finally be paying off.

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