Still no resolution to Tata Steel's UK woes

Steel worker uses a crane to handle rolls of steel at Tata Steel's Wednesbury site in Willenhall, Wolverhampton. Image: Ben Birchall/PA Images via Getty Images

Why did Tata Steel get into the UK mess?

When Tata Steel acquired Corus, it was on top of the global steel cycle. Large steel makers were scouring the globe for assets and in a decade, Mittal Steel had gone from one mill to the world’s largest steel maker with the acquisition of Arcelor in 2006. It was in this backdrop that Tata Steel, which was India’s largest steel company then, acquired Dutch steel maker Corus in 2007. The acquisition happened after numerous rounds of bidding at a $12.9 billion valuation. A year later, the recession of 2008 caused a global collapse in commodity and steel demand and prices. 

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What is the issue with the UK assets?

Unlike the assets in the Netherlands, which are near a port and can be used as an export base, the UK assets are nearing the end of their life. The two blast furnaces have to be replaced and the carbon footprint of the facility has to be brought down. This can only be done if the UK government subsidises the cost of new furnaces or else the capital expenditure would render the project unviable. There are also pension liabilities to be taken care of, but that has been spun off into an independent pension scheme—the British Steel Pension Scheme—and those liabilities are off Tata Steel’s books. Brexit has further complicated matters as steel exports are now subject to tariffs. 

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Where do talks stand?  

There is as yet no clarity on what offer the UK government has made. So far, the company has indicated the UK government’s proposal doesn’t go far enough and the Economic Times reported that when N Chandrasekaran and Rishi Sunak met at the inauguration of Tata Motors’ giga factory, Sunak did talk about Tata Steel’s UK plant issue. The two sides are scheduled to meet again in September, and if an agreement is not reached, the company would have to plan to exit its UK operations. At stake are 8,000 jobs and the future of steel making in the UK. 

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Where does this leave Tata Steel?  

A UK exit wouldn’t harm Tata Steel materially. In fact, it is possible the markets would cheer. “Earlier, the UK portfolio was 10 million tonnes out of 25 million tonnes of Tata Steel’s total production. Today, the UK business is only 3 million tonnes out of the total capacity of 32 million tonnes. It is thus a much smaller part of the overall business. So, while it's a problem, its materiality is reduced,” TV Narendran had told Forbes India in an interview in May. The company’s fortunes are inextricably linked to the fate of its expansion plans in India and the growth of steel demand in India.