No respite from tough decisions for Tata Steel’s Europe subsidiary
Europe ops did improve some quarters earlier, but overall their contribution has been dismal
Tata Steel has no option but to continue taking tough decisions for its Europe operations to keep its overall business growing, according to brokerages and rating agencies.
Dutch media outlet NH Nieuws recently reported that Tata Steel Europe, subsidiary of Tata Steel India, had decided to cut 2,500 jobs, which would be a fourth if its work force, to save $930 million in costs. The final plan on this would be ready by November, it said.
“Performance of the Europe operations is going nowhere and it continues to need a lot of support from India operations. In such a scenario, it makes sense to cut fixed costs (such as head count) to curtail cash loss,” said a senior analyst with a rating agency.
Europe operations did improve some quarters earlier but, overall, its contribution to the consolidated figures has been dismal. “As a management, we are not keen on missing out opportunities in India because we have to keep sending cash to Europe. We have told the (Europe) team that the best way for them to control their future is to be cash-positive,” T V Narendran, chief executive at Tata Steel, had earlier said.
In June 2018, Tata Steel decided to merge its European operations with Thyssenkrupp, giving the latter ultimately 45 per cent stake in the merged entity. However, this did not go well with the labour unions of Thyssenkrupp, who feared job losses. Besides, investor groups, which held 18 per cent stake in the German company, also did not approve and its share price lost half the value in the past year. Then, in May this year, the merger plan collapsed after objections from the anti-trust authorities of the European Commission.
“There is no other major player in the region for any JV (joint venture) with Tata Steel. Also, they (Tata Steel) do not have any Plan B to make operations profitable. In such a situation, the company has no choice but to keep downsizing operations gradually,” said a Mumbai-based brokerage analyst, on condition of anonymity.
Tata Steel has responded to these reports with this statement: “Like all European steelmakers, Tata Steel Europe continues to experience challenging market conditions, made worse by the use of Europe as a dumping ground for the world’s excess capacity.”
Its spokesperson was quoted as saying: “We launched a transformation programme in Tata Steel Europe in June. We are aiming to develop a simpler and leaner organisation, capable of sustainably financing high levels of investment, essential to our long-term success.”
The programme to urgently improve is gathering pace, says the company. Proposals are being developed to improve the supply chain, manufacturing performance and raw material usage, as well as efficiency gains through digitisation. "We expect these to include a reduction in our employment costs, which would be subject to the full consultation process with employee representatives."
Tata Steel entered the Europe market in 2007, when consumption was on a declining trend in the region. At the same time, JFE Holdings, the world's fifth-biggest steelmaker, and Nippon Steel entered the India market, where consumption has been continuously rising.
By World Steel Association data, consumption of crude steel in the European Union region was 178 million tonnes (mt) in 2017, from 207 mt in 2008. In this period, the consumption pattern has been erratic, not displaying any clear growing demand trend. In the same period, crude steel consumption in India nearly doubled, to 101 mt in 2017, from 56 mt in 2008.
In the latest CARE Ratings report, the domestic operations of Tata Steel continue to remain strong, with PBILDT (profit before interest, lease, depreciation and tax) of ~23,833 crore in 2018-19, or ~14,679 per tonne. The comparative per-tonne figure for the European operations was only ~5,634. The European operation faces lack of captive raw material sources, intense competition, high employee cost and overheads, says CARE.