Tata Steel’s problem child finally comes up with the goods in Europe

It’s been a long wait. In 2007, Tata Steel acquired Corus for £6.2 billion in one of the largest cross-border acquisitions in Indian corporate history, but except for a few good years, it was largely a problem child.

But 15 years and significant cost takeout later — not to mention a record rally in steel prices — have finally pushed Tata Steel’s European business to a good position.

In FY22, Tata Steel reported its highest-ever consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) of ~63,830 crore and Europe contributed significantly. It generated the highest-ever EBITDA of ~12,164 crore (or £1,199 million).

Tata Steel Europe’s (TSE’S) previous best on account of operating performance was in 2007-08 — the year of the acquisition — with EBITDA at £1,063 million.

The steel cycle was at its peak then. From H2 of 2008-09, the global financial crisis started playing out and EBITDA plunged. A wave of cheap imports from China added to the problems, particularly for the high-cost UK business.

But the key difference between TSE’S EBITDA in 2007-08 and now is that the EBITDA of FY22 is on much lower volumes.

Since the acquisition, the European portfolio has shrunk – from around 18.2 million tonnes (mt) production in 2007 to about 10 million tonnes in FY22 (capacity is 12 mt).

The India side — where EBITDA margins are much higher — went from 5.3 million tonnes production to more than 19 million tonnes in the same time.

At the centre of the Europe turnaround is the transformation programme that the company unveiled about three years back, and the record rally in steel prices.

“The transformation programme happened around the time we were talking to thyssenkrupp. We continued with it even through the SSAB conversations because we knew it was important, going forward,” said Tata Steel managing director (MD) and chief executive officer (CEO), T V Narendran.

In many ways, Tata Steel tried to make its expensive buy work — from a review of the European portfolio in 2016 after an asset impairment of £2 billion to selling units in the UK and a joint venture with thyssenkrupp in 2018.

In 2020, it had even initiated talks with Sweden’s SSAB to sell its Netherlands unit, but it didn’t materialise.

The transformation programme continued and translated into cost savings of about £100-150 million in a year (TSE turned cash positive in the latter part of FY21).

Originally, the programme was chasing about €800 million of cost benefits and the company is progressing on it.

“One part of the transformation programme was to separate out the UK and Netherlands, which we have done.

It helped us take out a lot of corporate overheads because today we run Netherlands and the UK like the sites in India. We have three sites in India and two in Europe. That’s the operating philosophy,” said Narendran.

“I think we are much sharper in our focus and able to take out a lot of avoidable costs, which is getting reflected. Of course, steel prices are there, but there has been a lot of cost takeout as well,” he added.

TSE has two primary steelmaking units: Ijmuiden, the Netherlands, and Port Talbot, Wales.

The UK is high-cost, has structural issues and mostly been a drag — losing £300-400 million at peak level.

Of TSE’S £1.2 billion EBITDA in FY22, Netherlands accounted for about £950 million and the UK, £250 million.

Analysts believe the outlook for TSE is positive. According to a Motilal Oswal report, TSE should continue to report record high profitability. The report mentioned that TSE has benefitted from the current supply shortage of steel in Europe.

“Steel prices in Europe are at their highest globally (even higher than the US). This is likely to last over the next 12 months, unless a meaningful supply reset occurs and European Commission raises quotas for the rest of the countries to reduce the shortage of steel in Europe,” it said.

So is TSE out of the woods? “We feel that the European steel industry is in a much better place as much as we are specifically in a much better place,” said Narendran.

While internally Tata Steel has been driving improvement programmes and making structural changes, the externality in Europe is also changing.

“The demand-supply is much better balanced. Europe is also going to bring in a carbon border adjustment mechanism (CBAM),” pointed out Narendran.

The CBAM — aimed to create a levelplaying field for EU producers subject to carbon pricing — is likely to come into effect from 2023 with a reporting system on emissions. From 2026, there will be a tax on imports.

That, coupled with an extension of safeguard measures, is expected to augur well for the local steel industry and TSE as well.