Thyssen-Tata merger puts fate of UK’s top steel plant at risk
Plagued by poor earnings, Britain’s biggest steel plant—located in Port Talbot—is likely to be first in line for job and output cuts after the planned European merger of Thyssenkrupp and Tata Steel, people from the industry told Reuters.
Germany’s Thyssenkrupp and India’s Tata Steel have signed a memorandum of understanding for a 50-50 joint venture which, if approved, would forge Europe’s No.2 steelmaker after ArcelorMittal, with sales of around €15 billion ($17.70 billion).
The merger was driven chiefly by a need to address chronic overcapacity in Europe’s steel market and should conclude late next year. The company will begin reviewing its combined production network from 2020 onwards.
This is expected by industry analysts to include further job cuts in addition to 4,000 already announced along with the deal, leaving open the question where the hammer will fall hardest.
Tata’s century-old steelworks in Port Talbot, Wales, employing some 4,000 people directly and up to 16,000 more indirectly in a region with few other major industries, is a prime target for cuts in the event of a steel market downturn after 2020, industry analysts said.
“They’ll only invest in the UK operations if they earn money,” said Rakesh Arora, managing director at Go-India Advisors in Mumbai, who has been following Tata for decades.
“It’s difficult to make a call, but one thing I can tell you for sure, earnings will not be higher than they are now because we’re at a
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cyclical peak in the steel cycle.” According to brokerage Jefferies, Port Talbot will have core earnings (EBITDA) of €12 per tonne, a margin of 2%, in the first year of the merger.
This compares with €92.4 , or a margin of 14%, at IJmuiden, Tata Steel’s other main production site in the Netherlands.
Thyssenkrupp’s key plant in Duisburg, Germany, will earn €85.4 per tonne, at a profit margin of 11%. “It would logically make sense to cut capacity at lower margin sites, which I believe are mainly the Tata assets. Thyssenkrupp’s sites are amongst the best earners in Europe,” one of Thyssenkrupp’s top-20 shareholders said.
A Tata Steel spokesman said it was the clear intent of both shareholders “to continue with the current asset configuration at all upstream sites including Port Talbot”.
Thyssenkrupp declined to comment.
Concerns resurfaced about Port Talbot’s future after the UK government wrote to Tata Steel Chairman Natarajan Chandrasekaran, asking him to commit to relining Port Talbot’s blast furnace 5.
That process typically costs over £150 million ($201 million) and gives the furnace about 20 additional years of life.
Chandrasekaran said this was Tata Steel’s intent should the funds be available, but he declined to commit.
“As you know, its (blast furnace 5) relining was not included in the memorandum of understanding signed earlier this year (with the unions),” he replied in correspondence posted on a UK government website.
A spokesman for UK union Community said: “Relining blast furnace 5 is something that in the next weeks and months we will continue to push for.”
Unlike Port Talbot’s blast furnace 5, Thyssenkrupp’s Duisburg furnaces will not need relining in the next five years, people familiar with the matter said, because all had been relined or started operations during the past decade.