Green shoots as Tata Steel’s UK pension drama ends

For a major part of the decade, Tata Steel's $12-billion Corus acquisition made in 2007 has been a drag, but green shoots are popping. The British Steel Pension Scheme now stands separated from Tata Steel UK and a number of affiliated companies; Tata Steel Europe is doing better; and the global steel cycle is supportive.

On Monday, Tata Steel announced that it had received confirmation from The Pensions Regulator that it had approved a Regulated Apportionment Arrangement (RAA) with respect to the British Steel Pension Scheme (BSPS). As part of the RAA, a payment of £550 million from Tata Steel UK has been made to the BSPS and shares in Tata Steel UK, equivalent to a 33 per cent economic equity stake in the company, have been issued to the BSPS Trustee under the terms of a shareholders' agreement. Tata Steel UK has also agreed to sponsor a new pension scheme, subject to certain conditions.

Tata Steel has said, the net financial impact of the RAA, including the payment of £550 million, would reflect in the second quarter of FY18 financials for the company. But what the deal really does is de-risk future cash flows of the company and it eliminates uncertainties surrounding deficit funding.

"We believe that there now exists higher probability of further restructuring of Tata Steel Europe, including a joint venture with ThyssenKrupp's Steel Europe division," said Edelweiss.

True enough, there were reports that the talks of merger had entered the final stage. Tata Steel Europe was in a good phase. The stock touched a 52-week high at ~692 on the BSE before closing at ~683.15, up 3.30 per cent.

In the first quarter, it had a good showing even though volumes were down. A Prabhudas Lilladhar report said, "Tata Steel Europe's volumes fell 3.6 per cent year-on-year and 16 per cent quarter-on-quarter to 2.4 million tonnes but thanks to better-than-expected realisations, Tata Steel Europe reported Ebitda per tonne above our estimate at $81, up 52 per cent year-on-year." Ebitda is earnings before interest, tax, depreciation and amortisation.

ICRA Senior Vice-President Jayanta Roy pointed out that the Purchasing Managers' Index in Eurozone has remained above 50 over the past several months, reflecting healthier economic environment. "Steel prices in the region, too, have increased to buoyant levels in 2017. Accordingly, Tata Steel's European operations have posted positive Ebitda per tonne since the first quarter of 2016-17. However, profitability will remain exposed to the risk of volatility in raw material prices."

It is the spread between the steel and raw material prices that had sent Tata Steel's calculations haywire at the time of acquisition. The spread between the raw material prices and hot rolled coil (HRC) in 2007 was in the region of ^350 per tonne but in 2015-16, it narrowed to ^196.

So while the Netherlands could withstand it, the UK dragged the rest of the group.