Ta-ta Tata Steel

Yesterday, the Tata Steel board ended months of speculation and arm-twisting when it rejected a proposed restructuring plan for its UK strip products arm, effectively voting to exit the UK industry for good. Tata is already in talks with Greybull Capital to sell its UK long products business, while fellow Indian firm Liberty Group last week agreed to pick up two Scottish plate mills in a move that casts Liberty as a saviour and the Scottish government as a better government than Westminster, because it seems to have fought harder to protect local steelworkers.

Announcing the decision yesterday, Tata’s board unanimously deemed the restructuring plan “unaffordable”, with heavy funding and significant capital commitments required in both the long and short term, while the assumptions behind it were considered to be “inherently very risky” and the “likelihood of delivery highly uncertain”. And amid continuing global overcapacity and intense competition, the logic of Tata’s decision to pull the plug on its UK steel assets is indeed hard to fault. 

Tata bought what was then known as Corus, a reincarnation of British Steel, in 2007, in the wake of Lakshmi Mittal buying French company Arcelor, creating a behemoth of a vertically integrated steel company with capacity exceeding 100mn t/yr. And while ArcelorMittal had some success at least in former Eastern Bloc and developing economies, Tata Steel UK has struggled from the start, chiefly because of the financial crisis of 2008 that wiped out demand for steel in developed countries, but also because it had to battle for market share with inflows of low-priced Chinese imports.

Mergers and acquisitions at the start of the century were driven by seemingly insatiable Chinese demand for steel, when any steel product from anywhere in the world could be exported to China. Add the booming property markets from the US to Dubai and beyond, and the result was a thriving, growing global steel sector.

But China’s shift from net importer to net exporter in the mid-2010s did little to bolster capacity expansion plans all over the world. The 2008 financial crisis had already left higher cost steel producing regions such as the EU and US struggling. But while the US has taken the hardline stance of protecting its market from the “dumping” of cheap steel, the UK has been less robust – a matter that has been much debated in the last six months, both in Brussels and Westminster.

In a climate where Chinese steel exports have become synonymous with “cheap” steel, European steelmakers’ interest have clashed with those big business interests that want to build, construct and assemble at the lowest cost — an impossibility with locally-produced steel, as production costs are so much higher in developed economies.

And so Westminster is once again faced with a dilemma of whose interests it is going to support — the nearly 15,000 workers who will become unemployed should Tata be forced to cut its losses and simply abandon the loss-making UK assets, or the steel-consuming industries that want to produce with cheap steel, which they cannot buy locally and are therefore importing. There are certainly ways to accommodate the interests of both parties, but much adjustment would be needed, at considerable cost.

It is ironic that Tata has finally made the decision to divest the UK assets when the global steel market is showing the first tentative signs of recovery in years. Beijing seems to be keeping true to its word to allow loss-making Chinese steel enterprises to die out, and to cap production at certain levels, on the back of its ubiquitous pollution problems, and by the tightening of credit facilities for the mills.

But, without the support of the state, UK steelmaking may die shortly, when the last two operational blast furnaces of Port Talbot — granddaughters of the modern steelmaking Sheffield-born Bessemer converter, take their final breath.

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