Comments
For some time now, the Tata Group’s two massive European acquisitions — Anglo-Dutch steel maker Corus in 2007 and Ford’s Jaguar Land Rover in 2008 — have appeared to inhabit different worlds. While, after a rough start and a good deal of restructuring, Jaguar Land Rover has revved up to prove a tidy profit earner for Tata Motors, the $12-billion steel acquisition has appeared more of a millstone around the Tata Group.
Unrelentingly tough conditions for Europe’s steel industry together with weakness in the construction sector have meant that the company has posted several annual declines in production, despite investing nearly $1 billion over the past three years. It has embarked on restructuring programmes under which head count has fallen by 10,000 and costs have been cut to make operations more flexible.
In May this year, Tata Steel declared a Rs 8,356-crore non-cash impairment charge on overseas assets, largely relating to Europe. The company has accumulated vast debts: Rs 55,421 crore at the end of FY-13. All this led The Economist declaring Tata’s acquisition of Corus “a financial disaster.”
Still, the situation isn’t quite as bleak as disaster-mongers might have us believe.
SILVER LINING For one thing there are signs that the European market is over its worst. In its most recent report, the European steel association Eurofer predicted a “moderate” recovery for the industry in 2014, following a mixed 2013 and a weak 2012. Deutsche Bank forecasts steel production in Europe to grow by 3.1 per cent in 2014 and 2.9 per cent in 2015. Tata Steel Europe has begun to benefit from a rebound in volumes. In the September quarter, the company had the highest quarterly production for five years, producing 3.74 million tonnes, up nearly a fifth over the same period the year before.
Despite a squeeze on margins, EBITDA for the period was Rs 554 crore compared with a loss of Rs 40 crore in the same period the previous year.
The rise in volumes has been aided by the reopening of a blast furnace in Port Talbot, Wales, earlier this year, following a £185-million rebuild. This has slightly raised its production capacity, enabling it to meet renewed demand.
New products Tata Steel is also increasingly focusing on so-called differentiated steel — high-end products for specific users such as car makers — enabling it to be less sensitive to the vagaries of the market. In Europe, Tata Steel produced 17 entirely new products last year and plans to release more by the end of this year.
It has been weaving an early vendor involvement strategy into its business — trying to talk to its customers about how new steel products can be used in the development of their own products.
The company has honed its business strategy by focusing on nine different market sectors — ranging from automotive and rail to energy and power. It seems to have netted a number of big contracts, including supplying steel for a high-speed rail link between Mecca and Medina.
CHALLENGES ABOUND Part of the challenge before Tata Steel Europe will be to raise the proportion of such products to inure it to downturns. One thing that benefits the company is that it has less exposure to the construction sector than many in the industry, says Colin Hamilton, Head of commodities research at Macquarie Bank in London.
That said, he remains cautious about the impact of the differentiation strategy being pursued across the industry. “Steel companies have made themselves experts in a particular sector, but you are still trying to gain market share in an industry that is generally trending lower. It’s a natural strategic move but they are still levered to market volumes.”
Yet, many factors outside the company’s hands will play a role in determining its success. Among these is the European Commission’s recently launched action plan for the industry, which promises measures to boost foreign demand, innovation and so on.
“They are trying to tackle our energy cost disadvantage based on the gap between the EU and most of its competitors, but there are still no concrete proposals on how it plans to do this,” says Axel Eggert of Eurofer.
One issue that remains only partly in Tata’s hands is capacity reduction.
Hamilton argues that part of the problem for the industry is a lack of supply discipline, with companies that had cut capacity during a downturn piling back in at the first sign of an uptick. “You don’t get the sustained reduction in capacity that the industry needs.”
While the Tata Group’s turnaround of Jaguar Land Rover has been ostentatiously obvious, a revival of Tata Steel Europe is more likely to be a long, slow grind.
But should a Mistry-led group succeed in this, it could yet prove one of Tata’s most impressive — and daring — achievements.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.