Moulding of a mega steel merger

Vidya Ram | Updated on July 06, 2018

Forging ties The merger between the two steel mergers has been fraught with uncertainty   -  ayzek

ThyssenKrupp and Tata Steel have lobbed the ball in EU governments, authorities’ court

Earlier this week, top executives at Tata Steel and German industrial conglomerate ThyssenKrupp gathered in Brussels to mark the long-awaited merger of their European steel assets – spread across Germany, the Netherlands and Britain – to create a new “steel champion”.

The route to the merger — talks on which became public in 2016 — have been drawn-out, heated, and even riven with uncertainty. First the talks centred on Tata Steel’s ability to offload its UK pension liabilities — separating the company’s costly £15-billion British Steel Pension Scheme was seen as a make or break moment for the potential merger. The company achieved this with a £550- million payment to the scheme, and issuing the pension’s trustee with a 33 per cent stake in Tata Steel UK.

Union concerns on company commitments to jobs and maintenance of facilities (particularly a blast furnace at Tata Steel’s Port Talbot plant) also persisted, while in the last few weeks, activist investors at ThyssenKrupp threw in another potential spanner, raising concerns that given a recent dip in profitability at Tata Steel’s European operations, the deal was stacked too favourably in Tata’s favour.

Nevertheless, the agreement was reached, and gained ThyssenKrupp’s strategy board approval within the first half of 2018 as the companies had estimated. While still a 50:50 merger, should an IPO occur, proceeds would be allocated on a 55:45 per cent basis in favour of ThyssenKrupp — an arrangement that both firms insisted kept to the “structure” and “philosophy” of the joint venture.

The Tata Steel-ThyssenKrupp agreement, as it stands, involves compromise by all sides. Up to 4,000 jobs, split roughly between the two companies — will go from the 48,000-employee strong joint entity. But in agreements struck with unions in the UK there will be no compulsory redundancies until 2026 and a commitment to spending millions on one of the blast furnaces at Port Talbot whose future had looked uncertain.

Tata Steel, while standing firm against investor efforts to rejig the deal entirely, gave ground to ThyssenKrupp through the IPO arrangements that would also give the German firm say over the timing of any IPO. Defending the deal against its critics, ThyssenKrupp CEO Heinrich Hiesinger pointed out that without the deal there would be no estimated €5 billion in additional value to both firms created (the companies estimate annual synergies will amount to €4-500 million). However, on Thursday he offered his resignation to the board to enable a “fundamental discussion” within the board on the company’s future.

Much work of course remains to be done: the venture is yet to gain the approval of Europe’s Competition Commission, discussions with which are commenced. While insisting they had to respect the commission’s processes, the firms appeared confident about this aspect — noting that conversations with the regulator had been going on over the past two years, during the course of which asset sales by the companies had taken place.

In recent months, the commission’s actions have also suggested that it is aware of the pressures facing the European steel industry. Clearing ArcelorMittal’s acquisition of Ilva, owner of Europe’s largest steel flat carbon steel plant based in Taranto, Italy, the commission acknowledged the industry’s problems in Europe, including the “unfair” dumping of produce on the UK market, and the potential impact of US import restrictions on steel.

Raising barriers

On Thursday, Reuters reported that European nations voted overwhelmingly (25 in favour with 3 abstentions) to support European Commission proposals to introduce a mixture of tariffs and quotas as trade defence measures to limit the impact of the US tariffs under Section 232 of the US Trade Expansion Act. The Commission has had to balance competing lobbying from the steel sector on the one hand — and on the other some industries in Europe which have been arguing against steel safeguard measures. Last month the European Automobile Manufacturers Association wrote to the Commission arguing the measures weren’t in Europe’s interests, as they put downstream users under pressure.

Even as they await the competition authority’s go-ahead, the onus on the deal has shifted very much towards national policy makers. Governments have proved surprisingly obstructive to change. Late last month, the Italian government postponed a decision on handing over Ilva to ArcelorMittal from early July to later this year.

While less directly obstructive, the British government too has faced criticism from industry, unions and politicians, over the lack of a solid strategy to support the domestic steel industry — including the sealing of a long-awaited sector deal that would involve commitments from the government, and industry.

The significance of a sector deal — which covers the UK’s main steel producers and includes industry pledges for significant new capital investment (including in R&D), — was stressed by a major steel conference organised by the Community union in northern England earlier this year, which also pointed to other very UK-specific challenges, including energy prices, which are among the highest for the energy-intensive industry in Europe.

“The Westminster government must end the delays and bring forward the sector deal for steel, and the Welsh government must to show its commitment to the industry too with tangible support,” said Roy Rickhuss, general secretary of the Community Union in the UK, as the union on Wednesday officially endorsed the joint venture arrangements. “It’s now time for the UK government to step up and back the sector deal for steel and follow through on its promises on energy costs and procurement,” said Stephen Kinnock, the MP for the Port Talbot region of Aberavon.

The Brexit factor

There is of course also further uncertainty about the implications of Brexit — not just on potential tariffs and the costs of trading with Europe, but also Britain’s ability to protect its industry. Earlier this year, the steel industry raised concerns that post-Brexit trade legislation might not defend steel companies adequately and could water down the anti-dumping and anti-subsidy measures that the EU had put in place.

The good news is that ThyssenKrupp and Tata Steel have inured themselves somewhat to the vagaries of individual markets: from around a third of Tata Steel’s European operations, Britain will now just account for three out of 22 million tonnes of steel produced by the joint group.

Published on July 06, 2018

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