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Wednesday, 30 March 2016

Is Tata Steel already anticipating towards a Brexit by abandoning its British subsidiaries, formerly known as Corus Steel United Kingdom?

Yesterday, the British Financial Times printed an article that probably shocked many workers in the British steel industry.  

In this article the FT stated that the Indian steel giant Tata Steel officially confirmed rumours in the market, that it is planning to sell its British subsidiary, formerly known as Corus Steel. This will without a doubt mean trouble for the more than 15,000 workers in the British steel industry, as the British branch of Tata Steel has been loss-bearing for years and will be extremely hard to sell without serious job-losses.

The following snippets were printed by the Financial Times:

Tata Steel has confirmed today that it plans to cut 1,050 jobs in the UK, including 750 at Port Talbot which is the UK's biggest steelworks.

The British steel industry suffered a severe blow as Tata, the Indian steel giant, confirmed fears that it was about to put its UK business up for sale. Late on Tuesday the Indian group said it was “looking at strategic alternatives” to the current ownership “to explore all options for portfolio restructuring, including the potential divestment of Tata Steel UK, in whole or in parts”.

Earlier, union sources had revealed that the company was poised to announce the sale of its British steel operations, plunging several plants — at Port Talbot, Rotherham, Corby and Shotton — into uncertainty. Steel workers had been waiting for days for a decision to be made by the Tata board 4,700 miles away in Mumbai over the fate of Britain’s steelworks.

Stephen Kinnock, Labour MP for Aberavon — who had joined Community union officials in Mumbai to try to persuade the Tata board to keep Port Talbot, Britain’s largest steelworks, open — told the South Wales Evening Post that the company intended to sell the steelworks.
Instead of the hoped-for approval of a rescue plan, Tata is intent on selling its UK businesses in a move that will come as a hammer blow to the remnants of one-time British Steel.

Tata painted a stark picture of the prospects for its UK business, saying that trading conditions in the UK and Europe had rapidly deteriorated recently due to “structural factors” such as global oversupply, increasing imports, high manufacturing costs and weak domestic demand. These were likely to continue into the future and had “significantly” affected the long-term competitiveness of its UK operations.

In comments that may damp hopes of finding a buyer, the company’s board concluded that the turnround plan for the Port Talbot was “unaffordable”, the assumptions behind it “very risky” and the likelihood of delivery “highly uncertain”. 

Tata revealed that it had been in talks with the government, seeking support for the UK business — within the scope of European state aid rules — and that these would continue.

Earlier in the evening, the government had denied a claim that it was on standby to part-nationalise Port Talbot.
Amid repeated rumours that the state could step in to rescue the industry, one official said the government was “looking at all viable options”. Asked whether that included part-nationalisation, he said: “Not to my knowledge.” Ministers are open to providing support, for example loans or loan guarantees or through further help with procurement. But a private sector sale is the preferred solution, not least because taking responsibility for the steel plants could leave taxpayers on the hook for large losses and invoke EU state aid concerns.

Port Talbot is heavily lossmaking, reflecting the troubles faced by British steelmakers. A combination of high costs and low steel prices on the international market has severely damaged the sector, leading to thousands of job losses over the past year.

In recent weeks concerns had grown that Tata Steel had cooled on further large investment into its UK operations. The company has poured £3bn into its European operations since acquiring Anglo-Dutch steelmaker Corus in 2007 for £6.2bn.

Insiders might have a ‘deja vu’ feeling, when they hear bad news about the British steel industry.

In contrary to some of the boasting done in the full FT article, in which it is suggested that Port Talbot – as a poster example for Tata Steel UK – “is only half a chance away” from returning to profitability, the British steel industry has been a problem child for the last twenty-odd years and perhaps much longer.

The following snippets come from a (translated) Dutch Wikipedia article about Tata Steel and especially its Anglo-Dutch predecessor Corus Steel, which was formed during a merger of Dutch steel company Hoogovens (i.e. currently the Dutch part of Tata Steel) and British Steel (i.e. now the British part of Tata Steel):

On the European ranking of steel producers, the British company takes a fourth place, while Hoogovens is the current number eight with 6.7 million tonnes. Hoogovens is producing much more efficient, however; with only 20,000 workers the company booked a sales of NLG 10.8 billion, while the 50,000 employees of British Steel only realized NLG 21 billion in sales. British Steel suffers from the expensive Pound Sterling, which makes it much harder to sell its products outside the United Kingdom.

At the end of 2002, the industrial council of Corus The Netherlands administered a negative advice with respect to the intended sales of the (ex-Hoogovens) aluminium plants. Also the Supervisory Board of Corus The Netherlands resisted against this sales. President-Commissioner Leo Berndsen stated that Corus in the United Kingdom should reorganize more vigorously, in order to prevent that ‘the loss-bearing British steel plants would drag down Corus IJmuiden on their way to the gutter’.

In the seven years that Corus existed, the first four years showed substantial losses [see the following table - EL]. The large loss in the year 2000 was the result of a one-off reorganization provision of £ 1 billion.

Overview of the profits of Corus Steel,
since it took over Hoogovens IJmuiden
Data courtesy of:
Click to enlarge
In those days, the word on the street in The Netherlands about Corus United Kingdom was “that the very efficient and profitable steel plant, as well as the plants specialized in other steel products and metals (a.o. galvanized steel, aluminium, stainless steel and other, tailor-made steel products) in IJmuiden, The Netherlands, were abused in order to cover up the enduring losses of the inefficient and unprofitable British plants. Thus, the company not only depleted the profitability of their Dutch branch, but even dismantled the production facilities of Corus IJmuiden, as these were sold over the years to cover up for the British losses”.

This was what I heard about Corus United Kingdom and the Corus General Management in those years. Whether those accusations were true or not, I don’t know. 

Of course, there might be some nationalist feelings involved in there, but the fact was that Corus IJmuiden (aka Hoogovens) had been much more successful in the past than British Steel, with their ‘made to measure’ steel, their aluminium plants and their ‘immersing-galvanization’ plant that produced steel for the booming car industries in Europe. And even though the profitability of Corus UK – and later Tata UK – might have improved indeed over the years, many Dutch steel workers probably still feel that Corus had been the worst thing that could have happened to them.

Recently Tata Steel has not been on my radar anymore, so it is hard for me to say anything about the current profitability ratio of Tata’s Dutch steel plant versus the British plants. Nevertheless, I get the impression from this Times article that the British plants are still heavily loss-making and can still not compete against their more efficient competitors all over Europe.

On top of that, there is the current situation that China is allegedly dumping steel on the international (and thus European) markets, according to various news media, like the EU Observer here:

Representatives of the steel industry warned that the EU Commission “massively underestimates” the effects of Chinese dumping on jobs, growth and investment in Europe.

“China is financing overcapacity, which leads to overproduction, which leads to selling below reasonable prices, below the cost of production. Nobody can compete with that,” said Milan Nitzschke, spokesperson for Aegis European alliance of about 30 European industrial sectors.

A letter sent to the EU Commission earlier this month by seven ministers from Germany, Italy, the UK, France, Poland, Belgium and Luxembourg underlined anxieties about Europe’s steel industry. The ministers urged the EU to step up action to help the ailing steel industry and stop cheap imports from China and Russia.

When China is indeed dumping steel on the European markets, this makes it even more difficult for the British steel plants to become profitable again.

Yet, except for the Chinese dumping of steel products, all these facts about the profitability of Corus United Kingdom and their enduring headwinds were probably known by heart among the Tata management. 

Therefore I am dead certain that the Indian company Tata knew extremely well what it entered into, when it took over Corus, including the plants in the United Kingdom. I also presume that Tata took that decision based on rational key data and sound prognoses of future profitability and not either based upon irrational romanticism or out of sheer rancour against 'its former colonizer'.

Therefore there might be another elephant-in-the-room that urges the recent fire-sale plans of Tata United Kingdom these days, of which the FT reports. Not only China...

In my humble opinion, that elephant might be the more than average chance for a Brexit within the next few months... When the Brexit takes place indeed, it will be even harder to sell British steel to the European continent at competitive prices and against a decent profit.

In the first place, the United Kingdom will have to renegotiate all pan-European contracts, rulings and subsidies that are now implicitely offered by their membership of the European Union, as after a Brexit the country will stand on its own two feet. 

Further, the abandonment of the European Union could lead to a situation of enduring political instability within the United Kingdom itself, as Scotland and Wales might see this as a good moment to leave the United Kingdom themselves. The damage of such a destructive political process might be immense and that risk could be much too substantial for Tata headquarters.

On top of that, the stability of the Pound Sterling – being the British currency – could get under serious jeopardy as a consequence of the Brexit, as many countries could consider to divest in the UK territory. This makes it even harder for the British steel mills to make a decent profit, as all raw materials have to be bought against then soaring Euro and Dollar prices.

All in all, the situation for the British steel industry looks extremely dire, with no easy Plan B available. One can’t really blame Tata for trying to sell an already enduringly unprofitable, loss-bearing complex of steel mills in the United Kingdom, under the immense pressure of the Chinese steel dumping and the looming Brexit.

A re-nationalization of British steel – as mentioned in the full Financial Times article – could be an option, but this option will probably fall on deaf ears with the Tories, who seem still to be clueless about the immense changes possibly coming from a Brexit.

And the chances that another large party will purchase the obsolet-ish and unprofitable British steel industry, seems close to nought in my humble opinion. 

That is bad news for the 15,000 workers in the British steel industry, for which I feel really sorry. Nevertheless, this could be the real reason behind Tata's firesale of Tata United Kingdom!

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