The options before Tata Steel in UK

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TATA Steel Co. Ltd will need to consider various options for its loss-making UK steel unit, with the likelihood of finding a buyer for a partial sale of the assets the most probable outcome, said analysts who track the sector and the firm.

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On Wednesday, Tata Steel said it will look to divest full or partial stake in its steel assets in the UK. The combined capacity in the UK is close to 7 million tons (mt) of the total 13 mt of steel-making capacity the company holds across Europe.

The situation has come to a head almost a decade after Tata Steel acquired Corus Group plc for $12.9 billion in 2007, in what was then Tata group chairman Ratan Tata’s most ambitious acquisition. However, the European operations soon took a hit due to the financial crisis in 2008 and has been a financial drag on Tata Steel ever since. It has taken impairments worth £2 billion on the asset in the last five years.

Matters reached a crisis level due to the recent fall in global commodity prices, a slowdown in demand in the UK and the growing influx of cheaper imports into that country.

Tata Group Chairman Cyrus Mistry is working on a few probable options to stop Tata Steel’s UK assets bleeding any further, according to analysts and Tata group executives.
Finding a buyer

The ideal scenario for Tata Steel is to find a cash-rich buyer to acquire the entire steel assets of Tata Steel’s European operations. Most analysts are writing off this scenario as next to impossible. Kaustubh Chaubal, vice-president, corporate finance group at rating firm Moody’s Investors Service, said the operating environment remains challenging with global steel supply continuing to outpace demand, depressing steel prices globally. Tata Steel’s UK operations have also been facing the brunt of a stronger pound against the dollar – in fact, Tata Steel has taken an impairment of more than £2 billion over the last five years, Chaubal said.

The company, however, has not given up on this option.

“When we started the long products divestment process, there were similar issues and doubts in everybody’s mind. We have found three potential buyers (for long products unit) and of which we are progressing with one. We will keep an open mind,” said Koushik Chatterjee, group executive director (finance and corporate) Tata Steel at a press conference on Wednesday.

Peter Brennan, editor, steel, at global energy, petrochemicals and metals information provider Platts, expects any buyer for the steel assets will base their decision on the expected price trend for steel in the UK.

According to Platts data, prices in the UK hot rolled coil market are up by £35/metric ton (mt) from mid-February until now – a increase of 14 percent. However, compared to a year ago, the prices are still £57.50/mt lower.

“Steel prices in the UK are going up very quickly. The story now is of market recovery… We need to see what happens to the Chinese domestic demand. If that falls, may be Chinese exports will rise,” Brennan said.

Partial asset sale

Most analysts are seeing a partial stake sale as the most likely scenario, given that there are few options for a complete buyout. Rahul Dholam, senior equity research analyst at Angel Broking Pvt. Ltd, said while this is the probable scenario, the valuations may not be in favor of the Tata group-controlled steel maker. Another senior analyst requesting anonymity endorsed this view.

Moody’s Chaubal said acknowledging the challenge of finding a single large buyer, the company is exploring all options. It had already identified the long products business in the UK for sale, for which it is holding exclusive talks with UK-based Greybull Capital, it said on 22 December 2015. Also, on 24 March, Tata Steel announced it has reached an agreement to sell the Clydebridge and Daizell steel facilities in Scotland to the government of Scotland, who, in turn, would sell them to commodities and properties group Liberty House. Other than these two, there is no identified buyer for the balance of the UK businesses.

“Tata Steel is exploring restructuring/divestment opportunities for the UK business in part or in full,” Choubal said.

Reduce size

In the absence of buyers, Tata Steel will have to wait and watch. In the interim, it can shut some of its plants and pare operations in Europe. Dholam said Tata Steel has already talked about a potential freeze on further investments in Europe. Tata’s Chatterjee on Wednesday said his firm invested £2 billion as working capital and capital expenditure in its UK business.

The firm, however, is not looking at an immediate shutdown.
“Our endeavor would be to operate in the way we have been operating, and preserving the asset doing it in an orderly manner as far as possible would be our objective,” said Chatterjee.

Pressure on government

The analyst quoted above who sought anonymity said the firm’s declaration of a near-crisis-like situation at the UK business could also be partly aimed at pushing the UK and other European governments to step in. “To bring relief for the domestic steel industry, India on 5 February notified a minimum import price for a six-month period for steel. Why can’t Europe do that and consider hiking (import) duties or look at a bailout,” asked the analyst.

Nationalization

There was also talk of possible nationalization of steel assets in the UK, but this has been shot down. A Bloomberg report on Thursday quoted British Prime Minister David Cameron saying, “I don’t believe nationalization is the right answer. What we want is secure a long-term future for Port Talbot and for other steel-making plants in the UK.”
Brennan from Platts also ruled out nationalization but said the government can intervene.

“There may be some help in some way – may be to do with pensions, may be with environmental investments,” said Brennan, adding that the UK has already agreed to a rebate on energy costs. “Action on imports has to be done through the European Commission and we have already seen preliminary anti-dumping measures for cold rolled coil and rebar. There are also investigations into plate and hot rolled coil from China.”

Choubal of Moody’s pointed out that in February, the EU imposed anti-dumping duties on steel imports from China and Russia which should provide moderate support to steel prices even as demand grows at 1-1.5 percent.

“Following the strategic view taken by the Tata Steel board on the UK business, it has decided against investing substantially in a risky turnaround plan for the UK business and advised the board of its European holding firm to explore all options for portfolio restructuring, including the potential divestment of Tata Steel UK, in whole or in part,” Tata Steel’s Chatterjee said on Sunday.

“The sale of the UK business is an option, but others could emerge. The firm has stressed the severe on-going funding requirements affecting the UK business and the challenges around its performance, given prevailing market conditions. The Tata Steel Europe board will be advised to evaluate and implement the most feasible option in a time bound manner,” said Chatterjee in an email commenting on options of a shutdown for the remaining assets in case the company is unable to find a buyer for all or some of its UK assets.

He added it would be premature to talk about specifics. “It is not a valuation exercise. There is severe cash burn in our UK operations; hence, it is imperative to close the review on priority,” Chatterjee said. TNS

TNS/BF

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