European overhang

Tata Steel is selling non-core assets to offset problems with its European arm. But will that be enough?

There are times when even nerves of steel ain’t enough. That’s what’s happened with the steel industry, with global production shrinking 3% to 1,623 million tonne in 2015. Demand has been lower in most regions including the US and Europe. The biggest culprit though is China, which saw demand shrinking to 620 million tonne in 2015 compared to 710 million tonne in 2014. Considering that China alone consumes close to 50% of the 1,600 million tonne steel produced globally, it hasn’t been good days for the industry. For Indian major Tata Steel, its dead-weight European operations have only compounded issues and impacted profitability. Now, after years of trying to turnaround operations, Tata Steel has advised its European arm to “explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts.” The move, which comes amid operating losses, falling realisations and workforce issues, also follows the recent exit of its European head, Karl-Ulrich Kohler. Admitting that “in the recent months and quarters there has been a significant cash drain”, the company statement stressed that a time-bound sale was essential. The board also rejected another round of expensive restructuring for its strip products vertical. “It is clear that the company wants to get away from the UK market, which is positive because it will be able to conserve cash. While we need to see if Tata Steel can find buyers, if it is able to exit completely, they will be left with about 7 million tonne capacity in Netherlands, which is a profitable business,” says Rakesh Arora, head of research at Macquarie Capital.