Will Tata Steel Survive in Europe? By Ashne Mehta from Pravin Gandhi College of Law
Liberty House, the metal group owned by Sanjeev Gupta, has acquired two British pipe mills owned by Tata Steel at Hartlepool. Liberty House specializes in commodities, metals recycling, manufacture of steel, aluminium and engineering products. On July 10, 2017, Tata Steel entered into a sale agreement with Liberty House for selling its 42- and 84-inch pipe mills, also known as the Submerged Arc Weld (SAW) pipe mills that produced steel for the energy, power and construction sectors in Britain and Europe.
WHAT LED TO THE ACQUISITION?
It was speculated about Tata Steel Europe that due to the erosion of the assets, company had to write down 10 million dollars. There was already a GBP 700 million deficit in the pension scheme, which was one of the major obstacles for the company to enter into joint venture or sale agreement.
Iron ore being the major component for making steel, continuous supply of iron ore was hindered because Tata steel did not have its own iron ore mines, like it has in India. This led them to incurring huge losses.
Again the Chinese steel imports to UK was at cheaper price and in huge scale, this led TATA steel to lower their prices, thus leading them to losses of 1.42 million dollars a day. This wasn’t the situation, when Tata Steel acquired Corus Group based in London at 70% premium. This made Tata Steel world’s 5th largest producer of steel. Paying so much for Corus, share prices of Tata Steel went down by 11% and the rating agency Standard & Poor’s placed it a credit watch list. Tata Steel was of the view that the global demand for steel would remain robust. There was also the condition of large scale layoffs which started when Britain decided to leave European Union.
TATA STEEL’S STRATEGY
TATA Steel has decided to consolidate its steel business and make an effort towards reducing its pension liabilities. Thus, they have decided of a joint venture with Thyssenkrupp AG. TATA Steel has planned to sell its South Yorkshire-based Speciality Steels business in the UK.
TATA Steel Europe would buy its iron ore requirement from Tata steel minerals at Canada, which had agreed with the government of Quebec. Government of Quebec had decided to invest in equity and would also lend to the Tata steel minerals Canada, a debt for its iron ore project.
Till 2008, there was a construction boom in China, the price of iron ore used to make steel kept on rising. This iron ore required to make the steel was imported by China from Australia and Brazil. Industries in the latter mentioned countries apprehended the ever growing demand for Iron ore in China and thus entered into 5 year expansion plan. In 2009, Chinese economy started slowing down, because of their expansion plans, Australia and Brazil were bound by their agreements with China. Thus, $70 a tonne iron ore now valued around $40.80 a tonne. Iron ore accounts for around 75% of the cost of steel production. This low price of iron ore was an advantage to China for it started making cheaper steel.
China accounted for almost half the global steel production by producing 803.3 million tonnes in 2015. This made China one of the major exporters of steel. In 2015, China exported around 107 million tonnes of steel making it the top exporter of the product. Since only 13.32% of its production was exported, China began adopting its strategy of dumping. Today reportedly, Steel is exported by China at a price below its cost price. While countries such as France, Sweden and Germany protected their domestic steel producers by permitting steel imports only at higher tax rates, Britain failed to protect its producers from China’s unfair competition.
BRITAIN’S LAID BACK ATTITUDE
Britain wanted long term investments in its infrastructure instead of raising funds at higher interest rates. Britain had decided to join Asian Infrastructure Investment Bank that was sponsored by China. Thus, Britain did not want to offend China by imposing higher tariffs on steel imports from China.
IMPACT OF ACQUISITION
Liberty House will use the steel from plate mills in Scotland acquired from Tata Steel for the pipe mills. Liberty House promised that all the jobs will be saved and it will further recruit people. Liberty House has rapidly expanded in last 2 years by acquiring distressed manufacturing businesses. Liberty House has secured 145 jobs by acquiring Caparo Merchant Bar a steel company, also won an auction of Australian mining and steel company named Arrium. After purchasing the Tata steel mills at Hartlepool, Liberty House employs more than 5000 people in all its sites across UK.
WILL TATA STEEL SURVIVE IN EUROPE?
Due to global dumping of steel, high manufacturing costs, decreasing demand for steel, fluctuating currency, it is difficult to sustain in such trading conditions. Because of oversupply, manufacturing in Britain and Europe was not only unprofitable but also did not cover the cost.
Donald Trump wants to “make America great again” by encouraging the manufacturing sector thus taking back from China and Mexico, Britain is not keen on saving the manufacturing sector except those industries that are knowledge based. Britain’s main focus is on industries involved in research, development, design and innovation.
It was only after a job cut of nearly 1000 employees announced by Tata, government of Britain eyed the manufacturing sector. As a result, instead of protecting the survival of existing industries, government started looking for buyers for those industries. Thus at this juncture, what is needed is a new policy by the government itself, to let the manufacturing industries survive like increasing the duty on steel products imported from China, facilitating cheaper cost of production, providing subsidies, etc. to save the jobs generated by these industries.
 The Hindu- Business Line- August 1, 2017
 The Economic Times- July 12, 2017
 Fact Check- Is China dumping Steel? – Durham University June 15, 2017.
 Liberty House Archive- MPT International
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