Yahoo Finance Tata-Thyssenkrupp steel mega-merger 'only a short reprieve'
Fears are growing that the mega-merger between Tata and Thyssenkrupp’s European steel business to create a £13.3bn-a-year industry giant and safeguard their futures – along with thousands of British jobs – will only grant a temporary reprieve.
The “momentous” tie-up announced on Wednesday between Indian conglomerate Tata’s Europe steel business and Germany’s Thyssenkrupp comes as Western steel companies face intense competition from cut-price Chinese producers.
However, UBS has questioned whether the strategy behind the deal – to produce advanced steel China cannot – is a long-term remedy. The heavyweight bank said China could quickly catch up, negating the rationale for the merger. If this happens Europe’s steel sector could be plunged back into a crisis of the like seen two years ago which cost more than 10,000 jobs.
“Moving to higher value products is what everyone in the steel industry is trying to do and it is important for Tata-ThyssenKrupp to do it quickly,” said Carsten Riek, executive director in steel research at UBS. “But going to higher value products could only be a temporary reprieve. The Chinese could catch up very quickly, possibly in five years.”
He said the only way to guarantee a future for European steelmaking is removing excess production.
“What is needed to safeguard the European steel sector is taking out capacity and we have not heard much about that in the details of this merger," Mr Riek added.
Steel mills in China are responsible for more than half of annual global production of 1.6bn tonnes of steel, and the country’s often state-backed steel sector is able to undercut Western producers and dump excess production on foreign markets. This flood of imports – mainly from China, but also India, Russia and Ukraine – drove Europe’s steel sector into crisis two years ago, claiming more than 10,000 jobs.
Detailing the plan, Hans Fischer, chief executive of Tata Steel Europe, said the driver behind the deal was cut costs and reduce reliance on low-cost commoditised steel by moving to more complex and expensive steel which foreign rivals will struggle to produce.
“We need to focus on higher value products,” he said. “China has huge overcapacity and there is a risk they will flood the market. The answer is not to compete with them, but try but find a solution where we have products than cannot be produced easily. We need to be a technology leader."
Such a move up the value chain requires the scale of a combined Tata and Thyssenkrupp, he said, in a deal which will create a business producing 21m tonnes of steel a year generating sales of €15bn (£13.3bn) and employing 48,000 people.
The merger aims to create savings of between €400m and €600m a year. It will see 2,000 redundancies and another 2,000 jobs going out of the combined business as overlapping operations are sold off, Mr Fischer said, adding he expects the losses to be split equally between Tata and Thyssenkrupp.
The merger of the two businesses will create a 50:50 joint venture, which Tata will shift €2.5bn of debt into and Thyssenkrupp will put in €4bn of liabilities. It also allows Tata to begin to draw a line under its venture into European steel, which kicked off in 2007 when it purchased Corus – formerly British Steel – for almost £7bn at the top of an M&A boom. Since then the volatile steel sector has proved troublesome, with huge losses, writedowns and an attempt to dispose of the entire UK steel operation.
For Thyssenkrupp the deal will allow it to focus on its more profitable capital goods operations. It is expected the new company – which will be based in Amsterdam and known as Thyssenkrupp Tata Steel (TTS) – will eventually completely separate from its parents, either in a sale if a buyer can be found or through a flotation.
TTS will focus on three main production hubs: IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales. The bulk of the redundancies are expected to go in support functions such as sales, HR and IT – and unions are understood to be hopeful that the 8,500 jobs in Tata’s UK steel operations should be relatively secure in the short term.
“A merger of this size will inevitably mean a review of support functions but the vast majority of these roles are no longer located in the UK,” said Roy Rickhuss, general-secretary of steel union Community. “We have been assured there will be no asset closures or reductions in production capacities across the UK.”
The tie-up has taken 18 months of negotiation and is expected to finalise next year if given regulatory approval. The path to the long-awaited deal was cleared earlier this month when Tata formally agreed a deal freeing it from the £15bn pension legacy attached to its UK operations which threatened to force the business into insolvency and had proved an insurmountable hurdle to a sale.
