Tata Steel will undertake one more restructuring at its UK steel-making operations. Today, it announced a restructuring of its long steel operations, which it says has become unviable due and has been making losses for the past two years.
Earlier, it had restructured its speciality steel operations and more recently, had disposed its steel slabs facility at Teesside Cast products. Its long products facility has been making losses for the past two years.
Lower growth rates in end-user markets, especially construction, has affected demand which is at two-thirds of the demand seen in 2007, and Tata Steel does not expect demand to fully recover (till economic conditions improve). The company has also talked about the regulatory outlook, with the European Union planning carbon legislation which will impose additional costs on the industry and the UK government planning its own measures that will result in carbon cost increases.
What does Tata Steel propose to do?
The company plans to take action to further reduce costs, focus on value-added products and become flexible enough to respond to changes in demand.
To begin with, it will close or mothball parts of the Scunthorpe steel facility, resulting in 1,200 job losses and 300 jobs at its Teesside plant. The company will close the bloom and billet mill and associated steel caster. It will mothball the Queen Bess blast furnace, and will reopen it when market conditions improve. It will review the operations of the billet caster.
The company said in a statement that the bloom and billet mill closure will eliminate an energy intensive operation which is obsolete relative to modern steel technology. Nowadays, steel plants employ a continuous casting technology, compared to the old technology where slabs (blooms) were made separately, then taken to the billet mill for rolling into long products.
The company has not specified what facilities will be set up with the £400 million pound investment, to be done over 5 years, but this will ostensibly be used to modernise the facility. Apart from the market downturn, the company also wishes to respond to changes in market sectors, where customers are demanding new products and better service levels.
What will this do to the company’s performance?
Tata Steel has a three-month window in which it will negotiate with the labour unions, at the end of which a compensation package will be decided. This will mean a cash outflow plus a hit on its profit and loss, either one-time or amortised over several years.
On the revenue front, it is not clear if Tata Steel will service its existing customers from products made at other locations, or it will exit these markets altogether. That will lead to a drop in sales for the company, though profitability will improve.
Long steel products contributed to about a fifth of Tata Steel’s European steel sales by volume in the September quarter. This is down from about a third of sales, compared to the year ago period.
Tata Steel’s record so far at restructuring has been good. Its speciality steels division, saw volumes grow again in the second half of 2010. It had even announced a re-hiring programme for this unit in early 2010. It would be hoping to repeat the feat with its long steel products unit as well.
Read the company press release here.