Europe's steel market takes big step on consolidation

Europe's steel market takes big step on consolidation

After more than two years of courtship, negotiations with labour unions and last-minute objections by activist investors, the biggest shake-up in Europe’s steel industry for more than a decade is finally within touching distance.

Tata Steel and ThyssenKrupp last month tied the knot with a 50/50 joint venture to combine their steelmaking operations on the continent, a landmark deal that will create a number two in the region with €17bn in revenues and 48,000 employees.

The transaction is likely to be the last big-ticket deal for the foreseeable future among European steelmakers, representing an important step in the sector’s consolidation that executives have long argued is vital in the face of overcapacity, cheap imports, and, now, US tariffs on foreign metal.

“If you have a more consolidated market, it generally drives better pricing power . . . and [supply] discipline,” said Cedar Ekblom, analyst at Bank of America Merrill Lynch. “The rational for a joint venture [is] to position the new group as a lower-cost producer than the two entities separately.”

Yet since no closures are planned at ThyssenKrupp Tata Steel, as the new entity is to be called, the merger may not solve European steel’s chronic problem of surplus factories, say analysts.

“It has been a while since consolidation happened in Europe, so the big hope is that it also leads to less production capacity, which still has to be seen,” said Carsten Riek, an analyst at UBS.

Nor will there be any honeymoon period for the enlarged group, which must first win the blessing of antitrust authorities in Brussels.

Since TK-Tata will control roughly 27 per cent of the European market for flat steel, behind ArcelorMittal with 38 per cent, divestments are more likely in speciality and niche product areas where it would be strongly dominant, such as tin-plate for food packaging and electrical steels, say analysts and bankers.

The joint venture’s management then has a target to achieve €400m-€500m in annual cost savings across its 34 sites, all while keeping the peace with highly unionised workforces.

Although some 4,000 jobs are to go, split equally between the two sides, there are clearly limits to cutting overheads. An original cost savings range was trimmed by €100m at the upper end.

This possibly reflects pledges of no compulsory redundancies until 2026, made to win over unions in Germany, the Netherlands and Britain, where the main steelmaking facilities are located.

“[This] will of course tie the management team’s hands and make [cost saving] synergies increasingly challenging to secure,” said Seth Rosenfeld, an analyst at Jefferies.

With annual output of 11.4 million tonnes of steel ThyssenKrupp’s Duisburg site has scale, while Tata’s IJmuiden plant in the Netherlands is considered to be among Europe’s most efficient. Both are situated close to customers in mainland’s Europe’s automotive manufacturing heartlands.

But even at the third plant, Tata’s Port Talbot plant in south Wales, widely regarded by analysts as the least competitive and therefore most vulnerable to future cutbacks, proposed shutdowns would probably encounter resistance not only from trade unions but also politicians.

Nevertheless, there does appear to be scope for more optimal use of the facilities in the current configuration.

“My guess is that they focus each of the [three major] plants on certain customer groups, and hence are able to have longer melting sequences for certain steel grades,” said Mr Riek of UBS.

In practice, that could mean one site concentrating on automotive orders, with the others specialising in grades used in packaging, engineering and general manufacturing, for example. “That gives you economies of larger scale,” he added.

Although a turnround plan is making progress at Tata’s UK operation, it missed a profit target last year. This contributed to a divergence in financial performance between the two merging parties, which in turn put ThyssenKrupp under pressure from shareholders — most notably the activist investor Elliott, which accused it of giving away assets too cheaply in the 50/50 deal.

But scepticism remains in other quarters about the merits of the joint venture.

“It is difficult to say if the merger really is a big strategic leap ahead. If you look at previous mergers, sheer size is not necessarily a success factor,” said Heiko Reese, steel industry expert at the powerful German workers’ union IG Metall.

“If you take the job guarantees given to workers in Germany, the Netherlands and Great Britain into account, it seems likely that not a lot restructuring will happen until 2021 or 2022.”

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