The UK’s Port Talbot is a loss-making plant in a sagging industry. Why would India’s Tata want to keep it?
From spoons and cars to fridges and railways, steel is everywhere. And so, over the past few weeks, have been headlines about the UK’s Port Talbot – a massive plant in South Wales India's Tata Steel is threatening to sell. With the region's prime industry and 15,000 jobs at risk, Westminster’s determination to keep the port’s owners in Britain has been all but ironclad.
The government’s efforts seem to have paid off. Over the weekend, it emerged that Tata Steel, after all, was considering staying in the UK. It can hardly be for the lure of profit: the group's British operations, of which Port Talbot forms part, are said to be losing £1 million a day. So why the reversal?
The steel industry is reeling worldwide, after prices slid by 30 percent last year due to oversupply. Swings are not uncommon in steelmaking, by nature highly cyclical. But this time it's worse: companies had bumped up capacity to match booming demand from China, who endeavoured to burry its post-2008 recession under steel and concrete by rolling out apartment blocks across the country. As bad debt and unsold properties started to pile up, Beijing then took fright. It pricked the building bubble – and steel prices collapsed.
Not helping are alleged uncompetitive practices by the world’s largest producer: China itself. In lean times, production normally adjusts to lower demand with a lag, sending prices back up over time. But that’s not happened so far, partly because Beijing’s been providing hefty subsidies to prop up state-owned producers – over half of which were loss-making last year. China’s exports rose to 112 million tons in 2015, as much as the total output of Japan (the world’s number two producer).
In Europe, the situation is dire. Demand remains a quarter below pre-crisis levels; despite plant closures and tens of thousands of jobs lost, experts reckon excess capacity remains. High production and energy costs also make the sort of heavy manufacturing steelmaking belongs to comparatively expensive.
It’s in this context that Tata Steel decided to shed its UK unit last March. The business has attracted interest: seven bidders, including trade players and buyout firms, were said to be in the running. And judging by its recent disposals, Tata probably isn’t asking for much money. The company sold the Scunthorpe steelworks, another UK asset, to London-based Greybull Capital for £1 in May.
Yet last week, Tata failed to come up with a shortlist. That is excusable: several bidders had dropped out or were rejected early in the race; those that remained, Tata claims, couldn’t guarantee they would keep Port Talbot open for more than three years (necessary to reassure the UK government). But it’s a simpler factor that may have trumped all others: Tata Steel’s UK business is burdened with £15 billion of pension liabilities, £700 million of which are unfunded. No buyer seems keen to take that on.
This is where the UK government jumped in. Sajid Javid, business secretary, last week offered to legislate to water down the pension scheme’s promised benefits, potentially shaving £2.5 billion off the total bill. Better still, Javid promised a loan worth hundreds of million pounds that Tata Steel could use to refinance £900 million of debt the company owes to Tata Group, its Mumbai-based parent. The loan, granted on cheaper terms, could drastically reduce Tata Steel’s annual interest bill. Last year its UK arm disbursed £200 million in interest payments.
The deal may yet founder. Pensioners could take the government to court, and the EU oppose the loan because it qualifies as state aid. Importantly, Tata has not explained how it intends to make Port Talbot more competitive internationally, raising doubt about its longevity. One possible solution would be to refocus the plant on higher-end niche products, but that space is by definition limited. A more promising one is to use smaller, less expensive ‘mini-mills’, which melt scrap and can be turned off (larger facilities often can’t). But these tend to be power-hungry, making them less suitable for Europe.
Like the stuff that comes out of their furnaces, steel plants are not very flexible. Should it decide to keep Port Talbot, Tata’s attempts at defying the laws of physics will be closely watched by many of its peers.