Though Europe operations did show some improvement in performance a few quarters ago. Overall, its contribution to the consolidated figures have been a dismal with India operations holding the fort for the steel company. (see chart)
“As a management, we are not keen on missing out opportunities in India because we have to keep sending cash to Europe. We have told the (Europe) team that the best way for them to control their future is to be cash-positive,” T V Narendran, chief executive officer (CEO) and managing director (MD) had said earlier.
In June 2018, Tata Steel decided to merge its European operations with ThyssenKrupp — giving it ultimately 45 per cent stake in the merged entity. But the merger idea did not go well with the labour unions of ThyssenKrupp, who feared job losses. Besides, investor groups, which held 18 per cent stake in the German company, also did not approve the plan and its share price lost half value in the last one year.
In May this year, Tata Steel's plans to merge its European operations with ThyssenKrupp collapsed following objections from the anti-trust authorities of the European Commission.
“There is no other major player in the region for any JV with Tata Steel. Also, they (Tata Steel) do not have any plan-B to make operations profitable. In such a situation, the company has no choice but to keep downsizing operations gradually,” said a Mumbai-based brokerage analyst on condition of anonymity.
Meanwhile, Tata Steel responded through statement saying, “Like all European steelmakers, Tata Steel Europe continues to experience challenging market conditions, made worse by the use of Europe as a dumping ground for the world’s excess capacity.”
“We launched a transformation programme in Tata Steel Europe in June to strengthen our business. We are aiming to develop a simpler and leaner organisation, capable of sustainably financing high levels of investment, which are essential to our long-term success,” Tata Steel spokesperson was quoted as saying. According to the company, the programme is gathering pace to urgently improve performance. Proposals are being developed to improve supply chain, manufacturing performance and raw materials usage, as well as efficiency gains through digitalisation. "We expect these to include a reduction in our employment costs which would be subject to the full consultation process with employee representatives."
In April 2007, Tata Steel announced that the company has completed its $12 billion acquisition of Corus Group plc (Corus). After this acquisition, Tata Steel will have crude steel production of 27 million tonne (MT) and will be the world’s fifth largest steel producer with 84,000 employees across four continents.
Tata Steel entered the Europe market (in 2007) when consumption was on a declining trend in the region. Around the same period, players such as JFE Holdings Inc, the world's fifth-biggest steelmaker and Nippon Steel made an entry in the India market, where consumption has been continuously rising.
According to the World Steel Association data, consumption of crude steel in the European Union region has declined to 178 million tonne in 2017 from 207 million tonne in 2008. During the period, consumption pattern has been erratic and not displaying any clear growing demand trend. Meanwhile, in the period under review, crude steel consumption in India was continuously on a rise, and in fact nearly doubled to reach 101 million tonne 2017 from 56 million tonne in 2008. (see graph)
According to the latest Care Ratings report, the domestic operations of Tata Steel continue to remain strong with PBILDT (profit before interest, lease, depreciation and tax) of Rs 23,833 crore during FY19 leading to PBILDT per tonne of Rs 14,679.
However, the financial performance of the European operations continued to remain subdued with EBITDA of Rs 5,414 crore, thereby leading to PBILDT per tonne of Rs 5,634
The profitability from European operations is constrained by factors such as a lack of captive raw material sources, intense competition, high employee costs and overheads. Thus, the strong performance demonstrated by the company in the domestic markets at operating profit level is partly offset by the subdued performance in the European market thereby keeping the consolidated PBILDT at Rs 30,734 crore with consolidated PBILDT per tonne of Rs 11,468 as compared to domestic EBIDTA per tonne of Rs 14,679, said CARE.