Brexit Worries India, Threatens That Other ‘Special Relationship’

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The decision by a majority of U.K. citizens to leave the European Union (E.U.) has injected a note of worry in business circles in faraway India, one of Great Britain’s former colonies and a nation that trades more than India Pale Ale with it.

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Especially worried are India’s steel and automobile sectors. The anxiety stems from the fact that the U.K. was always seen as an attractive business entry point to the rest of the E.U. It’s favorable tax regime was the other positive factor that encouraged trade between the two nations.

Tata Steel’s Conundrum

But now, with the referendum over, trade bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI) feel that Brexit could create a lot of uncertainty for India, Inc. After all, Indian companies are the third-largest source of foreign direct investment in the U.K.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

Tata’s steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Source: Adobe Stock/Petert2

Take Tata Steel for example, the company’s steel products enjoyed free trade with other European countries because Britain was part of the E.U. Now, depending on what type of deal is struck with its former E.U. cohorts, that status will likely be gone, leaving Tata Steel negatively impacted. Not only will it hurt the division’s exports, but it also complicates proposed sale of its U.K. plants.

The entire scenario has changed, and so potential buyers will now have to study the trade ties that Britain will have with the rest of E.U. before buying the Tata’s U.K. operations.

About 12% of steel produced by Tata Steel’s U.K. operations is exported to the other E.U. members. A report by financial institution ICICI Direct put it bluntly when it said Brexit may delay the sale process of Tata Steel’s U.K. operations as it will elevate the level of uncertainty within the region. Furthermore —on account of sharp volatility in currency especially the pound sterling — there could be renegotiations with respect to different aspects of a potential deal.

The loss-making Tata Steel UK operations’ capacity stands at 5.5 million metric tons. Tata has business in the Netherlands, too, which still remains part of E.U. and those operations enjoy positive earnings before interest taxes depreciation and amortization (EBITDA). There are reports of a proposed sale of the Netherlands business, too.

Indian Auto, Inc. and the UK

Another part of the Tata conglomerate, Tata Motors, will be majorly affected by the Brexit. A senior, unnamed executive of the company told The Wire that out of all of India, Inc., Tata Motors was perhaps the worst off when it came to using the U.K. as a base for E.U.

Tata Motors, through its luxury car subsidiary Jaguar Land Rover, enjoyed a price advantage because its exports from the U.K. counted as a local manufacturer since the U.K. was part of the E.U. The difference in price was about 10% when they made cars in the U.K. and then exported them to other E.U. nations. That advantage is most likely gone.

But there’s some renewed hope for Tata Steel, at least, according to a recent report in the Guardian.

It said Tata Steel was close to a deal to save its Port Talbot, South Wales, plant in spite of the Brexit, as the pound sterling’s slump potentially boosted the industry’s survival prospects.

The report quoted sources familiar with Tata Steel’s thinking, saying the company was still working on a deal with the government to keep its U.K. business, and that the slump in sterling’s value could actually help the plant survive.

More than 11,000 jobs are at risk after Tata Steel announced in March that it was considering pulling out of its U.K. business, which includes the Port Talbot steelworks.

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As reported by MetalMiner, there were seven suitors in the ring for its U.K. operations but Tata Steel could be evaluating the package of financial support that the U.K. government offered. The company’s main concern was whether the government would be strong enough to push through changes to the British Steel pension scheme in order to make it a law.

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