Tata and Thyssenkrupp Finally Wed

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Thyssenkrupp and Tata Steel have finally made it to the altar.

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After 18 months of mostly behind-the-scenes negotiations to resolve several potentially “deal-off” stumbling blocks, all the major issues have been resolved. The two firms have signed a memorandum of understanding to create a 50:50 joint venture based in Amsterdam, Netherlands, called Thyssenkrupp Tata Steel (TTS).

The behemoth will rank second to ArcelorMittal with 21 million tons of annual steel capacity generating sales of €15 billion ($17.8 billion) and employing 48,000 people, The Telegraph reported.

New Focus

TTS will focus on three main production hubs: Ijmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales, the paper reports, Analysts say improved viability will come from cost savings of between €400 million and €600 million a year arising after 2,000 redundancies and another 2,000 jobs going out of the combined business as overlapping operations are removed.

Not surprisingly, TTS sees the value proposition as the enhanced opportunity for the combined group to move its business up the value chain in cooperation rather than competition with each other.

Hans Fischer, Tata Steel Europe’s chief executive, said “We need to focus on higher value products, China has huge overcapacity and there is a risk they will flood the market. The answer is not to compete with them, but try but find a solution where we have products that cannot be produced easily. We need to be a technology leader.”

Tata wriggling out of the old British Steel Pension fund liabilities was the final major hurdle to overcome — albeit to be fair, at considerable cost to the parent — and the willingness of British workers to agree to an end to the final salary scheme and reduced benefits for existing members underlines their desperation for a deal, matched by compromises made in Germany by workers fearful of the prospects of foreign competition with the European steel industry.

But therein lies the dilemma.

No amount of rationalization will save the European steel industry on its own. Nor will moving up the value chain in the longer term.

The Challenge of Overcapacity

The problem is global overcapacity and dumping by foreign steel producers in Russia, Ukraine and, yes, China in the relatively open European market.

China’s overcapacity is many times the combined total production of TTS. The whole group could be closed and China, or Russia, or Ukraine – or, more likely, a combination of all of them – would promptly fill the gap.

Moving up the value chain won’t last for long, either. As we have seen in aluminum, China is perfectly capable of buying Western technology and moving up the value chain themselves. Where once China only made commodity extrusions and poor quality sheet, they now supply Boeing and Airbus with extrusions, flat rolled and forged aluminium.

Short Term Versus Long Term

Moving up the value chain also means moving into more niche areas. For every 10 tons of commodity steel there is only one ton of high-value electrical grade steel or automotive sheet. It yields higher profits, and for a while it gives an edge, but it lasts maybe five years at today’s rates of technological improvement in China.

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Nevertheless, shareholders approve of the merger. With their shorter term time frame, they see the benefits far outweighing any disadvantages.

In the short term, they are right.

The merger gives both companies a chance to improve the fortunes of their European steel operations and safeguard the jobs, for the time being, of many thousands of steel workers.

As a panacea for the European steel industry’s woes, however, it still leaves something to be desired.

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