Tata Steel Europe: A tale of 2 plants and their transition to green future

Both the Netherlands and UK facilities have turned around but the transition to a green steel future may differ

Tata Steel’s European story is a tale of two halves: The well-configured, efficient and bigger steelmaking site is in the Netherlands and the high-cost plant with structural inefficiencies is in the UK.

Numbers reflect this. A record rally in steel prices led to a stellar showing by Tata Steel Europe in FY22 and Q1FY23. The EBITDA in FY22 — at £1.2 billion (Rs 12,164 crore) — was the highest ever since Tata Steel’s £6.2-billion acquisition of Corus in 2007.

In Q1FY23, Europe EBITDA at £621 million (Rs 6,037 crore) was the best ever quarter. But the bulk of that would have come from the Netherlands, typically accounting for about 75 per cent.

The UK, which at peak level was losing £300-400 million, has come a long way — Tata Steel UK EBITDA in FY22 stood at £215 million.

A flash in the pan or sustainable enough to justify the substantial investment required for the impending transition to greener steel?

In an interview to Financial Times last month, Tata Steel and Tata Sons Chairman Natarajan Chandrasekaran indicated that a transition to a greener steel plant was the intention but was only possible with financial help from the UK government.

The management has made it clear that without this support, the sites could close. Tata Steel has been in discussion with the UK government for the last two years. But the clock is ticking as many of the assets will come to their end-of-life cycle in the next couple of years at Port Talbot, the steelmaking site in the UK.

These assets will either have to be replaced with new ones or transition into a new process, T V Narendran, managing director and chief executive officer, Tata Steel, explained. So this is a good opportunity to transition into greener processes.

Tata Steel Europe has two primary steelmaking units: IJmuiden, Netherlands, and Port Talbot, Wales. The approach to transition for the two sites is different.

In the Netherlands, the plan is to adopt a hydrogen route involving the introduction of direct reduced iron (DRI) technology, which can make iron using natural gas or hydrogen before being converted to steel in one or more electric arc furnaces to be set up in the future.

In the UK, the idea is to replace the blast furnace route with electric arc furnace and use locally available scrap (the UK is the second largest producer). The main point of difference between the two sites, however, lies elsewhere.

In the Netherlands, Tata Steel is not as dependent on government support for the transition as it is in the UK. Why? It generates enough cash, and mostly has.

A host of advantages tip the balance for IJmuiden. “It’s a coastal plant. It’s the only plant in Europe with a pellet plant, which is a big advantage because you have a lot more flexibility in raw material,” said Narendran. And it’s a single-site 7-million tonne (MT) operation — larger the site, the better it is from a cost-efficiency point of view.

In the last 15 years, Tata Steel Europe has mostly hobbled on account of its UK operations. The British side — 14.4 MT at the time of acquisition — was a constellation of sites. But over the years, a number of units in the UK have been sold and the capacity shrunk to around 5 MT.

In 2011, Tata Steel sold Teesside Cast Products to Sahaviriya Steel of Thailand for $469 million; in 2016, Scunthorpe was sold to Greybull Capital, reportedly for a token amount; in 2017, the specialty steel business was sold to Liberty House for £100 million. The only upstream asset now left is Port Talbot.

But the downstream assets — though on a much stronger footing than the upstream — are also spread all over the UK. That means additional cost in transporting steel from one site to another. The energy cost in the UK is twice that in the Netherlands and Port Talbot has to buy more electricity from the grid than the plant in the Netherlands. The result: the cost of production in the UK is £30-40 per tonne more than in the Netherlands.

“In the cost curve point of view, the UK side is in a worse position than the Netherlands,” said Narendran.

So, while the capacity utilisation in the Netherlands is more than 90 per cent, in the UK it’s more about operating at an optimal level — which Tata Steel has found to be 3-3.2 MT (or 60-64 per cent capacity utilisation).

High operating cost in the UK has contributed to the decline of the steel industry over decades particularly with the rise of low-cost producing countries like China. According to a House of Commons Library Briefing Paper, the steel industry in the UK supported 320,000 jobs in 1971 compared to 23,000 in 2019 (excluding steel processing).

But there are other externalities that have changed for the better, especially as far as steel tariffs are concerned. “The present set of steel tariffs/safeguard measures were introduced by the European Union back in 2018 in response to the tariffs imposed by the US under Donald Trump. Even after Brexit, the UK continued with it. The same was again extended for two years by the UK in June 2022,” said Hetal Gandhi, director, CRISIL Research. That should protect the local steel industry from cheap imports.

The focus of Tata Steel in the last few years has been to make the European business self-sufficient. And to make it happen, Tata Steel Europe has been split into Tata Steel Netherlands and Tata Steel UK effective October 2021 with separate governance structures.

While it does all of that, it may also help in seeking support from respective governments in the transition to green steel. The UK government, for instance, may be warmer to the idea of supporting a company focused on UK operations, in contrast to Tata Steel Europe, the holding company, which also had mainland Europe operations, especially in the Netherlands under the fold.

The journey of Tata Steel’s European operations — spread over the UK and the Netherlands — had a shared beginning but is expected to chart their own course from here on.