Tata Steel strikes European deal to secure jobs

The joint venture with Thyssenkrupp will help address Indian market needs, according to the Indian steel giant.

The chairman of Tata Steel welcomed the definitive agreement with German steel major Thyssenkrupp to create a new joint venture company as a “historic” development that would strengthen the steel industry across Europe and India. N. Chandrasekaran was addressing a joint press conference with Thyssenkrupp CEO Heinrich Hiesinger in Brussels at the end of June to mark the creation of Europe's second-largest steel giant in the form of the new JV company was announced over the weekend.

“For Tata, this marks a significant milestone in the history of Tata Steel and the Tata Group. It strengthens and provides scale to our European operations, creates a strong steel enterprise and also helps the Indian operations to grow and address the needs of the Indian market,” Chandrasekaran told reporters.

Addressing a question on what the new company, named Thyssenkrupp Tata Steel BV, would mean for Tata Steel employees in India, he described it as a “great development” for all employees.

“We are structurally strong in India, which offers tremendous opportunities as a growing market. This JV creates an opportunity for us to create a good, strong and sustainable footprint in both geographies,” he said. Chandrasekaran also asserted Tata Steel's plans to “double down” in India, where the company plans to increase its presence from 13 million tonnes to 25 million tonnes a year capacity.

In reference to the company's recent acquisition of Bhushan Steel in India, he indicated that Tata Steel was negotiating another acquisition in India as part of its focus on creating a “strong Indian platform” through Brownfield and Greenfield opportunities.

New deal

Tata Steel′s new 50-50 joint venture with Thyssenkrupp involves a total workforce of 48,000 employees, spread across 34 sites, producing about 21 million tons of steel a year with revenues of around EUROS 15 billion. As the second-largest European steel company, after Lakshmi N. Mittal's ArcelorMittal, the company has forecast cost savings of between £350 million to £440 million a year as it becomes a "one balance sheet" entity.

“There is industrial logic and strategic rationale behind this merger, which creates a new steel champion in Europe... we are forming something great, which expresses our trust in the successful future for the steel business in Europe,” said Thyssenkrupp CEO Hiesinger, before he stepped down from his post just weeks later.

In a move that came as a surprise, the company announced that Dr Hiesinger had asked the Supervisory Board of the company to end his mandate as Chief Executive Officer of thyssenkrupp AG “in mutual agreement”. Hiesinger said: “I take this step very consciously to enable a fundamental discussion in the Supervisory Board on the future of Thyssenkrupp.”

A joint understanding of Board and Supervisory Board on the strategic direction of a company is a key pre-requisite for successfully leading a company, he said. He added: “The joint venture of our steel activities with Tata is the next significant step to turn thyssenkrupp into a strong industrial company. We can be proud of what we achieved until now.

“For this I would like to thank all employees. They are the most valuable capital of thyssenkrupp.”

Brexit impact

The JV will now undergo routine clearance process, with the new company board set to be announced within a few weeks. Both entities expressed confidence in being able to navigate the upheavals in store as a result of ongoing Brexit negotiations and US tariff wars, with Hiesinger expressing hope that a free market context will be maintained for the steel industry.

“Having integrated plants across Europe, gives us some flexibility... but we will hope for free flow,” he had said. “We need to wait and see what the outcome of Brexit is,” added Chandrasekaran.

The definitive agreement signed between the two companies includes a “proper compensation” for a valuation gap between the companies, which means that in case of an Initial Public Offering (IPO) of the JV, Thyssenkrupp will receive a higher share of the proceeds, reflecting an economic ratio of 55/45. Both companies stressed that the timing of the IPO is some way off, as the initial focus would be on kick-starting JV operations following the required regulatory approvals and “building credibility” of the new company.

The merger has been widely welcomed by workers' unions in Britain as the best solution to ensure the long-term future of Tata Steel′s UK operations. The Indian company owns the UK's largest steelworks in Port Talbot, South Wales, employing thousands of staff.

UK operations

“Steelworkers have fought hard to ensure the future of British steelmaking. As part of this joint venture, we have secured significant investment across Tata Steel's UK business, including a repair of Port Talbot's blast furnace number five, which could see it produce steel until at least 2026,” said Roy Rickhuss, General Secretary of the union Community.

“With a commitment to avoid compulsory redundancies until October 2026, and the first GBP 200 million of any operating profit being invested back in the business, this joint venture has the potential to safeguard jobs and steelmaking for a generation,” he said.

Tony Brady, National Officer for Unite, stressed that his union would be seeking guarantees for jobs and investment for Tata Steel's UK “world class” workforce.

“Those steelworkers have made great sacrifices in working to secure a future for Tata Steel,” he said. Ross Murdoch, National Officer for GMB, added: “We will continue to ensure jobs and investment remain the key underpinning priorities within any final joint venture, which must equate to opportunities for our members in the UK, particularly after the difficult and uncertain recent times they have faced.”

The local MP from the Port Talbot area in Wales, Stephen Kinnock, also welcomed the new JV announcement, calling for “sustained investment” in the region's steel industry.

“With Brexit looming large and Trump recklessly spoiling for a trade war there are still all sorts of risks and challenges facing our industry. By teaming up with Thyssenkrupp, Tata Steel has added strength and resilience to its recovery, but we must now be vigilant, to ensure that we see full delivery on all the important commitments that have been made by all parties today,” the Labour party MP, who has been part of crisis talks since Tata Steel had announced major changes to its European operations, said in a statement.

The new company's complete production network is to be reviewed starting in 2020, with the aim of integrating and optimising the production strategy for the entire joint venture.

“All sides of the JV will have appropriate support to prosper and progress under the new enterprise,” said Koushik Chatterjee, Executive Director and Chief Financial Officer of Tata Steel.

Until the JV gets all its clearances, Thyssenkrupp Steel Europe and Tata Steel in Europe still operate as separate companies and as competitors.