Corus future in doubt as Tata hovers

Corus future in doubt as Tata hovers

By Peter Marsh in Buenos Aires, Financial Times

5th October 2006

News that Tata Steel, India’s biggest private sector steelmaker, is considering Corus as a potential merger partner has reignited speculation about the future for the Anglo-Dutch steel producer – and throws up the possibility of the biggest international expansion to date by one of India’s largest industrial groups.

A deal would also be further evidence of the consolidation of the global steel industry, a process that that has accelerated considerably in the past few years through the combination of large companies to form bigger and more powerful groups. The most recent move in this direction was the €26.9bn takeover by Lakshmi Mittal’s Mittal Steelof Arcelor, the Luxembourg-listed European group, to form Arcelor Mittal – easily the world’s biggest steelmaker, with an output three times higher than its closest rival.

Tata Steel is part of the Tata group, a large Indian conglomerate which is owned by a private trust and headed by Ratan Tata. While the softly-spoken businessman shuns the limelight, he has led Tata into several overseas investments. These include a significant move into Europe by Tata Consultancy Services, the group’s large IT services division, and an ambitious plan to construct an automotive research centre in the English Midlands. This would be part of efforts to gain a stronger foothold in Europe by Tata Motors, the group’s automotive arm, which is also looking at various joint ventures – notably in South America and India with Fiat of Italy.

For Corus, a deal with Tata could form the culmination of a plan by Philippe Varin, its French chief executive, to link the steelmaker with a low-cost producer. Mr Varin took the helm in 2003 after several years of financial losses following the creation of the company in 1999 through the merger of British Steel and Hoogovens of the Netherlands.

Corus has since made substantial progress in sharpening its operations and is now profitable. But Mr Varin has come to realise that its European steelmaking sites – particularly those in the UK – need to be supplemented by lower-cost locations in other parts of the world. The main problems are the UK´s high labour costs, Corus’s poor record in manufacturing efficiencies and the cost of bringing to the UK increasingly expensive raw materials – chiefly iron ore.

It would make some industrial sense for Corus to shut down at least some of its high-cost steelmaking sites in the UK, such as in south Wales or Scunthorpe, and replace them with cheaper steel shipped from India in unfinished “slab” form.

Tata Steel has a large and efficient site in Jamshedpur, northern India, and its slab could in theory be “finished” in final processing or rolling procedures in the UK – to make into flat automotive sheet for use in the auto or domestic appliance industries, for example.

Such a project could involve the loss of more jobs in the UK. Corus has already cut more 10,000 British jobs since 1999 as it has battled to stay competitive. A partnership of this sort between Tata and Corus – perhaps as part of a merger or takeover by one company of the other – would also bring together two companies with different management styles but some strong common interests in areas such as marketing and use of new production methodologies.

Corus already has good marketing contacts in India – where, for instance, it sells some high-value steel used in buildings such as airports – while several top Tata Steel executives were trained at the former British Steel and admire the UK approach to business.

A combination might, however, raise the problem of uniting two companies of quite different scale. Corus is the world’s eighth biggest steelmaker with an output last year of 18m tonnes. Tata Steel, by contrast, is a minnow with production from its one site in Jamshedpur last year of 5m tonnes, making it the 55th biggest steelmaker in the world according to international rankings.

Despite that, Tata Steel has ambitious expansion plans. B Muthuraman, managing director, has announced a scheme to spend more than $20bn by the middle of the next decade to increase annual output to more than 20m tonnes, mainly through new projects in India but also by moves to set up steelmaking units overseas. (The company has already acquired fairly small steelmaking operations in Singapore and Thailand.)

Mr Muthuraman likes the idea of using India’s low-cost steelmaking sites – helped by good access to high quality but cheap iron ore - to turn out slab steel for finishing closer to the consumer. He is developing this idea partly through a partnership with Bluescope, the Australian steelmaker. Mr Muthuraman also has an upbeat view of the future for the Indian steel industry and sees steel demand in the country expanding three-fold over the next 15 years, to reach 150m tonnes a year.

So if the two companies did unite, there would be every chance that their respective managements could combine to create potentially powerful force in global steel.