When Corus was sold to Tata Steel five years ago, we feared the worst. At the time, I was in the automotive industry and the news weighed heavily on the sector. Combine the tail-end of 2007 with the first signs of a global downturn appearing through the cracks and sphincters were starting to get twitchy even then.
The shadow never truly disappeared, hanging over the automotive industry like a Dementor. With the labour bill for the UK outweighing that in India by so much per head, it was always a case of when, not if, job cuts were going to happen.
And now it has; the spectre of redundancies will haunt 900 Tata Steel workers this Christmas in both Wales and England. Coming on the back of a surprise trading loss announced earlier in the month, the clock that has been ticking for half a decade has finally chimed the hour. It will resonate across England and Wales over Christmas as if Jacob Marley himself was chiming the chord.
Tata Steel’s Euro Ops CEO Karl Kohler explained away the move. It seems that India’s largest producer of the alloy has not weathered the stormy global economy too well. The job cuts are the first step in the multi-national’s bid to become an “all-weather producer”, not just a company able to perform when the sun’s shining. Strange coming from India, but hey-ho; Kohler must have been referring to UK plants, for sure.
Tata Steel profit pressed from all angles
The price for steel, sold in coils and in sales units of tons, was down 20% year-on-year. At the end of Q3 in 2011, a ton of coiled hot-rolled steel would have cost $764. Compare that with $625 in today’s market and increased running costs over the same period and an insight into the profitability of Tata Steel suddenly becomes clearer.
Tata Steel has placed much of the blame on demand in Europe and the slackening off of end product demand during the global recession. Despite what the Government is trying to tell us, more and more commodities are becoming luxury items.
As a large percentage of steel imported by Europe goes into the automotive industry and subsequent car-sales dropping respectively, stock piles of hot-rolled steel have been building up in the global warehouses in the Far East, India and Australasia.
The effect of having stocks of so much base product causes a Dutch auction in the market-place. I say ’causes’ and not ’caused’ because this is not a unique experience. The metal market goes through cycles like this every so often, irrespective of external market conditions, it seems.
When this state is reached, manufacturers of coil like Tata Steel undercut the competition to offload their rolled steel to nut and bolt manufacturers and other OEMs to turn the coils into end product. If the raw material is bought while prices are high and the factored product sold during the dip then profit can easily experience negative growth, as is the case now.
Sadly, cost-saving often begins on the shop-floor, but rarely is it excessive as this unless there’s a huge underlying problem. Tata Steel’s shareholders may be the ones feeling a twitching in their undergarments if this trend continues across the group.