Weakening steel demand from construction companies has forced world’s seventh largest steel maker Tata Steel to shut down its Llanwern steelworks blast furnace in South Wales in Britain, cutting down 115 jobs, but analysts say the benefits will take a while to flow in.
?There is still a demand supply mismatch in Europe and Tata Steel would have to reduce its capacity,? a consultant with a global consulting and audit firm said. ?This can be done either by closing down some blast furnaces or running them at lower capacity. They have begun to do so, but the effect on the balance sheets will kick in only after a few quarters when the restructuring across Europe is complete,” he added.
Demand in Europe is yet to recover from the 2008 economic crisis, according to Tata Steel which purchased Corus in 2006. ?Steel demand levels are only at 80% of the pre-2008 crisis levels,” Karl Kohler, Tata Steel’s Europe?s CEO and MD, said after announcing the company’s fiscal second quarter results. “In places like China, demand is now 160% of the pre-crisis levels.? In September, ArcelorMittal, the world?s largest steel maker, announced shutdown of one of its blast furnaces in Germany as demand slackened.
Steel makers are facing slower demand and rise in iron ore and coking coal. The European steel units, which contribute roughly two-thirds of Tata Steel’s 28 million tonne capacity, purchases all raw material from miners, unlike India which has raw material security. Coking coal prices have risen 40% in fiscal second quarter. The steel maker has tweaked its strategy by modernisation, shutting down its unprofitable construction sector steel production and instead focus to make specialised steel.
?Demand from the construction sector in Europe is sluggish,? Kohler had said in November. ?We will be exiting from the unprofitable construction sector in Wales.?
The company may axe 1,000 more jobs in four years after it restructures its Ijmuiden plant in the Netherlands. K?hler also said in November that Tata Steel Europe will follow the footsteps of its peers and may cut production in the next quarter due to the demand slowdown. The company will cut down its capacity by a million tonne in UK as demand slows.
?Tata Steel?s European operations are exposed to multiple variables,? Espirito Santo, a global brokerage, said in its report released on November 24. ?Uncertain steel demand outlook, lingering employee cost provisioning and pension fund deficit funding and impending impact of the EU Emissions Trading Scheme Phase 3 are the biggest concerns.?
?Acknowledging EUROFER?s recent downward revision in European steel demand outlook, we reduce our saleable steel volumes estimates for Tata Steel Europe by 20% for FY13. We expect Tata Steel Europe to report cumulative Ebitda level losses of $36m over 2HFY12,? the report added. EUROFER is a federation of all steel producers in Europe and tracks the supply and demand of steel in the continent.
South-East Asian brokerage firm Kim Eng concurred with the view and said in a report that european operations are eating into the profits.