Tata Steel and the United Kingdom government last week announced a joint investment package worth 1.25 billion pound, which includes a government grant of 500 million pound. The agreement will secure the future of Port Talbot operations in Wales, which is the country’s largest steelworks, by giving it a fresh lease of life. The 500 million grant is one of the largest from the UK government. While the joint investment would enable the company to move to greener steel making process, there’s likelihood of job losses at the plant. Koushik Chatterjee, executive director and chief financial officer, and member of the board, Tata Steel, spoke to FE giving a holistic perspective on the underlying theme of decarbonisation at the plant. Excerpts:
The capital investment for the electric arc furnace (EAF) project is GBP 1.25 billion pounds. How do you propose to fund the same?
As this is going to be a organic project, the cash flows will be phased over the build period as far as the EAF project is concerned. So on the project itself its not an upfront cash. Broadly, as you are aware the UK Government will be providing us a grant of GBP 500 million and the balance will be funded by Tata Steel. The financing plan for the proposed investment will be done in a manner that reflects financial prudence, capital efficiency and the agility that enables a faster execution of the investment so that the cash cycle can commence quickly. All of this is designed to give the balance sheet a optimum financial structure. Finally, the Tata Steel Europe debt has been significantly prepaid in the last five years and most of the debt there is working capital related which is part of the ongoing business.
Will the proposed installation of an electric arc furnace result in a loss of jobs? One media report cited the department for business and trade as saying 5,000 of the more than 8,000 jobs would be safeguarded. Your comments
We have already mentioned that we will undertake meaningful consultation with the Unions regarding the transition and the way forward. That process will commence soon. We have always worked transparently and diligently with the unions and other stakeholders in the past consultations over the years to ensure a fair and responsible consultation process. There will be an inevitable restructuring as the current situation is neither sustainable nor investible. Finally, and most importantly, I think everyone understands that this is a very important moment for the steel industry in the UK that can define the future pathway for a sustainable future, hence everyone’s support in this journey will be valuable.
The European operations have hurt Tata Steel’s performance over the years. When can we expect a full turnaround? What specific measures need to be taken to achieve this?
We need to think of this in couple of ways. First we should now look at it separately between the UK and Netherlands. For most part of the last decade the Netherlands business has been profitable both on the earnings and the cash flows front. However due to structural issues the UK hasn’t been profitable or able to meet its own cash requirements. Now with this announcement and the project we propose to reboot the UK business to a new phase resolving the structural weakness, state of the art facilities, higher productivity, lower cost base and higher efficiency, higher automation and digitisation and better customer centric business model. Once the EAF project is build and commissioned, the UK business will be profitable.
Can you explain the thinking and approach behind the decarbonisation strategy both in UK and Netherlands and what role does the regulatory changes play in this? And why are governments supporting private sector decarbonisation with grant funding.
Good question and let me explain. Decarbonisation as a theme globally aims to reduce carbon emission by transition to low carbon processes. Post the Paris Agreement in 2015, countries have taken emission reduction target as national goals and have legislated the pathway on that basis. Carbon is also priced in geographies like EU and the UK which triggers the decarbonisation transition because carbon management has a cost. Steel is known as a hard to abate sector because there are no at scale technology available to remove the entire carbon from the processes – the best available economical technology today is through the electric arc furnace route with either scrap or direct reduced iron as the raw material. In the steel industry the direct emission which is referred to as Scope 1 is the highest hence the technology process for the steel manufacturing will play a critical role towards decarbonisation. The journey of decarbonisation or transition to low carbon technology needs to be just for all stakeholders including the company. Since the transition is not going to add capacity or volume, sometimes it becomes difficult to develop a investment case. The moot question then is who bears the cost? To make the decarbonisation transition just and viable, there are three market participants who has to support the funding transition – obviously the company, the community through the governments and the customer through the different regulatory mechanism like carbon border adjustment mechanism. This is currently the trend world over especially in Europe and the USA where the governments are supporting the transition through either target funding support or equivalent large scale incentive mechanism. Abatement of carbon from hard to abate sectors also helps achieve the national goals in a collaborative manner. The UK government’s decision to support Tata Steel UK’s transition is consistent with the above philosophy and in line with the UK’s own net zero goals.
Tata Steel has de-risked its exposure to pensions by divesting the remaining 40% ownership in British Steel Pension Scheme (BSPS) in 1QFY24. Are there any other exposures that need to be de-risked?
Yes we have successfully de-risked the GBP 12 billion pension portfolio with the buy in of the portfolio to Legal & General. This has not only de-risked the company but also ensured a fair and responsible closure of the pension uncertainties for the pensioners. This has been one of the most significant and complex de-risking projects for Tata Steel.