What does Tata-Thyssenkrupp mega-merger mean for UK jobs and the European steel industry?

When will the merger take place?

The aim is to have the deal signed off by autumn 2018 but it’s a massively complex operation with huge regulatory barriers to overcome. 

Why are these two companies linking up?

To have a better chance of thriving, or at least surviving, in the future.

Two years ago the steel industry was in crisis. Globally, the industry had a production capacity of about 2.3bn tonnes of steel a year but demand was far lower, at about 1.6bn tonnes, thanks to China’s slowing economy.

Western steelmakers were struggling to survive as China, which is home to half the world’s steelmaking capacity, dumped steel on the international markets.

The situation was compounded by the fact that the Beijing government subsidises much of its steel industry, which already works under less rigorous regulation than many other nations.

In the UK, the situation was exacerbated further by the strong pound, which made Britain an attractive market for foreign steelmakers to sell to, and other European nations to a lesser degree. High energy prices added to the burden on British steelmakers and the crisis cost more than 10,000 UK jobs as plants closed down.

The situation became so bad that in early 2016 Tata’s Indian parent tried to sell its whole UK steel business, before doing a U-turn as it became clear that the complicated and expensive British Steel pension scheme that was attached to the company would scare buyers off. 

How will combining help them?

The steel industry is now in a much better place than it was in 2016. Demand and pricing have improved and companies are no longer on the precipice.

However, the problem of global overcapacity remains: Western steel companies are still struggling to compete with peers in China, and other nations such as Russia, India and Ukraine, which produce high-volume, low-margin commoditised steel. There is no guarantee that these companies won't find themselves in the same difficulties again.

Tata and Thyssenkrupp hope to achieve savings that will make them more efficient. They are also refocusing their efforts on higher-value, more specialised and high-tech forms of steel, which they believe China and other nations cannot produce.

“It’s true China and others have a huge overcapacity and can flood the market,” says Hans Fischer, chief executive of Tata Steel Europe, explaining the rationale for the deal.

“The answer is not to try to compete with them on the same thing but to find a solution where we make products that cannot be produced easily.”

A higher-tech approach would offer other advantages, such as digitisation, Fischer says: “Improving the links between suppliers, customers and producers digitally will be an asset - and we also produce locally, that is something China cannot do.”

However this does not mean low-value steel products will be entirely abandoned; Fischer points out the scale of the enlarged business could mean products that are currently unprofitable become viable again.

As well as easing worries about the future of the sector, for Tata a deal ends the turbulence started by its aborted attempt to sell the UK steel business.

Koushik Chatterjee, executive director, says it offers the chance for a “significant deleveraging” of the company’s balance sheet.

And for ThyssenKrupp, the merger allows it to spin off its primary steel business from its more stable capital goods operations.

What will it mean for Tata and Thyssenkrupp staff?

There will be jobs losses for certain. At the moment the combined companies employ 48,000 staff and Fischer says he expects about 4,000 roles to go out of the merged company through a mixture of redundancies and disposals as overlapping businesses - such as the lower-value commoditised steel operations - are sold off.

The intention is for the job losses to be split evenly between the companies but Fischer stressed it was early days and details have yet to be finalised. 

Sources close to the deal say that the creation of such a huge business could mean regulators - who will have to sign off on the plan - may decide the companies will have to dispose of some operations to ease competition concerns. This could mean a greater number of jobs are taken out of the merged business - though in theory they would transfer to any buyer.

What is the impact on the UK?

Tata employs around 8,500 staff in the UK, with about half of them at its giant Port Talbot plant. Announcing the tie-up, the companies said they imagined most of the jobs would go in administration roles, though refused to be drawn on whether production positions could be targeted.

Community, the UK steelworkers' union, said it cautiously welcomed the plan as it was likely to mean British jobs were saved.

Roy Rickhuss, general secretary of Community, said: “A merger of this size inevitably means a review of support functions such as HR and IT, but the vast majority of these roles are no longer located in the UK. We have been assured there will be no asset closures or reductions in production capacities across the UK.”

There are also questions about investment in Tata’s UK plants. Last year the company agreed a deal with unions to invest £1bn over the next decade in British operations. Tata said it was an aspiration and was dependent on it being financially viable, but the unions see it more as a cast-iron agreement and want to see the expensive relining of a blast furnace at Port Talbot to secure the plant’s future.

Fischer says he will “stick to the agreements with all the relevant parties” - though precisely what this means is unclear.   

As for jobs abroad, powerful European unions - particularly in Germany - are likely to fight hard against compulsory redundancies in their local plants. 

Will the merged company be a success?

The answer will depend on the global steel markets, but one thing is for sure: together the businesses have a much better chance of success than they would have done alone.

“We want to be a technology leader in steel and high-quality products play a role in that, but that is only possible if we are of a certain size as a company to give us the possibility to invest in that,” says Fischer. “We tried to do it alone and we were partly successful but we were not able to do it at the speed we needed.”

Others in the industry believe it could be a success - if handled correctly.

“The market has turned 180 degrees from where it was two years ago and if they exploit that correctly, they have every chance,” says one industry source. “But it needs Thyssenkrupp to take charge because Tata have been terrible at trying to turn their business round.

“What it will mean post-Brexit for British steel production without some sort of trade deal is anyone’s guess.” 

If the combined business can successfully transition to higher-value steel, it will be “one of the most complex corporate turnarounds in the history of the EU steel sector”, according to Berenberg analyst Alessandro Abate.

Tata's operations in the UK date back to 2007 when it bought Corus - formerly British Steel - for almost £7bn. But Tata acquired Corus at the top of an M&A boom and just ahead of the financial crisis, resulting in what Abate calls the “most painful deal in EU steel history”. 

If ThyssenKrupp Tata Steel is a success, it would be a “glorious exit” from that earlier debacle, Abate adds.