In today’s Finshots, we tell you why the UK government is paying £500 million to Tata Steel.

The Story

In the mid 2000s, Tata Steel was bubbling with ambition. It wanted to be ranked among the top 50 steel companies in the world. But since it didn’t have enough production capacity, getting into that list was hard.

So, in 2007 the steelmaker did something sudden. It acquired Corus, an Anglo-Dutch steel company that was 4 times its size, but earned much lower profits than Tata Steel itself. At $12 billion, the deal was considered the biggest foreign acquisition by an Indian company back then.

But its dreams soon became a dud because Corus, which later became Tata Steel Europe, turned out to be a problem child for Tata. It has incurred more than a whopping £4 billion (nearly ₹42,400 crores) in losses ever since it was acquired. And that has forced its UK steel plant at Port Talbot to succumb to a tough decision ― shutting down its blast furnaces and letting go of 2,800 employees.

How did it come to this, you ask?

Look, operating the furnaces (essential in steel production) is rather expensive. It needs large amounts of resources like coke fuel, ores, limestone, energy and labour.

It needs regular maintenance too as the furnace’s lining wears out over time due to high temperatures and chemical reactions. As a blast furnace ages, efficiency declines, paving way for higher maintenance costs. This gradually makes them unsustainable.

But that may have only played a small part in the decline of Tata Steel’s UK operations.

Things began to actually fall apart with the global financial crisis (GFC) that panned out just a year after Tata’s Corus acquisition. The crisis severely impacted businesses across the globe. And the steel industry was no exception.

Falling house prices in the US and a rise in the number of borrowers who were unable to repay their loans meant that a looming bubble had burst. This pushed governments worldwide to tighten liquidity by reducing the amount of money people and businesses could borrow.

Industries found it hard to finance their operations since demand in the construction, automotive, and appliance industries began to fall too. At one point the global demand for steel dropped by 21% compared to the year before. And this was a big blow for Tata Steel.

Then came the deluge of cheap Chinese steel. A construction boom in China until the GFC meant that its government invested quite a bit into steel production in the form of subsidies. This translated into an overcapacity. Low labour costs in the country also meant that the steel was cheap.

And as the world was recovering from the GFC, China began exporting or dumping its steel to other countries including European markets. Cheap Chinese steel imports into Britain forced Tata Steel to halve prices on some of its products to remain competitive too.

As if that was not enough, Brexit came around quickly. As the UK exited the European Union, exporting to other EU nations became more expensive. Thanks to higher tariffs and trade restrictions, the demand for UK steel nosedived.

The biggest blow though was the fact that Tata's Port Talbot plant is also the UK's biggest carbon dioxide emitter. But since the country wants to reach net zero or nullify its carbon emission by 2050, Tata had to think in the direction of completely shutting shop.

That would mean laying off nearly 4,000 people that the steel plant at Port Talbot employs. That’s roughly 10% of the city's population. This would set off a significant rise in unemployment rates among the local community.

The UK government definitely knew what an economic turmoil that would cause. It could not let its domestic steel company shut down and rely entirely on foreign imports for its steel requirements. And that’s exactly why it went looking for a sustainable solution.

It came up with the idea of transitioning Tata Steel’s coke powered blast furnace operations into electric arc furnaces (EAFs). EAFs use an electric current to melt scrap steel or iron and produce steel. So it’s environmentally friendly.

But here’s the thing. Doing that can cost a hand and a leg or precisely £1.25 billion. And without support from the government, Tata would only have to pack up its bags. That’s exactly why the UK Government agreed to put in £500 million into revamping Tata Steel.

It would be like killing two birds with one stone, really. It would save the jobs of thousands of people at the Port Talbot plant and also dramatically reduce the carbon emissions by about 85% a year.

Sure, Tata Steel UK will still have to lay off a good chunk of its workforce since operating electric furnaces requires fewer people and a different skill set. But that’s probably the best possible way to cut emissions as well as support sustainable economic growth for the UK’s steel industry.

Until next time…

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