Tata Steel reveals $1.6bn writedown

May 14, :-



India's Tata Steel has announced a $1.6bn writedown on its struggling European division, underlining the chronic difficulties facing steelmakers across the continent.

In a notice to the Bombay Stock Exchange late on Monday, the steel division of the broader Tata conglomerate blamed weak European macroeconomic conditions for the decision, the largest writedown by an Indian company.

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Tata Steel's European operations, which it acquired following the $13.1bn purchase of Anglo-Dutch steelmaker Corus in 2008, have endured a torrid period recently in the face of weak demand and falling prices. The announcement raised fears in particular over the future of the group's troubled UK operations, where 18,500 of its 33,000 European staff work.



In the notice, Tata Steel said: "The impairment is primarily due to a weaker macroeconomic and market environment in Europe where apparent steel demand has fallen significantly in 2012-13 by almost 8 per cent, which in aggregate results is almost 30 per cent since the emergence of the global financial crisis in 2007."

"The above underlying condition is expected to continue over the near and medium term and has led to the downward revision of cash flow expectations underlying the valuation of the European business."



The $1.6bn impairment is likely to increase speculation that Cyrus Mistry, the recently appointed chairman of the overall Tata group, will soon seek to sell assets belonging to the former Corus division, which lost $884m last year.

The writedown is the largest for a company with Indian operations since Vodafone of the UK took a £2.3bn impairment charge on its unit in the country in 2010.

"It really is a huge writedown," said one senior figure at an international bank in Mumbai, speaking on condition of anonymity. "It's terrible news for them and they are going to have to do something now but it also isn't clear what they can do to turn it round."



Mr Mistry is understood to be considering various options for the future of the company's European division, which could include entering an investment partnership with another steelmaker.



Another option would involve selling assets in its weaker UK division, while attempting to keep those of its more efficient Dutch subsidiary, according to people familiar with the situation.



"[Tata Steel] has limited options, beyond selling off some of the weaker assets in Europe," said Sanjeev Prasad, Mumbai-based head of Kotak Institutional Equities. "This would allow them to concentrate on the Indian side of the business, which is profitable and growing."



Last November Tata Steel cut 500 out of 4,500 positions at its Port Talbot operations in South Wales – formerly part of British Steel – in an effort to cut costs. However, the measures have are yet to stem the company's losses.

"Time after time, we have been given assurances from Tata Steel that they have no plans to cut investment in the UK or to close plants. That said, these kind of statements are concerning," said Community, the union that represents many of the steelmaker's employees in Britain.



Hywel Francis, the Labour MP whose constituency includes Tata Steel's Port Talbot operations, said the company's presence in the area was vital for the local economy, and highlighted its recent £185m investment in a blast furnace.

"Tata Steel has kept faith with the steel industry in Britain and particularly in Port Talbot. It is critically important to the region," he said.



The Indian group's decision follows an even larger €3.6bn writedown taken by German steelmaker ThyssenKrupp in December last year, also in part caused by chronic overcapacity in the European steel market.



Tata Steel said the impairment also related to its divisions in South Africa and Thailand, and said it would provide full details of the impairment at its quarterly results next week.


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