Tata to cut Corus flab; Teesside future bleak - Quoted in the Financial Express

As demand in Europe is yet to pick up, Corus’ Teesside casting plant leaves no choice for the Tatas but to mothball it. Tata Steel, India's largest and world's eighth largest steel manufacturer, said Corus' Teesside casting plant in the United Kingdom was a major drag on the company's profitability in Q2 of the current fiscal, and it was prepared to mothball the plant, if necessary.

Experts say there is no hope for Teesside and mothballing only suggests that the plant is not running at an economically viable condition. Kirby Adams, managing director and chief executive officer of Tata Steel Europe, revealed that walking away of four international partners from the annual contract resulted in a significant loss in cash and earnings for Corus.

Teesside's Ebitda loss in H1 stood at $220 million and cash outflow was $144 million, affecting profitability of Tata Steel. Tata Steel's shares on Friday were marginally up by 0.27% to close at Rs 544.90 on the BSE.

"In April this year, four international companies walked away from an annual contract to buy slabs from Teesside only after four years of performance. They walked away with more than $700 million profit in four years," Adams said.

Dipesh Dipu, principal consultant with PwC, said: "The termination of the off-take agreement certainly is a setback for the Teesside plant and it might have to look for strategic alliances for continued production."

The company has appealed in the court against the consortium of four companies for backing out of the TCP contract. The consortium included Marcegaglia SpA, Dongkuk Steel Mill Co, Alvory SA and Duferco Participations Holding Ltd.

These companies agreed in 2004 to buy 78% of the production of TCP under a 10-year slab off take agreement.

Meanwhile, Corus is also searching for other joint venture (JV) partners to either replace or replicate the similar kind of transaction. "We are in discussion with a couple of other parties which might or might not lead to a joint venture. We might take a decision by the end of this financial year," Kirby said.

Industry experts say the demand in Europe would take several years to return to previous capacity levels.

The company's European steel plants have been reducing production and capacity utilisation in view of lower demand. Analysts are predicting economic recovery not earlier than the middle of 2010. "The output is stabilising but at lower levels. The construction market in Europe is still depressed. But the company is seeing some stability in the selling prices going forward," said Adams. Tata Steel said in August that Corus had seen external orders picking up at Teesside cast products, where the order book is full till the end of October. It is confident that the business is in the best possible shape to benefit from a future increase in demand.