Tata Steel’s UK arm missed its profit target last year, according to people with knowledge of the matter, in a sign that the turnround of Britain’s largest steelmaker is far from complete.
The owner of the Port Talbot steelworks in South Wales has undergone an operational overhaul as it seeks to regain its footing after nearly collapsing two years ago due to sustained losses.
While financial performance has improved significantly since a low point, when the company was haemorrhaging as much as £1m a day, it failed to hit a key objective in the previous fiscal year.
Annual earnings before interest, tax, depreciation and amortisation fell short of a £200m internal target set as part of a rescue package, agreed with trade unions, to keep the Welsh plant’s twin blast furnaces running until at least 2021. Ebitda came in at around £80m to £90m, two people told the Financial Times. Tata Steel declined to comment.
The disappointing result will be noted by the British government, which pressured Tata not to pull the plug on Port Talbot after the Indian conglomerate put its UK steel assets up for sale in 2016. A crisis in the country’s steel industry caused thousands of job cuts and factory closures in 2015 and 2016, though Tata subsequently decided to stay.
Steel companies around the world are enjoying one of their most buoyant periods for years, having emerged from turbulent market conditions caused by international oversupply and a wave of Chinese exports. Profitability in the sector is at its highest level in a decade, according to analysts at Jefferies.
A combination of reasons was behind the underperformance at Tata Steel UK, said three people familiar with the matter. Higher raw material costs weighed on earnings, despite strong steel prices, while another important factor was the legacy of under-investment dating back to previous owners.
“The investment you need in the plant is just to stand still,” said one person.
Despite not hitting its profit target, Tata Steel continued to invest heavily into its UK business. The Indian group’s deal with unions included a pledge to plough in £1bn over a decade, in return for the reform of a large pension fund that had become a significant burden. As part of a wide restructuring, Tata has also sold off several of its British steelworks.
A crucial investment decision is looming around the repair of one of Port Talbot’s blast furnaces. Workers fear that the plant would not be viable with just one furnace.
As the company pursues a merger of its European steelmaking activities with those of German rival ThyssenKrupp, there are concerns the UK operation could become the victim of cutbacks in the combined entity.
Tata Steel UK’s most recently filed accounts showed a pre-tax loss of £471m on turnover of £1.99bn at its continuing operations for the year ended March 31, 2017.
Source: Financial Times