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Steel loses its sheen

Soon after taking over as Chairman of Tata Sons on 25 March 1991, Ratan Tata effected certain major structural reforms. He decided to focus on certain core areas like automobiles, steel, chemicals, IT and telecom. Pushing aside sentiment, he phased out activities like textiles, soaps and electronics. He also embarked on an acquisition spree of global enterprises in steel, automobiles, beverages and chemicals involving high quantums of debt. His tenure was also marked by a big boost in building the brand equity of Tatas aided by that marketing expert, R Gopalakrishnan.

His successor Cyrus Mistry has also been looking at re-structuring, rationalisation and reforms. There have been indications about vacating areas, which continued to be constrained by government controls, like fertilisers. A few months back one came across a report on Tata Chemicals’ interest to hive off its fertiliser business. Likewise, the company has also not been doing too well in its telecom business. There have been reports of vacating this sector as well.         The foray into civil aviation has also been suffering from uncertainties over civil aviation policy. The great expectations on launching the budget airline Air Asia India and the much larger Vistara set up in collaboration with the Singapore Airlines, have not been realised.  The new civil aviation policy expected soon, combined with handsome growth recorded in passenger traffic, may trigger action soon.

The recent announcement to sell the Tatas’ Corus Steel appears to be part of Cyrus Mistry’s plan to orient the group’s businesses on profitable lines.

The acquisition of Corus Steel in August 2007 for $12 billion was the country’s biggest foreign acquisition. Remember, it was the height of the boom period for the steel sector. It was rumoured that as part of the re-structuring plan of Tata in the early 1990s, even Tata Steel was considered for a phase out. There was frustration over government control with production stagnating around two million tonnes for years. But the boom of subsequent years helped Tata Steel rationalise its large workforce, embark on massive expansion at Jamshedpur and plan for capacity at new green-field sites. Post 2000, the Indian steel industry was booming with Tata Steel in the lead. Capacity increased from two million tonnes to six million tonnes and thence to 10 million tonnes. Steel companies, including SAIL, were making profits in a quarter they didn’t for years put together. So, acquisition of Corus was built on such spectacular performance for a few years in a row.

Post 2008, things changed dramatically. The global financial crisis depressed growth in the western world. Europe and Japan are still to recover from this meltdown. Cost of production in Europe zoomed. The most shattering blow came from China, which rapidly built steel capacity and today accounts for nearly half the global output. It has been selling steel at prices far lower than by others. Over-capacity of steel is slated to prevail for several years.

The decision of Tata Steel to sell off Corus appears logical and inevitable. It had already parted with a part of its assets at a nominal value of one pound sterling.

This move would release the company of the burden of pulling down  the profitable Indian operations as the capacity outside is several times more than that of India’s.

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