Tata Steel Port Talbot - the road to viability

We have previously discussed in this blog some of the issues surrounding the future of Port Talbot in south Wales. Below, I outline our own views of the way ahead for steelmaking in south Wales – as seen by the experts at Metals Consulting International Ltd.

The problem

The biggest problem at present is that Port Talbot is reportedly losing somewhere between GBP £0.5 million - £1 million per day. With production of finished steel products at Port Talbot of the order of 3 million tonnes / year, this translates (assuming losses of just £0.5m per day) into a loss of ~£60/tonne. With weak balance sheets across the steel industry pretty much worldwide, few steel companies today are able to sustain loss-making at this level for very long.

Suggestions for business turnaround

In recent weeks, a number of apparent solutions for the turnaround of Port Talbot have been mentioned in the international press. These include business rate reductions, employment cost reductions and even reductions in energy costs. Let us examine these ideas in turn.

(i) Business rate reductions

Many industry commentators note the cripplingly high business rates that sometimes apply in the UK. Port Talbot currently pays ~£10m/year in business rates. On a sales volume of ~3 million tonnes, this cost amounts to roughly £3 / tonne. If the objective is to improve profitability by £60/tonne, it is clear that substantial reductions of business rates will do little to restore viability at Port Talbot.

(ii) Employment cost reductions

Port Talbot employs a labour force of ~4000. If we assume an average wage of £25,000/year per employee, this gives a total wage bill of £100 million per annum or roughly £33/tonne. Trimming this by 10% could therefore reduce Port Talbot’s production costs by ~£3/tonne. If the objective is to improve Port Talbot profitability by £60/tonne, trimming the wage bill by a few percentage points will also do very little to restore viability to the business.

(iii) Energy cost reductions

There is much discussion concerning the relative cost of electricity prices in the UK as compared to the continent; many observers consider that electricity costs in the UK are double those in other parts of Europe. Depending a little on the exact steel product, our own assessment is that Port Talbot’s electricity costs are currently in the £12.50-£17.50 / tonne range.  If we ignore the fact that much of this electricity can be generated from hot gas that is generated from carbon-based inputs such as coal and coke, and further assume an average electricity cost of £15/tonne of finished steel, it is clear that whilst halving of these costs might save ~£7.50 per tonne, this level of cost saving is also very far from the profit improvement target of £60/t discussed above.

The solution

What then is the solution for Port Talbot if the objective is a profit improvement of £60/tonne, when measures such as business rate reductions, employment cost reductions and reductions in electricity costs can at most generate savings of £3, £3.50 and £7.50/tonne respectively (or just £14/tonne in total)?

MCI’s view is that the only solution is to stop production of liquid steel in south Wales, and to ship in steel slab (for further downstream processing into hot and cold rolled and coated steel at Port Talbot) from one of the lowest-cost producers of these steels.

The chart below illustrates Port Talbot’s slab production costs on the world cost curve, as at Q1 2016.

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Readers of this blog post will notice that the difference in slab production cost between the world’s lowest cost producer and the Port Talbot works is ~$110/tonne. If we assume a transport cost via sea freight of ~$35/tonne, the total cost saving at Port Talbot of purchasing rather than making slab works out at $75/tonne or ~£52 / tonne. With some small reduction in business rates or employment costs or energy prices, Port Talbot should therefore be able to achieve a profit improvement of £60/tonne and thus attain viability, if it can source low cost slab.

Next steps  

Do we have any other evidence that such a strategy would be viable for Port Talbot? Who would be the best foreign partners for sourcing the low-cost slab (and do they have the capability for immediate slab supply)? How do we calculate the production cost savings and freight costs?

For further information, please contact us.

Andrzej M Kotas

Managing Director

Metals Consulting International Limited

Website: www.steelonthenet.com

Mobile: +44 775 149 0885

      

Liberty House completes acquisition of steel mills

Statement from Liberty House regarding the steel plate works at Dalzell and Clydebridge

Liberty House has completed its acquisition of the former Tata Steel plate making facilities at Dalzell and Clydebridge in Lanarkshire.

The deal involved a back-to-back transaction in which the Scottish Government acquired the two plants from Tata Steel and immediately sold them to Liberty House.

Sanjeev Gupta, executive chairman of Liberty House said: “We’re very pleased to announce that we have completed the deal to acquire Tata’s plate mills in Scotland and we now look forward to continuing to work with local management and the workforce to re-build these great businesses in the months ahead. We’re very grateful for the valuable support of the Scottish Government and the trade unions in concluding this deal. Our team are continuing to evaluate the opportunity to make a bid for other Tata UK assets.”

Commenting First Minister Nicola Sturgeon said: “I am delighted that the final details of the deal to transfer the Scottish steel plants is now concluded and implemented. We are very grateful to Liberty for their foresight in coming forward to take up this exciting opportunity in Scotland and for the energetic and speedy manner in which they worked with the Scottish Government to help save these jobs. We look forward to working very closely with them in the future.

“When we convened the Scottish Steel Taskforce back in October we did so with a determination not to stand by and watch these plants close, but to do everything possible to secure a new operator, and to do whatever we could to make the plants an attractive proposition. I am delighted that that approach has proved successful.”

 Scottish Business Minister, Fergus Ewing, who chaired the Scottish Steel Taskforce, said: “I was pleased to update the House of Commons Select Committee on this exciting news for the Scottish steel industry when I gave evidence to their inquiry this morning.

 “Over the course of eight taskforce meetings and a lot of other engagement we made significant progress in five key areas to support the industry, namely business rates, energy costs, environmental issues, skills and procurement.  It has been a team effort which has paid off and once again the steelworkers of Scotland will produce world class products from Lanarkshire.

 "The individuals who worked for us from the Scottish Government, Scottish Enterprise, Skills Development Scotland and SEPA were outstanding in their effort and commitment to the task before us.  I am truly grateful to all these public servants for their work, as well as to the local trades union reps and the management”

ENDS

Further information from Eoghan Mortell on 07977 555116

Note to Editors

About Liberty House Group

Liberty House Group is an international business, specialising in metals trading and the manufacture and distribution of steel and advanced engineering products. Operating from four strategically-positioned hubs in London, Dubai, Singapore and Hong Kong, the Group has a network of operations spread across 30 countries. The Group is focused on creating a sustainable, balanced international business that is non-cyclical, environmentally conscious and socially responsible, and has an integrated and agile business model.

blogger@steelonthenet.com