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Melting Demand

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Recession is W-shaped for Tata Steel Europe (TSE). After a lull of a year (second half of 2010 and first half of 2011), TSE is going back to the production-cut era. It aims to cut up to 18 per cent production at its Europe plants due to weaker demand.

Major European steelmakers — ArcelorMittal, ThyssenKrupp, Celsa and Salzgitter — have announced their plan to idle some of the blast furnaces. The curtailments might dominate as consumers prefer to run down stocks in an uncertain economic environment, say experts.

Tata Steel managing director H.M. Nerurkar reportedly said there would be a 15 per cent to 18 per cent production cut at TSE. In December, the world's seventh largest steelmaker had said it would mothball a hot strip mill at its Llanwern site in Newport, south Wales on weak demand for steel and a poor economic outlook. In September 2011, the European unit shut down one of its four blast furnaces in Scunthorpe in the UK. Another blast furnace at the site was idled a few years ago on a long term basis.

Ravindra Deshpande, research analyst at Elara Securities, says that the European steelmakers are in trouble due to the fall in demand. "Since Tata Steel's European division had cut costs through all possible way during the first downturn, it doesn't have any room left for further cost cuts."

TSE, the second largest steelmaker in Europe with an annual capacity of 18-million tonne, has major steelmaking operations in the UK and the Netherlands. It supplies steel and related services to the construction, automotive, packaging and material handling industries.

Says a company official: "Significant raw material inflation is continuing in Europe. Working capital demands are huge to finance inventory. Despite slow demand, high volume of import continues in Europe. It is difficult to pass through this burden fully to the customers when the market is fragile."

After the fall of Lehman Brothers and the resultant economic paralysis, European steelmakers had reduced production, pruned manpower and cut down input costs. TSE's crude steel output was cut by 40 per cent in the six months ending March 2009, idling three blast furnaces — at the IJmuiden, Port Talbot and Scunthorpe mills.

At the same time, the company had moved to reduce costs in line with expected reduced revenues through ‘Weathering the Storm' and ‘Fit for Future' programmes. The first comprised many short-term actions designed to cut costs and keep supply and demand in balance. The second addressed longer-term and structural issues that the downturn had brought into focus. In the six months period, they had saved £700 million in cash through cost-cutting, working-capital and inventory management. The new production cut is after the company had restored the confidence through refinancing, rebranding and introducing a new business model.

Other steelmakers are also in rampant production cut in Europe. ArcelorMittal has temporarily closed a blast furnace at its plant in Dabrowa Gornicza in Poland. It halted production at Sestao in Spain, idled an electric arc furnace and some steel production lines in Madrid and shut blast furnaces in Eisenhuettenstadt and Florange in Germany. Germany's second largest steelmaker Salzgitter said it would cut flat steel production by 10 per cent or roughly 300,000 tonnes.

ThyssenKrupp said that it had brought forward planned maintenance at a blast furnace in Duisburg in Germany due to a decline in steel flat products orders.

(This story was published in Businessworld Issue Dated 16-01-2012)