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Tata’s Corus sale: Nerves of steel to ride out this storm

The sale of Corus is emblematic of the changes sweeping the world’s manufacturing industries

editorials Updated: Apr 03, 2016 22:21 IST
Britain's opposition Labour Party leader Jeremy Corbyn outside the Tata steelworks, Port Talbot, Wales, Britain.
Britain's opposition Labour Party leader Jeremy Corbyn outside the Tata steelworks, Port Talbot, Wales, Britain.(REUTERS)

In 2007, the world watched with amazement as Ratan Tata, the then chairman of the Tata Group, announced the acquisition of the Anglo-Dutch Corus Group in a $12 billion deal. It also marked a high point in a spree of overseas acquisitions by Indian companies before the 2008 financial crisis. The company went on to acquire Jaguar Land Rover. Mr Tata called the Corus deal a “very visionary move... Hopefully in future, people will look back and say that we did the right thing.”

Less than a decade later, Tata Steel has put up for sale its loss-making business in Britain, putting thousands of jobs at risk and potentially forcing the David Cameron government to seek a solution ahead of an EU referendum dominated by concerns about the economy.

Read | How the Winner’s Curse caught up with Tata Steel in UK

A banner declaring ‘Save our Steel’ erected outside the Tata Steel plant at Port Talbot is emblematic of the changes that are currently sweeping the world’s manufacturing and commodity industries.

In an integrated world the volume and direction of raw material and intermediate goods’ shipments can prove to be a useful guide to gauge the health of economies. The level of action in the factory floors of China is of far greater consequence, given the economy’s size and its influence over global commodity prices.

What we are witnessing in the steel industry is primarily a consequence of the slowdown in China’s factory floors. If people across the world are buying fewer cars and houses, it is showing up in the slump in demand for steel. Global steel demand has not returned to the levels seen before the Great Crash of 2008. Sluggish demand has led to a fall in prices. The deceleration in China has only accentuated the crises. With local demand faltering, Chinese steel and other producers, some analysts point out, had to export substantial quantities at lower prices, or even at a loss, to the rest of the world, leading to accusations of “dumping”.

For Indian companies that have added capacities over the years riding the boom, the wobbly world economy isn’t a happy state to be in. Buying factories is a common strategy to corner a larger chunk of booming global demand. The problem occurs when companies borrow large sums to fund these acquisitions on assumptions that the rapidity of demand expansion will continue consistently for a long period of time.

Read | Tata’s UK steel exit raises expectations of European mergers

When the slide occurs, as witnessed currently, the companies struggle to earn enough to repay their debts. This is a lesson India’s corporate world can continue to ignore only at its own peril. In the final analysis, the ability to read the early warning signals of a global economic slide will separate those that deftly ride the boom-bust cycle, and those that fall by the wayside.