The Tatas have taken Corus for well over $11 billion at 608 pence
a share. This is no small money. The question is whether Corus was worth that much. Tatas and all the banks backing them up have certainly gone through every detail to be sure that whatever was paid for was worth that.
It is only in the minds of outsiders that a few questions arise on the reasonableness of this offer. After all, Corus owns high cost and also ageing facilities and many would question the merit of it all, brooding over the cost it will involve to reach a synergy among all the assets of these two entities.
How long Tata Steel will continue with the upstream facilities of Corus if they are looking at the possibility of producing semi steels in India or even elsewhere and shipping them over to the world class downstream facilities of Corus in Europe is not yet known.
It is also not known how much will it cost the company in the event of a necessary capacity closure for restructuring of Corus plants considering all the social and legal obligations.
The Tata–Corus story has not unfolded as yet and one can only speculate what the Tatas possibly are planning to do in terms of a viable business strategy.
But, with iron ore being projected as advantage to both Tata Steel and CSN all the while and at the same time the Indian company taking a clear position against iron ore exports to feed Corus facilities, what Tata Steel is visibly looking at is the export of India’s iron ore advantage embedded in the form of some value-added products such as slabs or billets or even HR coils.
The thesis that steel production can be vertically disintegrated with the hot ends stationed near raw materials and the higher ends closer to the market is not a universally well-accepted profitable business practice.
Specifics differ and it may work well for some in certain conditions. In a world of easy and seamless technology transfer and absorption, economies of scale can be better achieved with a larger and longer integration chain instead of fragmenting the production process across geographical points.
It would not have been difficult for Tata Steel to produce from hot metal to the highest grades in any product and ship the same to the market wherever it is.
The only fear is of trade barriers in the event the penetration rate rises beyond comfort levels in the destination markets. It is again a matter of speculation. Only time will tell how far will the more open nations go despite their pronounced adherence to free trade.
The Tatas have not given up their greenfield projects. But, the progress in India has been pathetically slow at least as seen by an outsider. Tata Steel is entitled to its own judgment.
There are doubts that if the company remains bound only to these projects, they will perhaps see the huge growth opportunities today slipping out and captured by rivals elsewhere in the world where - from land acquisitions to mining leases to infrastructure construction - all move faster.
They need to make an early entry into the market, or face the prospect of forever lagging behind. Given the compulsions, the second best option for the company is to acquire a set business and this may worth much more than the value of the assets they buy in the process.
Tata Steel needs to grow fast in India too, or, it will be overtaken by the massive ambitions displayed by rivals next door who were in fact of much lesser reckoning only the other day. There is stronger competition from Arcelor-Mittal and POSCO as well.
Tata Steel can now boast of being the fifth largest producer of steel in the world, can hold sway over a larger space in the global capital market and also use up the current cash with Corus (liabilities do not come immediately) to fund new investment projects or another acquisition.
With steel prices expected to remain high in the years to come, even Corus will remain strongly profitable. Selling 17 million tonnes of steel for another decade of good times, the Tatas will recover a lot of the money they are putting in. But, in an unlikely event of a crash in steel prices, Corus will prove an unbearable burden.
Dr AS Firoz is an independent steel industry strategy analyst