Tata Steel UK is reformatting its operations in Port Talbot by investing £1.25 billion in an electric arc furnace facility with the UK government contributing £500 million.
The project will take around three years to complete, if all the regulatory clearances come through.
The facility will use scrap and be classified as green since it will utilise renewable power and cut carbon emissions considerably.
The company will also have to consult unions and other stakeholders during this process and that could take up to two months.
Despite the upfront investment, which will come from internal accruals, the project should eventually add to earnings and be more sustainable than the current facility, which is coming to the end of its operational lifespan.
Apart from the furnace, the project includes enhancement of two casters, a hot steel strip mill, and the consolidation of a cold rolling mill.
Once at full capacity, costs would reduce by $150-170 per tonne compared to the alternative blast furnace process.
The scrap would be sourced from within the UK which should make it cost effective.
The UK is developing renewable power capacity, which will be among the cheapest sources in Europe.
Emission should reduce from the current 2.16 tonnes of carbon dioxide (CO2) to around 0.4 tonnes of CO2 per tonne of steel.
The other key advantage is that this would help sidestep likely taxes that could be imposed on higher emission blast furnace processes.
The UK consumes 10 million tonnes per annum (MTPA) of steel.
Tata UK holds a 50 per cent market share in the auto industry, 43 per cent in construction, and 62 per cent in packaging.
It is expected that the return on investment for the project could be around 15-16 per cent.
Tata has an outstanding loan of around $1.3 billion for its European operations, including working capital requirements in the UK and the Netherlands, as well as legacy acquisitions and leases.
The project aims to restructure Tata Steel’s balance sheet, potentially eliminating cash losses in UK operations and recognising non-cash impairments of legacy investments.
During the transition period and project phase, Tata Steel UK will ensure uninterrupted supply of products to fulfil commitments and import steel substrate to feed downstream units.
The company will also invest about £20 million over the next four years to set up two additional centres of innovation & technology at the Henry Royce Institute in Manchester (for advanced materials research) and at Imperial College London (for research in sustainable design & manufacturing).
The project will help preserve employment, but some of Tata Steel UK’s 8,000 employees may need to be rationalised.
This is why discussions with the unions are necessary.
If a substantial number of jobs is lost — up to 3,000, according to some estimates, Tata Steel will have to pay to settle one-time restructuring charges.
Details will be available when the company does a concall post Q2FY24 results. The initial reaction from analysts is positive but the stock has not moved much.
