After the largest write-down ever for an Indian company, Tata Steel should focus on home turf

May 13, 2013
May 13, 2013

Tata Steel’s $13.1 billion acquisition of European steelmaker Corus in 2007 was a sign of the Indian company’s global ambitions. Now it’s the division that is dragging Tata Steel down. Today, Tata Steel announced a $1.6 billion write-down, the largest ever by an Indian firm, largely due to its European operations. The news puts further pressure on Tata to pare down its European investment and focus instead on its home turf.

When Tata Steel bought Corus, steelmakers were enjoying boom times because of high demand from China. But growth in China has slowed and European demand has slumped because of the continuing debt crisis there. Anglo-Dutch Corus also comes with high labor costs because of its strong union.

Tata Steel has been trying to figure out what to do with its European division for several years. Last year, it cut 500 of 18,500 jobs in the UK, but that hardly made a dent in the unit’s losses. The division presents the biggest challenge for Cyrus Mistry, who last December succeeded Ratan Tata as chairman of Tata Steel’s parent company, Tata Group.

Mistry is reportedly considering various options for Corus, including selling some of its assets. But with the outlook for steel still looking dim, Tata may have a difficult time finding buyers unless it wants to conduct a fire sale. Still, that may be the best way to stem the bleeding.

The good news for Tata Steel is that steel demand is expected to grow in its home country—by 5.9% this year and 7.5% next year. That’s all the more reason for Mistry to find a quick fix for the company’s European problem, so it can focus on India. Other steel makers are also looking to expand in the country: South Korea’s Posco has long been planning a $12 billion steel plant and iron-ore mining operation in India. Last week, a court ruled that the federal government could decide whether Posco would get preferential access to a mining license. The government is known to look kindly on Posco’s investment, so that should help its chances.

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