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  • Teesside Cast Products – Myths and Facts

    6 Mar 2010

    The partial mothballing of Teesside Cast Products, which was announced in December 2009 and put into effect February 19 2010, has received plenty of media attention.  Much of the coverage and comment has served to distort a proper understanding of the events that led up to the decision and of related issues.  This document sets out the facts and debunks the myths.

    The reason for the partial mothballing

    Corus was forced to partially mothball its Teesside Cast Products plant (TCP) as the direct and sole result of a unilateral and illegal decision in April last year by a consortium of four international steel slab buyers to renege on a binding 10-year Offtake Agreement that was not due to expire till the end of 2014.  These buyers were responsible for almost 80% of TCP’s sales and had made an estimated $800m in profit from the Agreement by the time they decided to abandon Teesside.

    Since April 2009 Corus has spent significant time and effort searching for a new long-term solution for TCP.  The company met the original Offtakers to try to broker a reversal of their decision or a sale of the plant.  When that failed Corus established a data room for potential investors to conduct due diligence and drew up an information memorandum.  The company has spoken to all the major purchasers of slab in the world and has followed up all the enquiries received.  But by December the losses at TCP, which from April 2009 to date are estimated to have reached £150m and are expected to grow further, had become unsustainable.  TCP had no interested investors and no external orders beyond December 2009 that covered its cost of production.  Corus had no choice but to announce the partial mothballing.

    TCP has a capacity to produce more than 3 million tonnes a year of slab, a semi-finished product that can only be sold to other steelmakers that have more rolling than melting capacity.  The total number of potential customers for TCP slab on this scale in the world is not much more than a dozen.  The plant has a single blast furnace, so it cannot be operated safely or economically at low production rates.

    TCP is a low-margin conversion business, importing raw materials from as far away as Australia, which are then re-exported as slab, mostly to South East Asia.  A Strategic Partner for TCP needs to have serious financial muscle, sufficient to take on a business whose turnover can be as high as £2 billion and whose working capital requirements are also massive.  It needs to show the capability to maintain or replace capital equipment that originally cost £800m.  And it should have an appetite  to consume 3mtpa of slab, or be able to supply more than $500m a year of raw materials.

    International slab demand collapsed as a result of the recession and there is no foreseeable prospect of a strong or sustained recovery for this particular product.  Though there is a modest recovery underway for finished steel products, the knock-on effects of this on the international slab market have so far been limited.  While prices have risen, they still fall a long way short of profitable levels, as raw materials costs are rising, and demand levels have not recovered to make a 3mtpa plant an attractive proposition for investors.

    Corus’ UK crude steel capacity is about 14 million tonnes, but demand in normal times for its finished products is only 10 million tonnes.  TCP is surplus to UK – and European – steelmaking requirements.

    The following timeline explains how events have unfolded in recent years at TCP:

    • 2003:  Corus strategically determines that it will supply its customers’ UK steel demands from the integrated sites at Port Talbot and Scunthorpe and declares TCP surplus to its own requirements; starts looking for a long-term solution as a supplier of slab to international export markets (ie instead of closure)
    • Jan 2005: 10-year binding Offtake Agreement comes into force with three overseas re-rollers (slab buyers), with a fourth joining some weeks later; this consortium agreed to take about 78% of TCP output at cost of production (ie all profit goes to the consortium).
    • Apr 2007: Tata Steel buys Corus
    • Nov 2008: Having made an estimated $800m out of the Offtake Agreement in its first few years, the consortium sees the market going against it and asks Corus to mothball TCP; Corus refuses, but agrees to reduce production by 30%
    • Apr 2009: Consortium unilaterally reneges on the Offtake Agreement less than half way through its term
    • May 8 2009: Corus says mothballing might be necessary; searching for new long-term solution (ie instead of closure)
    • May 14 2009: All Party Parliamentary Steel and Metal Related Industry Group “Steel Summit”, at which the UK steel industry puts forward to Business Secretary Lord Mandelson the assistance it needs from government to tide it through the downturn (see Government section below)
    • July 23 2009: Mothballing postponed to at least the end of August because of external orders giving more time to seek a long-term solution; at the end of August it is postponed further to the end of October, and subsequently to the end of the year.
    • Dec 4 2009: Comprehensive search process completed, after huge losses; Corus CEO Kirby Adams says consortium members should “hang their heads in shame”; partial mothballing scheduled for the end of January 2010, but hundreds fewer jobs than envisaged are to be lost because of partial nature of mothballing
    • Dec 17 2009: Corus and steel unions agree to establish Joint Taskforce to make appropriate preparations for mothballing and work together on related issues
    • Jan 15 2010: Corus agrees with unions that partial mothballing will take place as soon as iron ore stocks are used up or by end-Feb at the latest
    • Jan 19 2010: TCP MD Jon Bolton acts as witness before NE Regional Select Committee enquiry
    • Feb 19 2010: TCP partial mothballing process begins

    What is happening now

    Since the mothballing announcement, Corus’ focus on Teesside has been to mitigate the effects of the mothballing on those leaving the company over the next few weeks and months.

    Through its subsidiary UK Steel Enterprise, Corus has made available an £8.3 million support package to local Teesside communities.  A considerable number of job vacancies, including scope for TCP employees to secure new employment elsewhere in the Group (“cross-matching”) so as to avoid hard redundancies, have been identified in collaboration with the Trade Unions and made available to those potentially at risk.  The company is working to make it possible for the large number of employees that want to leave as soon as possible in order to realise pension entitlements to do so.  Corus is also offering redundancy packages, wherever possible voluntary, to direct employees that are substantially more generous than the statutory minimum.  A support service has been established by Corus in conjunction with local agencies in Steel House at TCP.  Help with training and skills is being offered through a portion of the government’s support package for Teesside. 

    In parallel Corus has been continuing its efforts to find a long-term solution for TCP and remains open to credible offers from third parties interested in providing such a solution.  This is necessarily a confidential process (otherwise credible investors would be put off), and as a result there has been considerable room for rumour and speculation, but every enquiry has been followed up.  The facts that the company has been willing to bear the losses that have been incurred since the consortium’s withdrawal and that it is spending millions more on partially mothballing rather than permanently closing the plant demonstrate Corus’ genuine commitment to this process.

    Looking to the future

    Corus will continue to be one of the largest employers on Teesside with about 2,500 people at various sites. As well as those retained in the continuing TCP operations, Corus employs large numbers of people at Teesside Beam Mill, Skinningrove special profiles, Hartlepool tube mills and the Teesside Technology Centre.

    The company is continuing its efforts to find a long-term solution for TCP that will enable the mothballed facilities to reopen.  This task is not made easy due to the surplus in steelmaking capacity almost everywhere in the world except India and by the high cost of importing raw materials and then exporting slab in and out of the UK. For this purpose the company will have to find one or more new Strategic Partners.  However, by keeping open the coke making and power generating facilities, as well as Redcar Wharf, Corus has saved upwards of 800 jobs.

    The lack of interest to date in TCP from credible suitors is because of the strategic challenges outlined in the “Rationale” section above.  Corus has a duty to sell the plant to a credible bidder.  As local MPs have stated on air, TCP must not be sold to asset strippers.

    Government and political relations

    Since late 2008 Corus and other UK steel companies have been discussing with government the effects of the recession and the urgent need for government assistance to mitigate those effects.  Although such assistance would not have avoided the events that have unfolded at TCP, which were entirely due to the consortium’s reneging on the Offtake Agreement, it is worth noting the kinds of support the UK steel industry has been seeking.

    The industry has asked government to:

    • Bring forward infrastructure projects, which stimulate steel demand
    • Improve access to trade credit insurance, especially for steel consumers
    • Intervene in relation to energy costs and security of energy supply
    • Introduce short-time work schemes of the sort that UK manufacturers’ competitors in continental Europe have benefited from
    • Apply pressure on the banks to increase lending.

    Throughout the period since the consortium’s withdrawal in April 2009 Corus has held frequent meetings with government, including at the highest levels, to ensure the true position at TCP is fully understood.  This engagement will continue as the search for a long-term solution for TCP goes on.

    We have also held frequent meetings with constituency MPs on Teesside and local agencies, keeping them regularly informed about developments and closely involving them in the process of dealing with the aftermath of the consortium’s decision to renege on the agreement.

    Corus has also cooperated fully with the North East Regional Select Committee, which has held an enquiry into Teesside.  Written evidence was provided in early January 2010, after which TCP MD Jon Bolton attended the enquiry hearing on January 19 2010 as a witness. At that time he was the only person from Corus to have received a formal invitation to give evidence.  Subsequently, a formal invitation was sent to Corus CEO Kirby Adams to act as a witness. This was at extremely short notice, so, as agreed with the Committee, Mr Adams participated in its enquiry by answering written questions.  Mr Adams has never refused an invitation to appear before the Committee as a witness.

    Corus welcomes the Government’s recently published response to last month’s North East Regional Select Committee report on Teesside Cast Products. In particular the company is pleased that the Government has recognised the following points:

    That the decision to mothball the TCP plant is a commercial matter for Corus.

    That the key issue for TCP is lack of demand for its steel slab at viable prices and the need for a strategic partner willing to invest and to take significant volumes of steel slab.

    That Corus believes that any increased domestic demand as a result of the developments in offshore wind, carbon capture and storage and low carbon industries more generally can be met from its other existing UK operations that have also been operating below capacity.

    That in accordance with current EU emissions trading rules (which apply till the end of 2012) the emissions allowance for TCP for 2010 has been issued to Corus and that the way the allowance is used is a commercial decision for Corus; that future emissions allocations for the TCP site will depend on the extent to which the site has closed all its operations covered by the EU ETS, and that Corus will be required to surrender allowances to cover emissions from its ongoing activities at TCP.

    And that decisions on the process of mothballing the plant, including numbers of staff required to maintain the plant, are a commercial matter for the company.

    The full Government response is to be found at http://www.official-documents.gov.uk/document/cm78/7868/7868.pdf

    What Corus is doing with TCP’s carbon credits

    There has been a great deal of coverage of this complex issue, much of it mistaken.  It is utterly untrue to suggest that Corus’ decision to partially mothball TCP was in any way motivated by the prospect of generating surplus credits for the purpose of emissions trading.  The following Q&A may help resolve some of the misunderstandings that have arisen:

    Q: Why does Corus get a “free” allocation of CO2?
    A: Calling allocations “free” under the EU Emissions Trading System (ETS) gives the wrong impression.  Carbon credits are like a licence to operate – steelmakers submit to the regulator sufficient credits to cover their emissions.  If emissions exceed a company’s allocation it has to buy credits to cover the excess; if emissions fall below expected levels a company can either bank them for future submission, or sell them.  Under the EU ETS the EU has capped the amount of CO2 that certain industries can emit.  Big CO2 emitters in each EU member state, such as the electricity, cement, glass and steel sectors, are limited in the amount of CO2 they can emit through national allocation plans (NAPs) agreed by the EU.  These NAPs were set in place prior to the start of the current, second phase of the ETS (2008-12).  Certain sectors have to buy a portion of their CO2 allowances via government auction even to cover normal production levels, but because EU steelmakers operate in a competitive, global market, and such cost impositions do not exist for steelmakers elsewhere, it is recognised that EU steelmakers should have credits to cover their “as-is” production, at least under Phase 2.  The DECC, Environment Agency and EU DG Environment websites all have more detail about the scheme rules: 
    http://ec.europa.eu/clima/policies/ets/index_en.htm
    http://www.decc.gov.uk

    Q: Does Corus have surplus CO2 allowances?
    A: The UK NAP resulted in an allocation that was expected to leave Corus slightly short of CO2 (ie needing to buy) over the 5 years 2008-2012.  However, nobody anticipated the full effects of the recession that started to hit the steel industry in the late summer of 2008.  One result is that CO2 emissions are lower than expected, so the answer to the question is Yes.

    But it would be wrong to look at this short period in isolation.  Under Phase 3 of the EU ETS (2013-20) steel and other industrial sectors are due to have their “free” allocations substantially restricted.  As a result EU steelmakers are expected to have to buy large quantities of credits in order merely to produce at the same level as before (there is very little scope for EU steelmakers to reduce their emissions per tonne of steel made with current steelmaking technology).

    EU steelmaking competitiveness will thus be damaged by environmental regulation, despite the EU steel industry being among the most environmentally friendly in the world.  The cost of making up these deliberately imposed deficits will be far greater than the value of unused credits generated as a result of the current recession.  Over the Phase 2 and 3 period 2008-20 (not merely the Phase 3 period) EU steelmakers are facing a huge emissions credits deficit, even allowing for the effects of the recession.

    Q: What is happening with TCP’s 2010-12 surplus allowances?
    A: There has been a lot of misunderstanding on this issue.  Carbon credits are easily available on the open market.  Whether a new owner of TCP gets the credits required for a restart from Corus or the market doesn’t matter (this issue only affects the price agreed in commercial negotiations between Corus and a potential investor).  If credits are needed in the event of a restart of TCP they will be available and we have given assurances on that score that have been accepted by Solicitor-General and local Teesside MP Vera Baird QC.

    We will not know until the end of 2010 what proportion of TCP’s facilities have been operated this year and for how long, so the size of any 2010 surplus is unknown.  But even if the iron and steel making plant at TCP does not reopen this year, the maximum value of the credits that are surplus to compliance requirements is likely to be £55m at today’s prices – far less than the greatly exaggerated figures that have been appearing in the media.

    We know even less about what the situation will be with the 2011-12 allowances.  It is possible that Corus might retain any surplus TCP credits in these years, but EU ETS rules also provide for the regulator to withdraw allowances if it determines that a facility has permanently closed.

    In any case, even if Corus is able to retain all TCP’s surplus 2010-12 credits, their value is dwarfed by the estimated £150m that Corus has lost keeping TCP open since April 2009, the £80m estimated cost of mothballing the plant and the colossal cost of the credits Corus looks likely to have to buy under Phase 3 of the ETS.

    Q: So has Corus gained a windfall?
    A: No, the system is working as it is meant to.  In the period 2008-20 the opposite is likely to be true.

    Q: Can you sell your surplus credits to India because of the new plants you are building there?
    A: No. There is no emissions trading scheme in India like the EU ETS, so Indian steelmakers do not need to generate or acquire emissions credits.  Besides, there is a misconception that the new capacity Tata Steel has been planning to build in India for at least 15 years somehow replaces TCP.  TCP makes slab (a semi-finished product) for the international markets.  Tata’s new Indian capacity will make finished products for the domestic market and so serve completely different customers.  It is possible for steelmakers in India to generate credits (known as Certified Emission Reductions – CERs) under the UN Clean Development Mechanism if they replace old equipment in India with more environmentally friendly capacity, thereby
    improving emissions performance on an existing site.  But CERs cannot be generated by investing in totally new plants in India.

     

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