Tata Steel’s Cost Rationalisation In Europe Credit Positive, Moody’s Says

Tata Steel Ltd.’s cost-rationalisation plans for its European business is credit positive as it will support a turnaround in Tata Steel UK Holdings' less profitable operations, ratings agency Moody’s Investors Service said on Monday.

On Nov. 18, Tata Steel outlined a programme to reduce costs and improve product mix at its European operations, which are held by wholly-owned subsidiary Tata Steel UK, Moody's said in a statement.

"The planned cost rationalisation program is credit positive for both the companies because it will support a turnaround in Tata Steel UK’s less profitable operations that have dragged on Tata Steel's consolidated credit quality," the statement said.

European operations accounted for 35 percent of Tata Steel's total shipments in the first half of 2019-20, but they generated only around 2.4 percent of the steelmaker’s reported consolidated earnings before interest, tax, depreciation and amortisation.

While Tata Steel’s cost-rationalisation plans are welcome, a timely and meaningful improvement in performance is key, Moody’s said. Sustained weakness in demand from Europe's steel-consuming sectors, global economic slowdown and increasing trade barriers cast downside risks to the pace of credit profile improvement.

Tata Steel's Indian operations are the cornerstone of the company's strong profitability because these operations are integrated into the production of key raw materials in steelmaking, which combats the country's slowing steel demand and declining end-product prices.

Sluggish economic growth with weak demand from automobile, manufacturing, property and construction industries have diminished steel demand in India and caused a decline in end-product prices in the first half.