ThyssenKrupp-Tata Steel concessions raise doubts, but EU regulator faces a tough test too

10 April 2019 10:34am

5 April 2019. By Natalie McNelis.

ThyssenKrupp and Tata Steel finally offered concessions this week in their bid to win EU approval to merge their European steel operations. But have they coughed up enough to satisfy the EU antitrust watchdog? There are some real doubts.

Their offer is automotive-steel plants in Spain and Belgium, plus packaging-steel facilities in the UK and Belgium — but no facility that is “integrated,” MLex has learned. In view of the EU’s emphasis on divestment of a “vertically integrated” plant — that is, one that carries out all steps of steelmaking from smelting iron ore to the rolled product — the offer seems to fall short.

It may come down to whether EU competition chief Margrethe Vestager — just weeks after blocking Siemens from merging its rail business with Alstom's — has the stomach to stand in the way of another powerful German company’s ambitions.

When the European Commission announced its in-depth investigation into the ThyssenKrupp-Tata Steel tieup, it targeted three product areas of concern: automotive steel, packaging steel and electrical steel.

Electrical steel is now off the table, MLex understands. Not so for packaging steel and automotive steel, where MLex understands the commission maintains its objections, despite the parties’ robust reply to the charge sheet they received on Feb. 13.

That meant ThyssenKrupp and Tata Steel had to come up with something to have any hopes of winning an EU nod. They made their offer of concessions on April 1.

What’s in the box?

For automotive steel, MLex understands that the companies have offered the ThyssenKrupp Galmed plant for hot-dipped galvanized steel in Sagunto, Spain. MLex has learned that they also offered Tata’s Segal facility near Liège, Belgium, which makes galvanized coil.

For packaging steel, they offered Tata Steel’s tin-plate and packaging-steel plants at Trostre in Wales and Duffel in Belgium. To attract suitors, they offered to sweeten the deal by promising millions earmarked for investments to expand and upgrade the facilities, MLex has learned.

MLex also learned that the companies have agreed to supply the buyers of the assets with steel from their foundries at close to cost price, for five to 10 years.

Not impressed

Some market players — customers and competitors — are saying it’s not enough. They say that one of the main concessions, the ThyssenKrupp Galmed plant in Spain, isn’t by a long shot one of the German conglomerate's key assets.

This factory is dedicated to hot-dipped galvanized steel sheet — it's not an integrated, blast-furnace-based steel-making site. And as ThyssenKrupp said last August, it produces “mainly for southern European carmakers and their suppliers.”

Moreover, the site was, in ThyssenKrupp’s words, “mothballed” in 2013, “against the background of the economic crisis in Spain.” It came back on line only at the beginning of 2017.

Those who are less than impressed say Tata’s Segal isn’t enough either. This too is not an integrated plant; it makes only galvanized coil.

Meanwhile, no part of ThyssenKrupp’s packaging-steel crown jewel is on the block, MLex has learned. Rasselstein, in Andernach, western Germany, is the world's largest tin-plate production site, employing some 2,400 people.

Instead, say customers and rivals, in offering Tata's Trostre and Duffel plants, the companies won’t do anything to counter the loss of competition brought about by the combination of Rasselstein and Tata’s packaging-steel line in IJmuiden, Netherlands — which is an integrated plant.

No furnaces

Crucially, nothing the parties have offered is “vertically integrated,” something the commission has stressed — at the behest of customers, MLex understands. An integrated plant includes a blast furnace — typically a tower around 30 meters tall lined with fire bricks and used to melt ore and release the iron. Blast furnaces can burn without interruption for decades.

Having a furnace, some customers say, is seen as critical in the industry to ensure consistent high quality of the materials and competitive economics. Without it, they say, there is little hope that the buyer can ever compete effectively with the parties.

They add that the geographic location of the divestments, particularly those in Spain and the UK, do little to address concerns about concentration in the northern European manufacturing heartland.

For comparison, to obtain approval to take over Italy's Ilva steelworks last year, ArcelorMittal offered up seven sites in six countries, two of which — Ostrava in the Czech Republic and Galați in Romania — are integrated sites with furnaces.

To the extent that having a furnace is a quality issue, one might say it’s even more important for ThyssenKrupp and Tata — high-quality steel makers — than it was for ArcelorMittal, where the concentrations created by the merger were in commodity-grade steel.

Because they can’t

So, if offering an integrated plant would mean so much to the regulator, why haven’t ThyssenKrupp and Tata Steel bitten the bullet?

It’s likely because they can’t — not without tearing themselves apart. Unlike ArcelorMittal, neither has integrated sites scattered across Europe that they could jettison without serious repercussions.

They have three steelmaking “hubs,” where they have their blast furnaces. ThyssenKrupp has Duisburg in Germany; Tata Steel has IJmuiden in the Netherlands and Port Talbot in the UK. The companies have been clear about their red lines from the beginning: none of those assets would be on the table.

As Guido Kerkhoff of ThyssenKrupp put it: the offer of concessions is “extensive and substantial,” but at the same time it is “acceptable to the joint-venture partners and no risk to the industrial logic of the joint venture."

Since the steelmakers don’t have integrated divestments to offer, they’ve simply had to focus on convincing the commission that they wouldn’t be necessary. “As we see it, our proposals cover all the concerns expressed by the commission,” they say.

They’ve argued that automotive steel isn’t really a concern because combined market shares aren’t that high — meaning giving up Galmed and Segal ought to be enough.

When it comes to packaging steel, ThyssenKrupp and Tata Steel would argue that any quality concerns raised by not having an integrated facility are covered by their guarantee to supply high-quality steel at near cost price.

Importantly, too, they say the commission needs to let them join forces precisely so that they can make a credible rival to the undisputed No. 1, ArcelorMittal.

But the EU regulator is not likely to be convinced that a duopoly is a better outcome than the status quo. It might rather see ThyssenKrupp and Tata Steel remain independent, and competitors such as Salzgitter and Voestalpine rise up the ranks.

The argument that the companies need to band together to take on a bigger rival has resonance, however, with its echoes of Siemens and Alstom's claims that they needed to create a "European champion." The difference is that in that rail merger, the parties said the competition threat came from China — whereas in this steel merger, ArcelorMittal is on the doorstep in Europe.

Vestager insisted that the Siemens-Alstom tieup wasn't justified because the Chinese threat was indistinct, in the future and not able to sway EU competition rules. But her veto infuriated the German and French governments and has sparked calls to overhaul the EU's merger control regime, including allowing national ministers a say.

In such a febrile political climate, and with Vestager having political ambitions of her own, even if she thinks the ThyssenKrupp-Tata Steel deal should be blocked, would she have the stomach to block another big German-led cross-border deal?

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