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Tata Steel’s Ferrochrome Venture in South Africa

CASE STUDY, MANAGERIAL ECONOMICS
Institute of Management Technology, Ghaziabad, 22 Pages
AUTHOR(S) : D. C. Singhal, Ex-AGM Tata Steel and Ranjana Agarwal, Associate Professor, Economics at IMT Ghaziabad

Case Preview

Tata Steel’s Ferrochrome Venture in South Africa

Introduction

In 2001, it was reported1 that Tata Steel was contemplating of setting up a ferrochrome plant in South Africa (S.Africa). Due to various problems, the plant started construction in 2006. Tata Steel KZN was a subsidiary of Tata Steel. Eight years later in 2015, due to various changes in the macro economic environment, the company announced its decision to sell the company. What were the costs and benefits of setting up the company in S. Africa? What were the changes in macro factors which led to the selloff?

Tata Steel: Quest for Global Expansion

In the quest to enhance its global footprint, Tata Steel decided to set up a plant to manufacture ferrochrome in S.Africa which had low cost electrical power and availability of chrome ore, as well as other inputs. The factors that led to enhancing the global footprint was competition and the desire to increase the company’s asset value.

Ferrochrome is an alloy of iron and chromium and is mainly used to produce stainless steel. Production of ferrochrome consumes a large amount of electrical power and hence the low cost of power is of considerable economic advantage.

In this business model, Tata Steel proposed to use relatively low cost electrical power available in S.Africa in 2001 (compared to India) to produce ferrochrome. High quality chrome ore was to be taken from India initially, (and later S.African chrome ore would be used). The finished product would be exported to various customer destinations throughout the world. The plant would be located at Richards Bay, about 200 km north of Durban............

Exhibits

Exhibit I: View of Richards Bay and Location of Tata Steel KZN Plant

Exhibit II: Main Furnace Building Under Construction

Exhibit III: Production Process of Ferrochrome

Exhibit IV: Product - A Typical Composition of High-Carbon Ferrochrome (HCFeCr)

Exhibit V: A Bird’s-Eye View of Tata Steel KZN Ferrochrome Plant in South Africa

Exhibit VI: Briquette Plant

Exhibit VII: Average Annual Tariff Increase over the years in Percent by Eskom

Exhibit VIII: Eskom tariff vs Inflation

Exhibit IX: Historical Ferro Chrome Prices (2005-17) in $/kg

Exhibit X: Advertisement Inviting Offers for Purchase of Tata Steel KZN in Provisional Liquidation

Annexures

Annexure I: TATA STEEL– A BRIEF PROFILE

Annexure II – Economy and Industry Scenario of South Africa During 2002-03

Annexure III - GLOBAL FERROCHROME INDUSTRY AND S. AFRICA’S POSITION


1 “Tata Steel to Set Up Ferro Chrome Plant in S Africa”, https://www.business-standard.com/article/companies/tatasteel-to-set-up-ferro-chrome-plant-in-s-africa-101112601011_1.html, November 26th 2001 (Accessed Date: July 5th 2018)

Teaching Note Preview

Tata Steel’s Ferrochrome Venture in South Africa

Synopsis

This Case Study discusses the start-up, the economic struggle to get returns and finally closure of Tata’s first greenfield venture abroad. This case study illustrates that in international business, risks are always present. A well thought out international business endeavour can often encounter risks over its life cycle and not provide the desired benefits to the investors as this case of the five years of struggle of Tata Steel TZN after start-up leading to its ultimate closure. Tata Steel set up its plant in South Africa (S.Africa) due to availability of low cost power. However, the assumption of low power cost in S.Africa at the inception (compared with India) of the project was completely nullified by subsequent increases in power tariff in S.Africa. Also, the progressive slump in market prices of product resulted in lowering the profit margin. Finally, Tata Steel shut down its plant in S.Africa.

Prerequisite Conceptual Understanding/Before the Classroom Exercise/Reading

• John D Daniels, Lee H Radenbaugh, International Business Environment and Operations, 15th Edition, Pearson Education, Chapter 4, pp.91- 181.
• Hill, Jain, International Business, Competing in The Global Market Place, Tenth Edition, Mcgraw Hill, 2014, Chapter 3, pp.68 - 101

Case Positioning and Setting

The case is designed to be used by academia and industry. The case can be used for teaching courses in Economics and Management Studies. The case can be used at graduate, MBA and Executive MBA level of education. In management schools, the case is designed for teaching courses in International Business, Strategy and Business environment.

This case is intended as an opportunity for students to discuss the importance of taking effective decisions for doing international business. It highlights the risks and benefits of doing business in a foreign country. The case highlights challenges and constraints faced while doing international business. It throws light on issues of business rescue and business liquidation.

Assignment Questions

I. In the light of cost and benefit analysis of globalization of a business, analyze Tata Steel’s decision of establishing a Ferrochrome plant in South Africa.
II...............

Exhibits

Exhibit (TN)-I: Classroom Discussion Dashboard

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Abstract

In September 2015, voluntary liquidation plans were announced by the company Tata Steel KwaZulu-Natal (TSKZN) in South Africa. This set tone for the final closure of Tata’s first greenfield venture abroad. Tata Steel KZN, a ferrochrome company, was a subsidiary of Tata Steel, located in Jharkhand, India. Electricity, a key component of ferrochrome industry, was available at low cost in S. Africa, and was one of the major factors of setting up a plant there. However, once the plant was established, cost advantages were nullified due to changes in the macro environment. The plant which started operations in 2008, was finally closed in 2015.

This case study explains the reason for Tata Steel to set up a ferrochrome venture in South Africa, the struggles it encountered after its startup and the factors that led to its sell-off.

Pedagogical Objectives

  • To understand the costs and benefits of doing international business
  • To comprehend how changes in macro environment affect operations in international business
  • To examine the issues of sustainability of assumptions on which a business venture is based and trace factors which lead to fallout of a business venture
  • To examine issues of business rescue and business liquidation

Case Positioning and Setting

The case is designed to be used by academia and industry. The case can be used for teaching courses in Economics and Management Studies. The case can be used at graduate, MBA and Executive MBA level of education. In management schools, the case is designed for teaching in courses in International Business, Strategy and Business environment.

This case is intended as an opportunity for students to discuss the importance of taking effective decisions for doing international business. It highlights the risks and benefits of doing business in a foreign country. The case highlights challenges and constraints faced while doing international business. It throws light on issues of business rescue and business liquidation.

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