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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............

Setting-up of Tata Steel KZN

In 2000, Tata Steel began exploring the possibility of setting up a greenfield ferrochrome venture outside India where electricity was cheap to gain competitive advantage in producing ferrochrome compared with other international producers. Tata Steel announced its intention to set-up the plant in S.Africa in November 2001.

The choice of location of the plant was made from an initial short list of eight countries and the final choice was between Australia and S.Africa. Tata Steel was almost deciding on Australia, when the S.African government offered them a significant incentive package. S.Africa was finally selected based on factors including low power costs, skilled technological base and manpower, developed infrastructure/logistics arrangements, and its strong financial institutions.........

Tata Steel KZN: Sourcing of Raw Material and Production Process

S.Africa is the world’s largest producer of chrome ore having about 82% of the world’s chrome ore reserves., while Zimbabwe had 11%, India had 3%17, and other countries the rest. However, the ore for the first phase plant was to be imported from India and Iran.

Tata Steel originally proposed to source the plant’s chrome ore requirements from S.Africa. But, Iranian and Indian chrome ore resources were reported to be qualitatively superior to those of S.Africa. In the long run, the input mix proposed was to include locally-sourced chromite ore in the production process (Exhibit III).........

Plant Start-up

On April 10th 2008, Tata Steel KZN commissioned the first electric furnace and the second furnace in July 2008 (Exhibit V). Commercial production began at the plant in August 2008 and a month later the first shipment of ferrochrome (of 1,507 tonnes) sailed to customers in China.

In October 2008, TSKZN commissioned a briquette plant (Exhibit VI) with capacity of 400,000 tonnes of briquettes per annum. With the addition of one more  briquetting machine, the plant could produce up to 600,000 tonnes per annum............

Initial Start-up Experience and Constraints (2010-2013)

Subsequent to the start-up of Tata Steel KZN, there was a power supply crunch in S.Africa. The national grid nearly collapsed in 2008 forcing mines and smelters to shut for days and costing Africa’s top economy billions of dollars in lost output. A grid collapse would have been catastrophic and could take weeks to recover from. Controlled load shedding was required to be done to keep the power demand below the generating capacity. Eskom has asked the S.African government to put a moratorium on new industrial projects for the next five years because it was unable to meet the demand for extra power..........

Changes in South African Economic Environment

Electrical power in S.Africa was regulated by National Energy Regulator of South Africa (NERSA). Electrical power is produced mainly by Eskom. In 2011 Eskom met about 95% of S.Africa’s power requirements of about 42,000 MW27 with the rest supplied through hydropower. Eskom generates, transmits and distributes the power to consumers..........

Increases in Power Tariff

One of the costliest items in production of ferrochrome is the cost of electrical power. In India power accounts for about 60% of the production cost28 of ferrochrome. Lower cost of power was the main reason for locating the plant in S.Africa. However, after the start of the company, there has been a steep rise in the power tariff in S.Africa nullifying the benefit of expected lower cost power.............

Slump in Ferrochrome Prices

Generally, if the price of inputs increases, profitability can be maintained by increasing the cost of the product. However, in the case of ferrochrome, the prices of ferrochrome began to slump 2010 onwards leading to lowering of profitability of the company. The demand of ferrochrome is linked to the production of stainless steel. In mid-2016, the demand of ferrochrome was subdued due to high stocks of ferrochrome with stainless steel producers............

Tata Steel KZN Prepares to Sell-Off

When Tata Steel was weighed down by loans raised to mainly fund its $12.9 billion for purchase of UK-based Corus in 2007, there was a buzz in the media that Tata Steel was considering selling its S.African unit to reduce its debt. However, Tata brushed these talks aside.

Initially, Tata Steel did not consider selling the plant at Richard Bay. The Managing Director brushed aside all prospects of sale. “We are not selling the plant...we are always approached by the buyers interested in our assets, but it doesn’t mean we are selling,” said H M Nerurkar, Managing Director, Tata Steel, in a seminar organized by Confederation of Indian Industry on September 2010............

The Final Bidders

Tata Steel KZN finally attracted only two bidders Traxys for R90 million and Precon Systems for R95 million. While the liquidators preferred Traxys, Tata India (which had 90% shares of the African unit) favoured Precon. This resulted in a legal battle in the Durban High Court with liquidators wanting to protect themselves against a potential conflict. The matter was first heard in court on June 24th 2016.........

The Aftermath of Sell-off of Tata Steel KZN

Traxys was a physical commodity trader and merchant in the metals and natural resources sectors headquartered in Luxembourg. Traxys has chrome ore mines in S.Africa. Later, on December 8th 2016, the merger between Traxys subsidiary Richards Bay Alloys (Pty) Ltd., and The Business of Tata Steel KZN was approved by the competition tribunal of S.Africa............

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. Analyze the macro business environment in South Africa when Tata Steel took the decision of establishing Ferrochrome plant. Do you think, it was a right decision then, to establish a sustainable business? Why? Contrast the same with factors that led to the change in the macro business environment later (2015-2016).

III.................

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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