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)
