All But Tata Could See That Corus Was a Pig in a Poke

I cannot abide columnists who are constantly claiming to have told us so when events seem to prove them correct.

Published: 03rd April 2016 01:05 PM  |   Last Updated: 03rd April 2016 01:05 PM   |  A+A-

As a general rule, I cannot abide columnists who are constantly claiming to have told us so when events seem to prove them correct. Yet at the risk of joining them in this journalistic indulgence, it was obvious to virtually everyone other than Tata Steel itself, and its ranks of fee-hungry investment bankers, that the company was buying a pig in a poke when it acquired Corus and its Port Talbot works for pounds 6.7bn in 2007 - and I said so at the time.

This was a classically hubristic, top of the market deal by an Indian conglomerate with more money than sense that always looked destined to end badly. The biggest mystery was why a low-cost emerging market producer would buy into the high-cost declining industrial infrastructure of the West in the first place, let alone pay such an inflated price for it.

Yet there was always an element of post-colonial triumphalism about this transaction. Ratan Tata, then chairman of Tata Steel, described it as "a moment of great fulfilment for India", as if the symbolism of acquiring such a prize in the imperial birth place of mass-produced steel was more important than any commercial justification.

The other factor was keeping up with the Joneses. Tata's great rival, the Indian steel mogul Lakshmi Mittal, had just bought another European steel maker, Arcelor, and Tata was determined not to be outdone.

So when CSN announced an agreed merger with Corus, Tata pounced and wildly outbid the Brazilian pretenders. It was brilliant news for Corus shareholders, a lucky escape for CSN, and one of the worst mistakes Tata has ever made, up there with Lloyds' merger with HBOS, or Royal Bank of Scotland's acquisition of ABN Amro in the roll-call of disastrously ill-judged takeovers.

To begin with, the deal just about washed its face, thanks to the miracle of the Chinese development story, which drove steel prices to record highs, lifting all boats. But as was always inevitable, the boom turned to bust, and the rest is history.

It is perhaps just as well that Tata bought Jaguar Land Rover at about the same time. This, by contrast, has proved spectacularly successful, in part because of booming sales to China. The Chinese, it might be said, have destroyed one company but made another. But that is little compensation to the besieged workers of Tata's remaining UK steel operations. What do you do with a post-industrial wasteland like Port Talbot? Nobody, it seems, has the remotest idea.

Protectionism runs riot

Tata may now have thrown in the towel, but no one can fault this deeply paternalistic company for lack of commitment or staying power. Since buying Corus, Tata has invested the thick end of pounds 2bn in its British production facilities, previously the victim of decades of under-investment, including, as recently as 18 months ago, pounds 185m in a new blast furnace at Port Talbot.

Tata's mistake was, at least in part, to have under-estimated the sheer bone-headedness of the UK government, which for a long time now has prioritised its green energy objectives, and more recently its great kow-tow to China, over the interests of the country's last remaining heavy industries. There has never been an industrial strategy worth the name, with the Government apparently keener on securing Chinese investment in nuclear power, and offshore rights to trading the renminbi, than ensuring the future of our basic industries.

British refusal to back higher European import tariffs on Chinese steel imports was said to have been the final straw.

I have some sympathy for the Government's free trade objectives, as well as for the argument that Britain, as more of a consumer than a producer of steel, has a vested interest in the cheap, state-subsidised steel prices that Chinese producers offer. But there is a world of a difference between outright protectionism and justified defence of an industry which is being hammered by unfair foreign competition. As it is, the Chinese have, ridiculously, got their retaliation in first, imposing tariffs on European steel which dwarf those that Europe proposes for Chinese imports.

It always used to be said that one of the differences between the aftermath of the financial crisis and the Great Depression of the 1930s is that this time around, at least the world hasn't fallen prey to a wave of viciously destructive, tit-for-tat protectionism. I fear we may need to think again.

China's dash for growth has spawned a worldwide glut of overcapacity, not just in steel but across a whole range of manufactured products, which is already giving rise to a tariff war that bears some comparison with the famous Smoot-Hawley Act of 1930. All manner of more subtle protectionist measures, from state aid to discriminatory product standards and taxes, are also being applied by the world's big trading blocs. Only Britain, it seems, still attempts broadly to play by the rules. And little good does it seem to be doing us. It's an ugly world out there, and it's getting uglier.

Current account alarm

In contrast to my early years as a financial journalist, when sterling crises were two a penny, nobody much cares about the current account deficit these days. Yet news last week that it reached a jaw-dropping 7pc in the final quarter of last year was enough to make even the most sanguine of observers sit up and take notice. It is a profoundly alarming spectacle, but both the UK budget and the current account deficits seem get markedly worse with each passing post-war, economic cycle. These latest ones are by far the deepest yet.

That they are in any way tolerable is, I suppose, down to the much more sophisticated nature of global capital markets, which makes funding them a lot easier than it was. But this in turn may make the country even more vulnerable to a sudden stop, or to any loss of international confidence in the economy's underlying solvency. Eventually there will be a shock, triggered possibly by Brexit, which will manifest itself in a deep devaluation and possibly a consequent, precipitous rise in interest rates.

A current account deficit of such magnitude would normally be an indicator of an economy which is seriously overheating, sucking in imports for lack of available domestic capacity. Yet inflation is at virtually zero, and no one would think we live in boom economic conditions. Again, we have the disinflation of Chinese overcapacity to thank for that. Hey ho.

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