* Investors see European operation as a drag on India's Tata
* Tata Europe CEO says will continue to respond to weak
* Indian operation enjoys lower costs, stronger demand
By Silvia Antonioli and Krishna N Das
PORT TALBOT/NEW DELHI, June 6 In the shadow of
Britain's largest steel works, the town of Port Talbot braces
itself after Tata Steel's $1.6 billion writedown.
The worry is that its Indian parent company is tiring of
pouring gains from lucrative operations into European units
struggling to turn profits.
"It's just the kind of a business you don't want to be in,
especially their UK assets, they are higher costs," said Willem
Schramade, materials equity analyst for the 7 billion euros
($9.12 billion) Global Equity fund at Robeco. "The most obvious
thing is to sell the UK assets, but to who?"
Dutch Robeco has already sold its stake in Tata. In the
Welsh valleys the financial calculations could be more brutal.
Steven Garvey used to work at the Port Talbot plant, like
his parents, grandfather and seven uncles before him, before
being made redundant in the 1980s, with 10,000 others.
"I would be absolutely terrified to see Tata even catch a
cold," he said. "If the steelworks closed we would certainly see
a lot of houses and shops repossessed."
The management in India has said a sale of some European
assets - which include another British plant in Scunthorpe - is
possible, if the right opportunity came up.
But buyers will be hard to find given Europe's flailing
steel industry, struck by shrinking demand - down 30 percent
since 2008 - over capacity and tight financing conditions.
Tata's European operation is the region's second largest
steel producer, so other options could be production cuts or
even mothballing of some plants, sources said.
Since it bought Anglo Dutch producer Corus for $13 billion
in 2007, Tata has already cut EU output from 23 million tonnes
to less than 15 million currently.
Cutting capacity further would be another blow for Europe's
manufacturing sector after the shutdown of the ArcelorMittal
plants at Florange in France.
"I think (Tata Steel Europe CEO Karl-Ulrich) Köhler knows
that the only chance to survive is to close everything except
Ijmuiden, the Dutch plant, which is still in a good shape...the
UK assets are all in very bad shape," an industry veteran said.
Köhler told Reuters he would continue responding to market
Asked whether this could include mothballing some plants he
said: "I wouldn't say mothballing of plants, but I would say we
will certainly, as in the past, continue to adapt as fast as
necessary," adding that often this includes production cuts.
EBITDA margin for Tata Steel Europe was 1 percent for the
financial year ended on Mar. 31. It was 31 percent for India.
In Port Talbot, known for its local actors made good -
Richard Burton, Anthony Hopkins and Michael Sheen - hopes are
based on a recently completed $280 million investment to rebuild
one of the two blast furnaces.
Producing steel profitably in Britain has become difficult
given shrinking demand plus higher production, labour and
logistic costs, compared with mainland Europe.
"If you move the steel industry out of the UK what happens
to the downstream activity like car production for instance?"
General Secretary of trade union Community, Michael Leahy, said.
"If one of the major dominos falls over that doesn't bode
well to the rest of the economy."
Port Talbot furnaces produce up to 4.5 million tonnes of
steel a year, used to make cars and domestic appliances
including washing machines and dishwashers.
Among the plant's largest customers are Caterpillar, Honda
Scunthorpe produces steel mainly for construction and
infrastructure, sectors crimped by the current economic climate.
That could put the plant in a more delicate position, should
cutbacks come, analysts said.
Scunthorpe has supplied Network Rail but the contract comes
up for renewal in 2014. The outcome could affect the plant's
Nic Dakin, a member of parliament representing Scunthorpe,
said the rail regulator should be mindful of any impact of its
decision on Britain's economy.
"Any UK government worth its salt would want us to have the
capacity to produce our own steel," Dakin said.
"Manufacturing ought to be part of our future."