What's going on?
Tata Steel and ThyssenKrupp agreed to merge their European operations on Wednesday to create the continent’s second-largest steel producer.
What does this mean?
The new company, “ThyssenKrupp Tata Steel”, is expected to generate savings of up to €600 million by combining the two companies’ capabilities to produce and distribute steel (i.e. synergies). For ThyssenKrupp, it’s a chance to separate its steel business from its better performing activities, like making elevators and submarines. For Tata Steel, which is headquartered in India, the deal brings closure to the uncertainty around its European business (it previously postponed plans to sell off its loss-making UK business) and allows it to focus primarily on its domestic market.
The deal won’t be finalized until early next year, and will require both the approval of the European Union and ThyssenKrupp’s powerful trade unions (who have signaled opposition to a deal that is likely to result in about 4,000 job losses across both companies).
Why should I care?
The bigger picture: Cheap Chinese exports are putting pressure on steelmakers’ revenues.
The steelmaking industry has been dealing with a collapse in steel prices, largely due to increasing output from China. To put this in perspective, the extra amount of steel China is producing (i.e. beyond what it needs) is more than the total demand in Europe – so Chinese steelmakers have to sell at cheap prices. This affects revenues for steelmakers globally – Trump has called it a threat to US national security, and in Europe steel prices are half what they were in 2008. By merging with rivals, steel producers can bring down costs to help deal with this challenge.
For markets: Investors in both companies seem happy with the deal.
The new company will be a 50-50 joint venture, i.e. both companies will own half of the new business. Investors seemed pleased with the deal’s rationale, as shares in ThyssenKrupp were 2.7% higher and shares in Tata Steel were up 1.6%.