>TATA STEEL (CITI)

Sell: A Setback for Corus

■ Shutdown of Teesside likely — Tata Steel has announced that its Teesside Cast Products (TCP) plant faced the risk of closure, as a consortium of four buyers had terminated the 10-year (from 2004) Offtake Framework Agreement (OFA) to buy ~78% of the plant's production. This comes soon after news that the proposed plant sale to some consortium members may not be completed.

■ Impact of shutdown — While the proposed closure would not have a major impact on profits (plant sales were at cash cost), this is a setback as it will be more difficult to cover fixed costs and is likely to involve a shutdown cost.

■ Corus restructuring hits roadblock — Tata Steel has closed service centres in UK; plans to sell aluminium smelters in Europe, and also an 80% stake in TCP in order to restructure Corus' operations. The TCP stake sale was expected to raise US$480m but is unlikely to go through as the buyers have cited financial difficulties. Tata Steel has to repay US$795m in FY10 and US$1.3bn in FY11. While cash as of Dec 2008 was US$1.1 bn, planned FY10 capex is US$1.2bn.

■ Covenant reset sought — Tata Steel UK has reportedly asked its banks to ease terms of £3bn loan for Corus' acquisition in exchange for a £200m repayment.

■ Safeguard duty deferred — The Indian government has deferred the industry request to impose a safeguard duty (likely 25%) to slow down HRC imports.

■ Difficult outlook in Europe — Demand continues to be 35-50% down. £600m savings hinge on hedging gains and plant closures, only the latter is recurring.

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