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BW Businessworld

Making Good Of A Raw Deal

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It is time to act fast. And Tata Steel is wasting no time. After bringing its European operation back to profitability, Tata Steel is thinking about managing the volatility of raw material prices. To this end, it is planning a series of mine acquisitions to feed mills in Europe. As costs of developed mines are higher, it plans to buy promising assets and stream them to production. The target is to raise raw material self-sufficiency to 50 per cent from the current 10-12 per cent.

Since it acquired Corus (now called Tata Steel Europe) in 2007, the steelmaker has been haunted by rising costs of iron ore and coking coal.  So, the then managing director B. Muthuraman (now the vice-chairman) set the target of 50 per cent for raw material security. But the plan got derailed by the financial crisis and its resultant cost cutting, and the debt recasting that the company undertook.

Tata Steel Europe expects its operating profit to rise by two-thirds to $100 a tonne over the next three years as it focuses on more value-added products and controlling costs, says managing director Hemant Nerurkar. The unit would produce around 15-16 million tonne (mt) of crude steel in this financial year, up from 14.8 mt last year.

Control over upstream supplies, though, will take some time. "Even if the company buys some mines now, production will begin only by 2014. Till that time, the raw material buying will continue the same way," says an analyst with a global research firm. Currently, it is developing some of the mines in Mozambique, Canada, South Africa and Cote d'Ivoire.

Self-sufficiency in raw materials for the European operations will translate into substantial savings. A 100 per cent control will lead to a saving of up to 60 per cent of input costs, which is about $120 for every tonne of steel. "Since the company is looking for only 50 per cent raw material security, the overall input cost reduction will be 30 per cent, or $60 a tonne of steel," says an analyst.

As for funding these proposed acquisitions, it is as yet unclear where the money is going to come from. In June, Tata Steel sold its 26.3 per cent stake in Australia's Riversdale Mining to Rio Tinto for $1.12 billion (Rs 5,030 crore) to fund capacity expansion of its Jamshedpur and Kalinganagar plants, mining operations and capital expenditure in its European operations. However, Tata Steel plans to maintain its 35 per cent stake in the joint venture it had entered into in 2009 with Riversdale Mining for developing the Benga coal fields.

The steelmaker has been a bit unlucky with funds. After it acquired Corus, there was not much space left for leveraging the balance sheet for further buys. The financial crisis that affected many of its operational geographies saw severe reverses — sales crumbled; debt burden squeezed its profit and lay offs led to labour issues. Though the mines were cheaper, the company was not in a financial position to cash in on that. Till mid-2010, the scene was same.

But in 2010-11, Tata Steel posted a $2-billion profit, powered mainly by the demand surge and better steel prices India. The European operations had posted an Ebitda (earnings before interest, tax, depreciation and amortisation) of $943 million, compared a loss of $303 million in the previous year.

The Indian unit's Ebitda was about three times that of the European operation. "Higher selling prices gave us a particularly strong end to the quarter, with additional one-off financial benefits from items such as the completion of the Teesside Cast Products sale (for $469 million)," said Tata Steel Europe managing director and chief executive Karl-Ulrich Köhler.

The figures will begin to look even better once Tata Steel's plans for securing raw materials begins to bear fruit.

(This story was published in Businessworld Issue Dated 11-07-2011)