The Raw Reality

Tata Steel, already reeling under the burden of the $12-billion acquisition of European steelmaker Corus in 2007, has seen its pain worsen in the current slowdown. Falling steel prices and high raw material costs have squeezed its margins, and there is uncertainty over raw material security. And it still has a debt of $9.7 billion to service.

Its troubles were reflected in its June quarter results, which showed a steep fall in profits. Analysts say that Tata Steel will continue to   fare badly in Europe until the euro zone crisis is resolved. Steel sales in Europe have declined since June 2011 on fears that Greece and other euro zone countries may default on debt.

According to the World Steel Association, crude steel production in the European Union fell by 5.4 per cent in June compared to the same period last year; the year-to-date total production was down by 4.6 per cent to 89 million tonne.

What surprised the analysts, though, was the poor showing by Tata Steel’s Indian operations, which source their entire iron ore and 60 per cent of coking coal from captive mines. Citibank, in its latest report, says that Indian mills with captive iron ore mines such as Tata Steel are better placed to protect margins, as prices weaken and steel imports rise. They have upgraded Tata Steel stock to ‘Buy’ from ‘Neutral’ status as they do not see further downside. The stock has already underperformed the Sensex 32 per cent over the past year.

In fact, after the Corus acquisition, the then managing director (now the vice-chairman)

B. Muthuraman had targeted to source half the raw materials from captive mines. But acquisition or development of mines has been delayed due to the company’s financial troubles. It is currently developing mines in Mozambique, Canada, South Africa and Cote d’Ivoire.

The Benga coal project in Mozambique, in which Tata Steel acquired 35 per cent stake in November 2007 from Riversdale Mining, started exports in June. In the first phase, it will have an annual production capacity of 1.7 million tonne of metallurgical coal and 300,000 tonne a year of thermal coal. After the three stages of development, the production will be around 6 million tonne of metallurgical coal, and 4 million tonne of thermal coal. Tata Steel’s coal mining project in Australia, a joint venture with Carborough Downs, is operating at a capacity of 1.8 million tonne per annum. The company has a 5 per cent equity stake with 20 per cent off-take rights.

The steelmaker is also developing iron ore projects in northern Quebec, Newfoundland and Labrador in Canada in partnership with New Millennium Iron Corporation. Production from the mines is expected to commence by the end of 2013, says an executive.
 
Analysts estimate that the European operations could save up to 50 per cent of input costs, or about $100 per tonne of steel, if the company could achieve self-sufficiency in raw materials. “Since the company is looking at only 50 per cent raw material security, the overall input cost reduction will be 25 per cent, or $50 a tonne of steel,” says an analyst.

Sanjay Jain, senior vice president at Motilal Oswal Securities, says that Tata Steel needs to ramp up production at its mines to tackle the situation. Other analysts say they need to acquire more mines for the economical production as they target 35 million tonne steel production by 2015-16 from 22 million tonne
in 2011-12.

(This story was published in Businessworld Issue Dated 24-09-2012)