The Hindu Business Line : `Corus buy will impact Chinese steel market'

They also say that the Chinese steel industry will continue to grow, and that China, not being a low-cost producer, will not flood market with cheap steel. They believe that steel prices will be positive in 2007.

Excerpts from CNBC-TV18's exclusive interview with Mr Patrick Flockhart:

A lot of people have been saying good things about the deal and raising a few question marks about the price — what is your own feeling about these two, the strategic moves and the price at which it has come?

Let us look at the price first of all. As a very rough rule of thumb, Mittal paid about $720 per tonne of production for Arcelor. Another way of looking at this deal is that actually Tata has paid about $620 a tonne for Corus, so yes, they had paid more as the multiple of EBITDA, but actually paid less per tonne of production that Corus is actually doing.

So in one sense, that is a good deal. I think that there will be further moves from Tata pretty soon after it has got Corus bedded down. With Corus of course, Tata gets a wonderful international distribution network. This distribution network has always been hungry for Corus in terms of a producer to actually develop internationally.

Speaking earlier about steel prices and the strength that has come in to them, you are not in the camp that believes it might be peaking out by the end of this year and then the Tata-Corus management might head into a sticky spot in terms of prices?

One of the reviews at the moment is that the average steel price for 2007 will be below the average steel price for 2006, maybe or maybe not. Even if it is the case that the steel prices in 2006 have been pretty good and prices in 2007 are going to be pretty good, as we are looking at the market at the moment, we have actually been seeing quite steady rises in Europe over recent weeks.

In Asia, there is a very steep rise in the prices in the Far-East at the moment. Largely as a result of China, non-exporting is much as it should be as people have expected, but the general picture though is that steel prices are looking quite positive in the world at the moment.

So I would be in the camp where steel prices will be above the average of 2006 in 2007. So I think that the management of Tata Steel would be in good shape at the end of this year.

I believe you have been speaking to a lot of Corus employees as well, do you expect or do you foresee any other problems for Tata Steel as they synergise and consolidate with Corus?

No, certainly in my initial discussions with people, they were quite positive about Tata; they were actually a bit negative about CSN. To be fair to CSN, they really did not know a great deal about CSN at that stage. But a lot of sentiment that I am hearing from people in Corus is pretty positive. Obviously, people are concerned about their jobs, but I do not think that as a result of this in the short-term there necessarily will be any major redundancy in Corus.

Corus has been a bit stuck over recent years because its balance sheet has not been strong. So with Tata buying it, I think all the employees will say okay, we are now in the business that can really go somewhere.

There might be some minor difficulties if Tata does decide to sell off one or two parts of the business and I am sure that Tata will decide to do that because there must be some parts of the Corus business that Tata would not want, specifically the engineering business, which I think could make sense for part of the sell now.

First Mittal-Arcelor and now this one — do you think the fact that this market is now congealing into larger pieces, does it really have positive ramifications on steel prices or do you think that is overstating the case?

Yes, I do think that is overstating the case. Worldwide, steel production is about 1.3 billion tonnes a year now. Mittal is only about 10 per cent of that, this new business which I think should be called `Tatorus' is going to be about 20 per cent of that. So the overall sectors will be very fragmented and so there might be a little bit more price control from these large producers.

But it's not going to be significant. They are not really going to control world prices too seriously, world prices are really controlled by consumer stock levels and up to a large extent what is happening in China, now, China has been the largest producer in consumer steel worldwide and the Chinese market is very fragmented, the largest steel company in China, is actually smaller than the new Tata Steel business. So the price volatility in the steel prices will remain.

But the outlook is quite positive because there is a reasonable balance between the supply and demand for steel.