‘Tata Steel has recovered cost increases because of a more favourable demand-supply situation’

Tata Steel just saw one of its best financial performance in many years. The company used the free cash flow to de-leverage the balance sheet, even while making slew of acquisitions during the ongoing distress asset sales by banks. However, rising operational cost and slowing demand due to high prices remain a key concern. TV Narendran, Managing Director, Tata Steel, spoke to BusinessLine on the way forward for the company. Excerpts:

Are you concerned over rising input costs for the steel industry?

Input costs seem to have stabilised to an extent. In March, there was lot of panic due to the Ukraine crisis and coking coal prices went up to $675 a tonne for some time. Today, it ranges between $400–490 and is likely to remain in this range for some time. We have managed to pass on a significant share of the increases to customers — both in India and overseas — because there is a lot of disruption in the supply of steel. Ukraine and Russia are also the largest suppliers of steel; they used to supply about 45 million tonnes. So that space was vacated and there was a better demand-supply situation.

Also read

Better operating leverage shields India Inc from cost pressures in Q4

Tata Steel net up 37 per cent on higher realisation

Sustainability could well be the next evolution in branding 

How is Tata Steel managing congestion at ports and logistics issues?

Directly, it is not a major issue for us as most of our raw material for Indian operations comes from Australia while Europe is supplied from the US and Canada.

However, our customers such as auto components companies in Europe were impacted by the war. So there is an indirect impact. Even in India, some of the consumables which we used to import from countries affected by the war were impacted. However, it is not that disruptive.

Do you expect a pressure on profit margins going ahead?

We expect to protect the margins, at least in the June quarter; we have to wait and see what happens in September quarter. But like I said, input costs have stabilised. Hence, the need to recover some of these costs from customers is less now.

Have Tata Steel costs gone up after no longer sourcing coking coal from Russia while others get it at a discount?

It will have some impact but not so big.

About 20 per cent of the coal we bought globally used to come from Russia. It was used both in India and Europe. Apart from this, for India, it comes largely from Australia with some PCI (pulverised coal injection) coal from Indonesia. In Europe, coking coal is largely sourced from North America — either the US or Canada.

Will the thermal coal shortage impact Tata Steel?

Not directly. We are largely dependent on metallurgical coal.

We need some thermal coal for our DRI units at Meramandali (Odisha) and Gamharia (Jharkhand) — which were erstwhile Bhushan and Usha Martin plants — besides our own Tata Steel Sponge and Tata Long Product plants at Joda (Odisha). A lot of thermal coal used in these plants is imported. On the supply side, there will be an impact because a lot secondary producers are dependent on grid power, unlike integrated plants. We have to watch out for customer-facing short supply of thermal coal. So far, however, there has been no material impact.

How do you see user industries dealing with the hike in prices? Will they blame it on a cartel?

The steel industry, along with the government, had worked out a plan to support MSMEs. But it needs to administered well so that there is no misuse. It needs to be structured properly. Otherwise, it will only help the intermediary buy steel at a lower price and sell to somebody else at a higher price.

The longer-term solution is to have indexed contracts. When we have volatile situation and need fixed price, the better way is to have indexed contracts so that the company in the middle does not suffer. Customers who are saying that they are impacted by volatile inputs have to take this up with their contractors. Tata Steel has price variation contracts with suppliers, whether it is for engineering projects or transportation contracts. We also have indexed contracts for labour. Similarly, our buyers should also have such contracts with their buyers.

Will you continue deleveraging the balance sheet despite a ₹12,000 crore capex?

We will continue to pre-pay the $1 billion debt as guided. That is the minimum guidance.

Over the last two years, we deleveraged by ₹52,000 crore — about $7 billion. The minimum is $1 billion but we will take a call. Currently, demand and profitability are strong and our debt is anyway down by ₹52,000 crore. Our net debt to EBITDA is 0.8. So pressure to de-leverage is less, but we will continue to de-leverage.

How do you see demand in Europe for this fiscal?

It is going to be another good quarter in Europe. I will wait to give guidance for the rest of the year, simply because there are too many moving parts. There is a lot of demand-supply balance because Ukraine and Russia used to sell a lot of their products in Europe. Now that they are out of the market, there is a vacuum on the supply side. Demand has been reasonably good, although the auto industry has been affected a bit.

Is cost in Europe going up?

Yes, and so are our selling prices. In the last two quarters, we had managed to recover cost increases because of the better demand-supply situation. That is why our margins in Q4 was higher than Q3. We expect Q1 margins to be similar to that of Q4.

With the Netherlands and UK business separated, what are the long term plans for Tata Steel Europe?

We split the businesses in Europe to make them self-sustaining. Today, the Netherlands business is not only self-sustaining, but also very profitable. We are building a corpus. When we transition to green steel there, we will use the corpus to take care of the capex that is required.

The UK business is also EBITDA positive, and should become cash positive soon. Structurally, the business is weaker and when it transitions to green steel, it will certainly need significant government support. It is the conversation we are having with the government there.

Have the plans to sell the Europe business been put on the back burner?

There are no plans just now. Fundamentally, we were looking at that option to de-leverage the balance sheet. Now, we have nearly achieved those goals. Those businesses were not self-sustaining then. Now that Netherlands is self-sustaining and UK is also able to run on its own, there is no urgency beyond continuing to improve performance.

COMMENT NOW