The year 2007 was special for Tata Steel
as it turned 100. But for B Muthuraman, then managing director, what added zing to the celebration was the £6.2-billion acquisition of Corus months earlier.
Before the acquisition, Muthuraman said, he wasn’t too excited about the centenary celebrations. “There was something missing...one has to earn a celebration,” he had said in a speech to a gathering of employees and guests at Jamshedpur to mark the centenary.
The demand for steel was booming then and companies
wanted a larger pie of the market. The Anglo-Dutch steelmaker, Corus, fit into Tata Steel’s long-term expansion strategy.
It was all good until the global financial crisis in 2008-2009 sent assumptions for the acquisition — what was India’s largest cross-border acquisition — into a tailspin as steel prices
crashed from $600 a tonne to $400 a tonne. And for most of the years that followed, Europe has been a struggle for Tata Steel.
But the current rally in steel prices
could well make FY22 a turnaround year for Tata Steel
TSE’s EBITDA for the current financial year is projected to be one of the best on account of operating performance, comparable with the commodity boom witnessed in 2007-08 when it recorded an EBITDA of around £1 billion.
In a recent interview with Business Standard, Tata Steel Executive Director and Chief Financial Officer Koushik Chatterjee said Tata Steel Europe will see one of the best years in terms of EBITDA on account of its operating performance this year.
The context was performance in Q2FY22 — one of the best in a quarter — and Chatterjee was responding to a question on the outlook for Europe (see table: “Metal mettle”). Some brokerages are estimating an EBITDA of more than Rs 12,000 crore for the current financial year.
“We are projecting an EBITDA of Rs 12,260 crore and EBITDA/tonne of $181 for FY22,” said Amit Dixit, director-institutional equities, Edelweiss Securities.
Chances are that realisations in H2 will be higher. “Contracts being negotiated for CY22 are at higher prices as they are being negotiated against the current backdrop of elevated spot prices,” Dixit pointed out.
The removal of “Section 232” — 25 per cent tariffs by the US while allowing limited volumes of steel from the European Union — should also augur well for TSE, which used to export about 1 million tonne.
But what makes the current projections look impressive compared to 2007-2008 is that it’s on lower volumes in Europe. In 2007, production was around 18.2 million tonnes and it stood at 9.56 million tonnes in FY21.
“On a smaller capacity, if you are reaching a record EBITDA; it reflects market spreads and the underlying efficiency of the business. It vindicated the actions taken in the last decade,” sources pointed out.
Over the last decade or more, Tata Steel sold off what it felt was the unsustainable part, which included a number of units in the UK.
In 2011, it sold Teesside Cast Products to Sahaviriya Steel of Thailand for $467 million; in 2016, Scunthorpe was sold to Greybull Capital, reportedly for a token amount; in 2017, the specialty steel business was sold to Liberty House for £100 million.
TSE has two primary steelmaking units: Ijmuiden, the Netherlands, and Port Talbot, Wales; the UK has been mostly a drag.
But Tata Steel’s woes have also been linked to subdued market movements in Europe. Steel consumption in Europe has remained weak for over a decade till the calendar year (CY) 2020, pointed out ICRA Senior Vice President Jayanta Roy. “Apparent consumption in Europe declined by almost 25 per cent between CY2008 and CY2020 as against an over 55 per cent growth in the rest of the world over the same time, driven by the growth in countries including China and India,” he said.
However, during the current financial year, steel prices
in Europe remained buoyant on the back of an economic recovery, restocking requirements and supply chain disruptions.
“Tata Steel’s European steel business will benefit from this upturn, with an expected EBITDA comparable to thatof FY2008, even though its steel capacity there has almost halved during this period,” Roy added.
The market in Europe is also turning over a new leaf. “We are looking at a new phase where prices in Europe and the US would be decoupled from China,” said Dixit of Edelweiss.
Price trends reflect this. In the last three to six months, international prices have corrected from peak levels. But the fall in China due to weak demand is much sharper at about 26 per cent compared to Europe at 16 per cent over the last six months; in the US, prices were up by 26 per cent in the same period.
Moreover, the price increase over the past year in the US and Europe has also been much higher compared to China.
Multiple factors may prevent a major downside in prices in Europe. “The European Commission adopted definitive safeguard measures on steel imports from 2019, which were subsequently extended for three years until June 30, 2024. An additional duty of 25 per cent is due on imports that exceed the quotas,” said Vivek Kamra, managing director, Alvarez & Marsal. The UK followed suit post Brexit.
In addition, the Carbon Border Adjustment Mechanism (CBAM) will come into effect from 2023. “Which means that from 2023 to 2026, exporters to the EU need to start reporting their emissions. This reporting needs to be done by the importer. From 2026, there will be a tax on imports, which will depend on the actual footprint of the producer and the carbon cost that will be incurred by an equivalent producer in the EU,” Kamra explained.
Moreover, about 60 per cent of steel in Europe is produced through the blast-furnace route (90 per cent for flat steel). So, European Union steel players in addition to seeking significant external support will need to protect their margins to enable the investments in transitioning to more emission friendly steelmaking, Kamra pointed out.
But without relying on what the market provides, there is an effort to make TSE weatherproof, irrespective of the cycle.
A “Transformation” programme is underway to improve performance and make the business more sustainable. Plus, the separation of UK and the Netherlands businesses with focused management teams is expected to improve cost efficiencies and profitability margins.
So, is TSE out of the woods? The next two quarters may hold out more definite answers.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.