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For the first time, Tata Steel’s European EBITDA/tonne numbers bettered India’s in Q1FY23. Tata Steel Managing Director and CEO TV Narendran say it was helped by long-term contracts and operational efficiencies.
He expects volume expansion to take place during the ongoing quarter as hot rolled coil (HRC) prices stabilise.
He also said the company is expecting some financial aid from the British government for its green plans to smoothly run the UK operations.
In first, European EBITDA/ tonne has been better than that of India. How sustainable are these numbers?
European business had a strong quarter, helped by long-term contracts and operational efficiencies. A sharper focus on the business, by separating the UK business from the Dutch one, also aided.
Spreads in Europe are expected to be better than the last decade owing to multiple factors, especially the changing cost structure – which is driven by higher gas prices. But the Indian business will continue to be stronger than the European business in the upcoming quarter.
Please provide margin guidance for the European and Indian businesses.
So, both the Indian and the European business will see a margin compression in Q2 since costs are expected to go down only by September, thanks to the impact of lower spot coal prices.
But we expect to sell more volumes in Q2 as steel prices stabilise and demand returns.
There are media reports that Tata Steel may shut down UK operations if the British government does not pay 1.5 billion pounds for your green plans. Is it true?
We sent a proposal to the British government a couple of years back since significant investments will be required for newer assets, which are greener. We can do this by leveraging on the scrap available in the UK, and also help the UK government reduce carbon footprint. It is so in many other countries like the US, Spain, Germany, and Canada.
Our request is not unusual as the company supplies more than 50 percent of the steel used by auto companies, packaging companies, and construction companies in the UK.
How much financial aid is Tata Steel expecting?
It's less than 2 billion pounds. But we put in this proposal two years back.
Tell us about the optimum visibility for both the UK and the Netherlands business, especially in terms of energy security and sustainability CAPEX…
I think neither of our businesses are at risk just now. We have fulfilled the goals set by the European Union, which is to reduce the gas requirement by 20 percent in the UK and by 15 percent in the Netherlands. Also, costs have been hedged.
But in the long term, the transition in the Netherlands is about substituting coal with gas, and, then eventually, gas with hydrogen. So investments in assets that use gas instead of coal should be available at a reasonable price.
In the UK, the company will be less dependent on gas and more dependent on electricity. We are in touch with the government, so that energy is available at a competitive price.
What’s your guidance on energy cost?
Gas price is three times more expensive than the previous three years. Today, since our energy sources are coal-based rather than gas-based, we are more vulnerable to coal prices than gas prices.
We do expect Europe to reduce its dependence on Russian gas over the next couple of years. There are a lot of investments being made in LNG since Europe has brought gas from Russia through pipelines. But the investment would ensure European imports from other parts of the world.
The UK is already quite well equipped to import LNG. So we expect that in the next year or two, the vulnerability to gas prices out of Russia will be less.
There are concerns about the Reserve Bank of India’s hawkish stance on inflation. How does that impact the steel industry?
The Reserve Bank will try to keep inflation under control, rightly so because inflation impacts the poorer sections of society. Secondly, it will also have to watch what's happening with the Fed and what the US is doing as far as interest rates are concerned. Otherwise, you run the risk of devaluing the rupee in some sense of the term, if there's a big disparity in the interest rate movements in the US and India.
In India, in terms of demand, most of the sectors continue to be strong. The auto sector had one of the strongest quarters despite some increase in interest rates. A lot of construction activity is going to be driven by government expenditure.
India is quite strong with low-cost housing. Oil and gas, and railways, all of them continue to have big expenditure plans because of the focus on infrastructure.
Even if it’s not in the 9-10 percent range, GDP will continue to be strong. Even 8 percent is fantastic. As far as the industry is concerned, the repair of balance sheets over several years has also aided. So, I think the industry is less vulnerable to rising interest rates than they were, maybe, a few years back.
Your reading of the global cues, especially in the background of the Ukraine crisis?
One positive development has been the recent agreement between Russia and Ukraine on wheat exports. Given its impact on many poorer countries that are dependent on wheat from Ukraine, it was a big deal.
So, I think a food crisis has been averted, to some extent. But the longer this war lingers, the more disruptive it would be for Europe. With this, Europe will spend more on defence, green infrastructure, and recovery.
So, while there are some short-term pressures, in the medium to long term, I think the fundamental or core businesses – the infrastructure-led and commodity businesses -- will see a fairly strong period ahead.
Would the company now prefer the inorganic growth route?
We will focus more on organic growth, going forward. As far as inorganic growth is concerned, over the last three years, we have enough options. So, we have the Kalinganagar site, whose capacity is being expanded from 3 million tonnes (MT) to 8 MT. It can go up to 16 MT.
We also have the Bhushan site, whose capacity we expanded from 3 MT to 5 MT. It can go to up to 10 MT. Then, there is the Neelachal site, which we just acquired. Its capacity is 1 million. It can go up to 10 million.
We have enough headroom to grow to 40-45 MT during this decade. That kind of fulfils our growth ambitions. So we don't need to acquire any new site, or have any more inorganic growth to fulfil our growth ambitions.
When would the benefits of Neelachal trickle down to your financials?
This plant has been shut for more than two years. We expect to start the blast furnace by the end of September. By March next year, we want the plant to have a capacity of 100,000 tonnes a month, which is the rated capacity. We have the experience of turning around Bhushan and Usha Martin. We are confident of doing the same with Neelachal, too.
Where do you see HRC prices finally settling in?
We feel steel prices have bottomed out. One reason is China. If you look at China, which is an exporter, it is already losing money, exporting at these prices. So I don't see much headroom in China to bring down prices anymore.
The second reason is Europe. Since prices fell so rapidly, a lot of demand or purchasing got postponed in Q1.
I think flat products have pretty much bottomed out. We will see prices stabilise and then start picking up towards the end of the quarter. The prices of long products have already started creeping up.
How do you expect to bring down net debt, which has risen, sequentially, for the June quarter?
Net debt has gone up from Rs 51,000 crore to Rs 54,000 crore due to higher working capital, driven by input costs. But with coking coal prices coming down, some unlocking in working capital is expected to take place.
Despite the Neelachal acquisition, which will have an impact on net debt this quarter, and all capex plans, we are still standing by the goal of reducing net debt by a billion dollars during the year. We hope to finish the year closer to Rs 45,000 crore. We started the year, at maybe, Rs 51,000 crore- Rs 52,000 crore.
So, how much do you expect your net debt to go up by in Q2?
We expect net debt to go up by at least Rs 12,000 crore to Rs 66,000 crore, due to the payment made in the first week of July for Neelachal.
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