India's Most Influential Business and Economy Magazine - A Planman Media Initiative 
 Search  
  Other Sections
  
  • Home
  
  •  Cover Story
  •  B&E This Fortnight
  •  B&E Indicators
  • B School
  • BE Corporation
  • Exclusive Interview
  • Finance
  • International Column
  • Overseas Talk
  • Politics
  • Project Syndicate
  • Scrutiny
  • Sector
  • Snapshot
  • Stratagem
  • Testimonial
 


Share |
BE Corporation
 
Go to Page Number - 1   2   
TATA STEEL: SQUEEZING MARGINS
Is the Corus diet finally showing on Tata Steel’s health?
The Indian steel giant Tata Steel reported an unexpected quarterly loss, its first in more than two years. While some blame it Corus, the Anglo-Dutch steelmaker, and mention that the real price of the acquisition that Tata Steel made in January 2007 is coming to fore, the real reason could simply be rising input costs and dwindling demand in Europe...
Issue Date - 15/03/2012
 
Indeed, Ratan Tata is not given to hyperbole or grandstanding, notwithstanding his “you put a gun to my head and pull the trigger or take the gun away, I won’t move my head” comments. Thus, when he had described the Corus deal (Tata Steel acquired the Anglo-Dutch steel maker Corus for $12.04 billion or 680 pence a share in January 2007) as being a “bold visionary move”, many had praised the move as being the harbinger of India’s rise on the global top ranks.

Of course, that part has surely been true, but what hasn’t and cannot be ignored is that he also seems to have invited discomfiting analogies and criticism on the Corus deal from significant quarters. The sounding board of these critics has become more cacophonous with the current situation of Tata Steel – the company is struggling with weak demand and higher material costs and reported a consolidated net loss of Rs.6.03 billion for the third quarter ending December 31, 2011, against a net profit of Rs.10.03 billion during the same period a year earlier.

Critics forward the proposition that had Tata Steel not acquired the Anglo-Dutch giant, it could have been more resilient in the current economic scenario. While that may well be putting it too plainly, the fact is that the acquisition of Corus brought with itself a debt burden of $6.17 billion on Tata Steel’s balance sheet. The company’s total debt liability has only moved upwards since then and today stands at a whopping $9.52 billion (as on December 31, 2011), up from $8.79 billion at the end of March 2011. While the company maintains that the Q3 losses have surfaced due to the exercise of writing down the value of inventories of raw materials and finished goods at some of its subsidiaries, particularly at Tata Steel Europe, to recognise the fall in market price of these products (the write-down for Q3 FY2012 amounts to Rs.7.41 billion or around $143 million), there is more. Steel prices in Europe have risen by approximately 7% during 2012, while prices of coking coal have declined by over 20% in the past three quarters. Imagine what would have happened had the conditions been the other way round. In fact, Tata steel is not the only company which has suffered due to a wounded Europe.

The world’s largest steel producer, Luxemburg based ArcelorMittal, has also reported a fourth-quarter net loss of $1 billion against a loss of $780 million during the same quarter last year. With European Union’s projection for the economy to contract at a rate of 0.3% for calender year 2012, the chances for steel demand to pick up in the region remains bleak, at least in the near future. To add to the woes, the World Steel Association has projected Europe’s steel demand growth for the year 2012 to be a meagre 5.4% compared to 15.1% growth in the year 2010.

Apart from operational issues, Tata Steel Europe is also facing regulatory challenges. It has got the mandate to lower its carbon emissions by 2013 to meet standards set by the European Commission.

 
The demand situation is similar back home too. Currently, India is producing 65 million metric tonnes of steel every year, which forecasts anticipate would double to 125 million metric tonnes by 2015 and 225 million metric tonnes by 2020. Also the hopes are high towards significantly increasing our GDP so that India has a per capita consumption of steel of around 96 kg per capita by 2015 and 130 kg per capita by 2020. Due to our huge population and a servile infrastructure in rural India, our per capita consumption of steel currently is 48 kg, whereas the global average is 180 kg. But then here too, Tata Steel has showcased mixed emotions (India accounts for just a quarter of Tata Steel’s global capacity). While sales at its Indian operations rose 13.3% to Rs.83.82 billion during Q3 FY2012 (from Rs.73.97 billion in Q3 FY 2011), profit after tax witnessed a 6.1% decline, down from Rs.15.13 billion in Q3 FY2011 to Rs.14.21 billion in the third quarter of FY2012.

And this despite the fact that at $81 per tonne slab cost, India is the lowest cost steel producer in the world (compared to $100 in North America; even China, at $87, is costlier; World Steel Dynamics report), and Tata Steel, one of the lowest – if not already ‘the’ lowest – cost steel producers in the world. And they’ve managed this not only by successfully killing legacy plants and machinery (and moving on to the most efficient ones by investing billions), but also by securing sources of coal and iron ore overseas, to achieve partial raw material security in the coming years.

Tata Steel’s peers on the Indian soil, SAIL and Jindal Steel and Power Ltd. (JSPL) are also taking hits. While SAIL’s profit from Indian operations are down 43%, from Rs.11.07 billion in Q3 FY2011 to Rs.6.32 billion in Q3 FY 2012, JSPL has reported a 56% y-o-y decline in its net profit during Q3 FY2012. Worse, the projections made by World Steel Association also do not give any reason to cheer, which predicts steel consumption in India will grow at a disappointing 4.3% for 2012. At a global level, one cannot deny the fact that Tata Steel Europe’s operations will have to continue competing in the high-cost market where demand is likely to remain stagnant in the near future. That’s a big concern for a firm which operates two-thirds of its global capacity (about 28 million tonnes) in Europe. This could seriously affect its ability to service its debt.

Bhavesh Chauhan, Analyst, Angel Broking, comments to B&E, “Despite all the distressed numbers, I am very much confident about the Indian operations of the company as the demand of steel cannot stay down and beaten for long in a growing economy like India.” Moreover, interest rates are also expected to start their journey downwards in the coming months which in turn is likely to boost the demand for capital goods, clearly a good indication for the company in general and the industry in particular. If the prices of raw materials continue to fall – which has started happening now – it will be an added bonus for all concerned. With respect to its European operations, Chauhan adds, “Even for the next 1-2 years, I don’t see any recovery in European operations. At best, the expectations for Tata Steel Europe is to achieve stability after this write down”.

          

Share |
 
Go to Page Number - 1   2        Next
 


      
Comments   
   
      
Leave your first comment

   


     Leave Comments to this story    
     
Name:  
Comments:  
Email id:  
City:  
 
 
Busines & Economy is also associated with :
©Copyright 2008, Planman Media Pvt. Ltd. An Arindam Chaudhuri Initiative. With Intellectual Support from IIPM & Malay Chaudhuri.