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Trade war impacting Tata Steel in Europe but not in India
2019-06-17

Jun. 17, 2019 - In an interview, Mr TV Narendran, CEO & MD, Tata Steel shared his thought on how the trade war will affect Tata Steel, with excerpts as follows:


Domestic steel demand is expected to stay strong but this is mainly due to government’s infra spends because capex commitment from the private sector is certainly sluggish. Would that really worry you? 


The government infrastructure spend is important in multiple ways. 60% of steel is consumed by the construction industry and about 25% to 30% of the steel consumption in construction comes from infra spend. When the government spends on infrastructure, it stimulates construction activity. 


The spend on infrastructure also works well for the auto industry because a lot of automobiles are used -- whether it is heavy vehicles, commercial vehicles, material handling equipments and so on. It also stimulates the auto industry which consumes another 10-15% of the steel in the country. 


The second part is it leads to greater efficiencies and lower costs, which hopefully helps the profitability of the private sector and for the private sector investments to come back, not only do we need demand, we also need profitable private sector companies because profitability gives you surplus funds to invest. In today’s scenario, when the cost of capital is quite high and liquidity is a bit tight, lenders are careful about who they lend to. 


It is important for companies to have strong balance sheets and good profitability so that they have surplus cash flows and funds available to invest. In many ways, these are interdependent. I do not think one can act without the other. The starting point would be the government spending and private sector investments will surely follow. 


India has traditionally been a consumption led economy and that is reflected in the fact that the steel consumption is traditionally grown below the GDP growth rate. In most developing countries, steel consumption is 1.2-1.3 times the GDP growth rate. Because India has largely been consumption led, over the last few years, we have started becoming more investment led both from the government side and hopefully that will lead to private investments coming into the system and that will help us. So that adjustment is being made. There will be a recalibration of the economy as we become more investment led growth which I think is good for a developing country as long as we keep the fiscal deficit under control. 


How worried would you be about the trade war and its impact on India? We have already seen imported steel making a comeback here. What is your sense now going forward?


There are multiple nuances to it. The trade actions of Trump impacts Tata Steel in Europe because from Europe, we sell about a million tonnes of steel into the US. But it does not impact Tata Steel much in India. The steel industry in India is impacted because of the divergence of material which should have otherwise gone to the US, into markets where India could have been exporting. So, sometimes, there is an indirect impact of trade actions rather than direct impact. Countries like South Korea, Turkey who have traditionally sold a lot into the US are looking for alternate markets and that could be in South East Asia, Europe or India.


As it is, the biggest exporters into India are South Korea and Japan with whom we have FTAs. There are concerns there about the flow of material into India and 90% of the steel which comes into India are very ordinary grade. They are commercial grades and not really the high-end grades which everyone talks about. There is a concern that we will be impacted directly or indirectly by the US actions. 


But as a country, as an economy there are also opportunities. There is a concern about trade flows. India as a large consuming market is better positioned than other countries who depend on exports. Of course, we need to export more. As a country, it is good for us to export more but fundamentally we have a large growing domestic market and we should play that card well, leverage that well to attract more investments into India rather than imports into India and create a globally competitive industry across sectors in India. That is a possibility. 

India is very open as far as FDI is concerned. Even if you look at steel and mining, you can have 100% FDI. Not every country in the world allows that and that should encourage investments in India, create a competitive industry just like the auto industry has been created over the last 20-30 years in India and then build a scale in India. The domestic market allows you to build scale here and export globally when things have mellowed down much more than it is today. 

Would you also be worried about the surge in iron ore prices being witnessed both domestically and globally? Also the fact that it is not being accompanied by simultaneous rise in steel prices? 


There has been a squeeze of spreads over the last few months because gold prices have stayed in the $200 range and iron ore prices have crossed $100 after a long time. So, the spreads have got squeezed. That is why the steel prices did not go up immediately when the iron ore prices went up but we have reached the stage where the costs are certainly putting pressure on the steel producers. It certainly hurts us more in Europe, in India we have our own iron ore mining but even in India we have been buying from the market because we consume more than we produce. So it does impact Tata Steel but it also acts as a push back for steel prices which have been a bit soft over the last couple of months. 

We have reached levels where steel producers will not be able to manage any more softness in steel prices and will look forward to pushing up prices because the raw material costs have been staying at a pretty high level. That concern may be slightly less for Tata Steel given that we are fully integrated but it does impact us as in Europe and in Bhushan Stee for instance, where we buy a lot of iron ore. 

Do you believe that the rise in iron ore prices will compress Chinese steel margins and cause some mills to go out of operations? 


The demand in China has been more robust than we had imagined. If we look at the last four months, both the demand and production in China have been in the 9% to 10% range which is very surprising for country which consumes more than 900 million tonnes of steel or about 900 million tonnes of steel so it has been much better than we had imagined. 

Obviously, a lot of actions are being taken in China domestically to counter the impact of the trade actions by the Trump administration and that is probably getting reflected in greater consumption that we had anticipated. We normally look for how much steel China is exporting. Despite their production going up 10%, because their consumption has also gone up by about 10%, the exports stayed stable at around 5 million tonnes a month which to me is a level the world can live with because even before 2015, China was exporting about 4 to 5 million tonnes a month. 

The problems happened in 2015 when they exports doubled to 10 million tonnes a month. We still have that 5 million level. The minute it crosses 5 and goes to 6 million tonne, the world should certainly get concerned that it could happen if China slows down more than it has today.


I hope some of the issues between the US and China would get sorted out in the next few months and the sentiment turn with more positive. A larger concern in Southeast Asia was export from Turkey. But the US is reducing port duties for steel from Turkey from 50% to 25% and so we expect some of the steel from Turkey will flow back to the US. We are basically looking at Turkey, we are looking at the CIS countries and of course Korea, Japan and China because these are the five big exporting countries and Southeast Asia is a region where everyone tries to sell steel into and of course India is a attractive market as well. 

For Tata Steel, the India target is about 30 million ton by 2025. What are you doing with that mix of organic and inorganic routes? 


All the investments that we talked about have already been done or are ongoing, I do not think we are going to do anything major beyond what we have announced, at least for the next three, four years. 

Basically, last year, we completed the Bhushan acquisition towards the end of last year and in the early part of this financial year, we completed the Usha Martin acquisition and we are midway through the Kalinganagar expansion. 

With all these, with Bhushan Steel integration, Usha Martin integration and the Kalinganagar expansionm we will be at around 24-25 million tons over the next three, four years. Thereafter we will see how the market is, how our balance sheet is and decide between 2022 and 2025 what is it that we need to do. 

Are there any inorganic opportunities particularly in long products which are typically smaller and easier to digest, which are coming our way and which we would be interested in? We are well positioned in flat products with three major sites in Jamshedpur, Kalinganagar and Angul which is a Bhushan facility. We have enough flat product capacity and we have the opportunity to build more flat product capacities in the existing sites. Long products is where we would like to get more capacities. Whether we do it through Brownfield expansion in Jamshedpur or through inorganic opportunities, that we may pursue beyond Usha Martin, we will take a call in the next couple of years, once we have settled down with the existing investments. 

We also have an opportunity to expand Bhushan Steel in Angul beyond the five million tons which is the rated capacity and we will explore all those possibilities. I think the good thing for Tata Steel is we have multiple options -- greenfield and brownfield. Actually, not so much greenfield but brownfield. We will exercise those options when we get there. 

In terms of numbers, as you know, we spent about Rs 35,000 crore acquiring Bhushan Steel. Usha Martin was in the Rs 4,000-4,500-crore range and the Kalinganagar expansion which includes the state of the art cold rolling mill is about Rs 23,000 crore which is an ongoing project. 

What is the plan about European business?A big fear is the ability of these assets to stay self sufficient and self sustaining with no recourse to the Indian operations, with the resumption a new blast furnace and the upgradation will operations be sustainably profitable?


A number of things have happened in Europe over the last 10 years, when we acquired Corus. It was a 18 million-ton production unit, of which 11 million tons was in the UK and seven million tons was in Netherlands. 

The Dutch business has always been self sustaining and profitable and could take care of its own needs. We have had challenges in the UK over the last 10-12 years and a lot of the issues in terms of the bleed or in terms of the cash calls were related more to the UK business than to the Netherlands business. 

The UK business over the last 10 years has shrunk from 11 million tons to three million tons because there two other sites -- Scunthorpe and Teesside and a number of smaller assets -- we have sold over the last 10 years. We have also slowly invested in Port Talbot which is currently our main site in the UK to make sure that we bring back some of the efficiencies that are required typically in a steel plant because if you are under-invested in a steel plant, despite your best efforts you can bleed because you do not have the right energy balance, you do not have the right facilities, you are buying coke, you are buying pellets, you are buying all sorts of inputs which are more expensive than what other steel plants buy. 

So there are a number of problems to solve in the UK and part of it was the portfolio. We have addressed the portfolio issues, the pension fund issues, these were two issues which used to create problems for us over the last 10 years. So we are today in a situation where the European footprint has shrunk to 10 million tons from 18 million tons and in that 10 million tons, the UK business is only three million tons. 

Structurally we are in a much better place in Tata Steel Europe and we have made investments in the Dutch business to keep improving the product mix. The Netherlands business is seen as a very serious player in the automotive space, which we were not 10 years back. 

In some sense, it worked against us with the competition commission this time when we were working with them for the merger with Thyssen. But having said that, we are seen as a strong player in the automotive space in Europe from Netherlands, in the UK as well we have invested in some state of the art galvanising lines and finishing facilities and we have invested in improving the efficiencies. So we are in a much better place than we were not only 10 years back than we were even three years back or four years back and the UK business was losing a lot of money. So that is one part of the journey which will help us going forward so we are much closer to running a cash positive business than we were earlier and while the joint venture would have certainly helped further in deleveraging because some of the debt would have moved from our balance sheet to the JV balance sheet but in terms of the bleed that we used to suffer in the past even as we stand the European business is in a much better shape. So that is what gives us the confidence, I am not saying the work is done yet, there is a lot more work to do, it does not help that the markets have softened a bit but we believe that structurally we are in a much better position than we were earlier. 

While on one side you have committed deleveraging on the other you also have incremental capex. How do you intend to balance both of these? 

As far as deleveraging is concerned, we had announced that we have a target of deleveraging $1 billion this year in addition to whatever happens because of the JV. We stand by that $1 billion guidance that we have given because that is something we are committed to and I know the market conditions have turned more challenging ever since we made that announcement. But I do not think we are giving up on that number as yet because I think there are many things that we can do. 

So in terms of portfolio choices, the JV was the biggest one but it did not work in our favour. Hence we focussed on the operational improvements that was anyway happening and we will continue to do that. Just now, the focus is going to be more from the efficiency angle we will continue to drive that both in India and overseas. It will come from further improvement in performance in Bhushan Steel, integration of Usha Martin and other efficiencies that we will drive both in Europe and in India. That was the original $1 billion target that we had set ourselves and we will continue to drive that. 
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