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| Edited By: Praveena Sharma |Source: DNA |Updated: Jul 16, 2018, 07:07 AM IST
Tata Steel has been in the midst consolidating its businesses across continents. T V Narendran, global CEO and managing director of the steel major, tells Praveena Sharma that after clinching the bankrupt Bhushan Steel acquisition under the Insolvency and Bankruptcy Code (IBC) and inking a pact with ThyssenKrupp in Europe, the company is all set to gain from the revival in steel demand.
This is not the ambition. At 22 million tonne per annum (mtpa), we have good enough steel for the (European) market, which is not growing so much. The European market is growing at 1-1.5% a year. We just want to have significant relevant size. As of now, the intention is to make the (ThyssenKrupp-Tata Steel) joint venture (JV) work, and make it profitable and sustainable. This market is not a growth market where you build capacity. It is a market where you will try to look at ways to make yourself structurally stronger so that you can be one of the last men standing.
Both ThyssenKrupp and Tata Steel have taken many actions over the last few years to optimise our footprint. Our European footprint was 18 mtpa when we acquired Corus. Today, it is down to 10 mtpa. That is a footprint that is more sustainable. We have seven mtpa capacity in the Netherlands and three mtpa in the UK. Both of us have taken actions over the last three years to prune capacity and come down to a footprint that we think is sustainable in the long run.
The action was taken by US President Donald Trump to protect the industry in the US. What has happened is the steel prices in the US have gone up because a lot of steel being imported earlier is now being produced in US. We sell a fair amount of steel from Europe to the US. The customers there have to pay us higher prices to cover the cost of tariff (hike by Trump) because they don't have too many local options. If you look at output prices, globally it is $600 per tonne while in the US it is in the range of $900-1,000 per tonne. What it has done, in effect, is increase steel prices in the US. And many countries selling into the US are happy to sell at those prices, which are much higher than the other markets. What we are more concerned about is whether any material (steel) headed for the US is likely to be diverted. For that, European Union (EU) has had a discussion (with the US). They will obviously take some measures to protect the domestic industry. We are also watchful of how much is China exporting. It is still 500-600 Mt per month, which is a reasonable amount. A level where we were in 2014-15. If it stays at that level, then the global trade balance of steel will be under control.
Steel prices have been moving up relative to the prices we saw two years back. But if you look at the long term average, steel prices are hovering at $600 per tonne. This is not an unusual price. It looks like it has gone up because you are comparing it to 2015, which was the lowest ever in 15 years. To me, that's not the appropriate reference point. The second point is, in India steel prices look like they have gone up more because the rupee is weaker than it was in the past. When the steel price was at an average of $600 per tonne in 2013-14, the rupee was around 53 or somewhere there. In rupee terms, steel prices today seem high largely because of a weaker rupee than because of an extraordinary hike. Going forward, I expect steel prices to stay in this band of $550-600 per tonne because the trade flows are more balanced. Besides, cost pressures are always there. Coking coal prices are very volatile. I don't think steel prices are going to drop very significantly. Also, most Chinese steel plants have had to incur a significant cost to keep up with the environment regulations in China. The kind of investments Chinese steel companies have had to make to stay within the environmental compliance level has escalated their costs.
In terms of prices, we follow the domestic market and what is happening to the international prices. The demand side is quite strong. The automotive and infrastructure sectors are doing very well. The rural markets are doing quite well as well. It's high time the demand growth of steel in India caught up with the GDP growth because in most developing countries steel demand growth rate is higher than GDP growth rate. For now, I expect steel prices to be stable.
Right now, our capacity is 11 mtpa in Jamshedpur, eight mtpa in Kalinganaga and five mtpa for Bhushan Steel plant. If Bhushan Power comes our way, that's another three mtpa. That would be a total capacity of 27 mtpa. Just now, Kalinganagar is operating at three mtpa capacity, Jamshedpur at 10 mtpa and Bhushan Steel at 3-3.5 mtpa. So, we are at 16.5-17 mtpa production level. As we ramp up our capacity utilisation at Kalinganagar, Jamshedpur and Bhushan Steel plant and get Bhushan Power it will go up to 27 mtpa.
The supply side has been growing. In fact, India is exporting a bit less. It has become a net importer. Import and exports are pretty much balanced at 4-5 lakh tonne a month, with imports slightly higher than exports. The demand growth is at 7-8% and the supply is also growing at a similar rate.
We've had some of the most profitable steel companies in India. This is a cyclical industry. So, in this industry you should always be strong to survive the down cycle. In the upscale, everyone looks good, but in the down cycle, you can survive only if you are competitive. The year 2015 was a particularly bad down cycle when steel prices dropped to 2002-03 levels. Overnight, prices dropped to a 15-year low. Costs were at a very different level while many players had a highly leveraged balance-sheet. They did not have the cash-flows to support that. Some of them lost their mines because of the changes in the regulation and Supreme Court judgement. They were competing with China as it was exporting more to due to a slowdown in its domestic market. It was a death blow to many of them. Hence, you saw a lot of them coming under Insolvency and Bankruptcy Code (IBC). Going forward, promoters and investors will be prudent in terms of building capacity because they will look at whether they can survive a down cycle. Bankers will also be more prudent in lending and be careful about getting overexposed. I don't believe that we will see 2013-2015 days in a hurry because those were very unique set of circumstances which came together. It was a perfect storm in the wrong sense and the industry struggled. We will have a stronger industry now, and hopefully a wiser industry. Globally, most steel-consuming industries have come back to normal. Two-three years back, five to six major regions in the world were shrinking in terms of steel consumption – US, Russia, China, the Middle East and Europe. We are out of all that. We are seeing that steel sector around the world is in much better shape than it has been. In India too, with a focus on infrastructure, we expect the steel demand to go faster than steel supply in the medium to long term.
We have discussed with the government – and they are receptive to it – that India needs to look at the cost of doing business to be competitive. In a capital intensive industry, it is a handicap because the cost of money is high in India. So, you start with a handicap and then on top of that the logistic costs in India are higher compared with other countries. The focus on infrastructure will bring down the logistic costs while driving up steel demand at the same time. GST implementation is also a step in bringing down the logistic cost. In terms of time taken to deliver and the bottleneck reduced, Tata Steel does a lot of mining. We have seen that the effective tax rate on mining has been creeping up because of various funds, taxes, cesses and royalties. The effective tax rate is closer to 60%-65% in India. It is a disincentive to invest in mining. India is so rich in minerals but is losing out on opportunity in mining. That doesn't mean we should condone illegal mining. A lot of people have corrected themselves and we need to build a sustainable mining industry and have a more reasonable effective tax rate for mining. People like us (steelmakers) can only take care of competiveness inside the factory gate what happens outside the factory is more for the government to take care of.
