Jamshedpur expansion will drive Q2 volumes:Tata Steel CFO

Tata Steel, India's largest private sector steel maker, is strengthening domestic operations to beat the slowdown in Europe where it has operations.

In an interview to CNBC-TV18,  Koushik Chatterjee, the compay's CFO said that Q2 volumes will be driven by the 3 million tonnes per annum capacity expansion at its existing 6.8 mtpa Jamshedpur plant. He however pointed out that FY14 profitability will be much better then the current financial year

He also said that there will be a further volume ramp-up as production at Jamshedpur rises. "We are making a structural shift toward increasing our India capacity,"said Chatterjee who further said that European operations will stabilize gradually.

Giving an outlook on the company's performance in flat products and long products. Chatterjee added that prices for flat products have .

Below is the edited transcript of Chatterjee’s interview with CNBC-TV18.

Q: The markets was quite happy to see the domestic volumes that you reported in October- are things picking up locally, are you ramping up volumes?

A: Tata Steel is commissioning its 3 million tonne expansion plan in Jamshedpur, so we are gradually coming into fuller operations. The blast furnace is running almost at capacity. We will ramp up our steel production as you have seen in the last quarter progressively across the next few quarters. So from our own perspective, given the new capacity that comes in, it will progressively increase as far as production and deliveries are concerned in India.

Q: How are prices holding up in the local market, as this new volume gets absorbed do you see prices holding the current line or do you see them coming off in the last quarter?

A: There are three elements to prices; one is what you sell, so the product mix is important. Secondly, given where the rupee fluctuation settles down, it provides a parity price and thirdly the domestic supply-demand scenario. For example, the flat product prices have softened but not so much, but we have had a premium because of our product mix.

Therefore our amplitude of volatility of prices is much narrower than market outside. In the long products it has been a completely different story, the prices have been not only holding up but they have been quite firm and quite high. That has also got to do with how you sell the product. So, the distribution is very important.

The channels and the manner in which it is sold through the channels are also very important and that is what our colleagues concentrate on. Over the last few years, there is a significant premium over the market in long products. I don’t think many people will have too much of a complaint from where Tata Steel sells or the price at which it sells, we need to see as to how it holds on going forward.

Q: Do you think most of your investors are tracking your Indian ramp up quite closely because your Indian operations per se are far more profitable for you than your European operations at least at this point – do you see India; as your ramp up progresses as you described, India accounting for a significantly higher share of that proportion compared to where it is today in your overall revenue mix?

A: Yes, that has been the structural story for the last few years ever since we have done our European acquisition. In 2007, we were about 4-5 million tonnes and in Europe we were about 20 million, so it was five times the size almost. As of today, we would be about 10 million tonnes capacity utilisation and Europe is about 15 million tonnes.

In about 2-3 years time, we would be setting up the Orissa project another 3 million tonne first phase and another 3 million tonne. It is a structural shift and derisking that is happening given where the market is. But the optionality for European upswing when the market returns will also be significant because we are taking significant amount of restructuring even in products at that asset also.

Q: Are things troughing out in Europe or do you see a couple of quarters a very sticky situation there before some kind of a mild upturn starts kicking in?

A: I would agree to your second proposition because there is no quick fix overnight solution to what is happening in sovereign Europe, it will be a slow climb back. The last two quarters we have seen significant volatility in iron ore and coal prices. For a non-integrated player, a stable iron ore and coal prices are the best thing to happen for steel prices.

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If iron ore and coal especially with shorter period of contracts change very significantly then the steel prices also react irrationally in the shorter-term. Which is what will happened in the last few quarters, especially in September quarter where iron ore spot prices moved down to USD 85 per tonne. Steel prices also changed very sharply on account of that, which brings in a significant cost price squeeze in the profit and loss of non-integrated steel makers,

This will take a little bit of time to even out. As we bring in our own coal and iron ore into our profit and loss account through the investments that we have made, we see few quarters after which it will stabilise much better. In between there would be significant volatility in earnings.

Q: Do you think you can still report EBITDA for European operations in the vicinity of USD 20 or it is difficult to predict, for this year FY13?

A: I wouldn’t guess into numbers, but our focus is certainly to get into that zone and beyond given our internal work that is going on just now. If you are talking about vicinity, I would say Q4 of this year onwards that is the target that we should be hitting for?

Q: Can you assure your investors that you are in probably the last quartile of the painful cycle for the global operations or is it difficult to stick your neck out and make that statement?

A: Yes, if you are talking about global operations largely focused on Europe and in Europe the dependencies are very external and not so much internal. Therefore, I would not be able to specify that, but certainly I would say that in our multiyear journey for restructuring the European operation whether it is on the cost side, fixed storage side, product differentiation, supply chain, IT system and so on, we are certainly much focused on ensuring that we reach our targets.

If the external market does stabilize, then that will only add to the benefits of this restructuring that we are undertaking. I would say that the market would have to play its own part, but the market is dependent on so many other things at this point of time starting from politics to economics. It would be rather hazardous guess to say whether on the timing as far as I am concerned.

Q: I am not talking of only global operations now but global plus local given the ramp up plan, given the work that you are doing on restructuring front, FY14 should be better than FY13?

A: Certainly, for two reasons; one is our capacity in India would be on a significantly higher level than FY13. We would be able to ramp up our 10 million tonnes. As far as Europe is concerned, we would certainly have one and half to two years of restructuring process being realized.

The benefits of that will start hitting out. Finally, the raw material projects which has been in the project stage are all coming into operations and that should give us some benefit from both iron-ore and coal perspective in FY14.

Q: Do you see the raw material situation getting a little less challenging going forward?

A: The raw material long-term prices for iron-ore, the consensus level are at about USD 100 per tonne. The long-term prices for coking coal us about USD 200 per tonne, some people put it between a band of USD 185-210 per tonne, it would be anywhere around that.

The key thing for people who buy, is the stability of price. Even if it is trending up but it is more stable, it helps in prediction, forecasting and in operations. Also it has got a direct linkage to the steel prices because destocking, restocking phenomenon then becomes lot more predictable. Finally, what happens in China has a big effect on the raw material prices globally.

Q: How are you reading China because the data from that is mix, a lot of people are alarmed, some people say it will get better on the margin, how do you see the China card playing out for the global steel market this year or next year?

A: The China is going through a certain level of recalibration as far as growth is concerned, which has implications on the consumption of steel and in return on the consumption of commodities like iron ore and coal. Many people say that Chinese per capita consumption has still miles to go. While on an overall China basis that is true, one has to see China in different parts specially, eastern China and southern China which are much more developed than western China, they need to be looked at differently.

With the new regime coming in, what is the focus of the policy makers in China will become extremely critical. If they were to develop the western part of China or interior China in the same manner that the eastern or the southern China is developed, then it will lead to another infrastructure cycle where the demand for steel will be significant.

In turn the demand for iron ore and coal also be significant. If that happens, then the iron ore and coal prices might go back to where it was because the Chinese converter models also do not make too much of money, the Chinese steel industry as a whole is not very profitable. It struggles with overcapacity and small suboptimal sizes and so on. So, they are also consolidating.

It would be interesting to see how the policy direction goes if the new regime focuses more on growth and more on developments on the areas where it has not developed then you would see significant demand increase as far as steel is concerned which might lead back to again a significant increases in the iron ore and coal.

As of now, most miners have shelved growth plans in iron ore and coal in spite of being flushed with capital. That is an indication that everybody is waiting and wanted to see which way China goes because for a country which is more than 50 percent producer and consumer of steel and similarly consumer of more than half of the global iron ore that is a big determinant, where the prices would settle and the quantities will come from.