In an interview to CNBC-TV18, TV Narendran, MD of Tata Steel spoke at length about steel demand and the latest happenings in the company from the sidelines of Centrum Conference.
He said that steel demand is growing at 4-5 percent and not yet at 6-7 percent which it should be and it could be because steel demand mirrors the gross domestic product (GDP) growth rate.
Below is the verbatim transcript of the interview.
Q: First things first on demand. There is talk that in fact demand is very strong. Do you see it head up towards 6-7 percent? Can steel demand be the lead indicator?
A: Steel demand is still growing at 4-5 percent, not yet at 6-7 percent which it should be and it could be because typically the steel demand mirrors the gross domestic product (GDP) growth rate, but it is still a bit slower than we would like it to be. Auto is doing well, auto is growing. Construction is not yet doing so great. Construction typically accounts for 60 percent of the demand. We are seeing electrical transmission, road building, etc. positive. So, all sectors are not moving in the same direction at the same pace. Once construction picks up a bit more, we should see the demand growing to 6-7 percent.
Q: You have just done that Kalinganagar expansion. That is off the blocks now. We are going to be seeing the fruits of that. That was a three million tonne plant. It was set up at around Rs 20,000-25,000 crore or thereabouts. When is the next phase likely to kick in and if you could give us a ballpark, what kind of a number are we looking at in terms of capex?
A: I would say that in the next 2-3 months we will be finalising the plans, we will going to board, we will be getting the necessary approvals. Kalinganagar phase one was three million. We are looking at five million for phase two because that seems to be the optimal size for the next phase of growth. What it will cost? It will cost less than phase one. I would not tell you exact numbers. We will do that later, but it will certainly cost us less than phase one because in phase one we had to spend a lot of money to build an enabling infrastructure. In phase two, you are building on what has already been built. So to that extent, the capex per million tonnes will be much less.
Q: So phase one was around Rs 22,000-25,000 crore. In that range, right?
A: Yes.
Q: The other big question and all our viewers want to know this and Latha has been tracking this as well very closely. What is happening in terms of expansion, an inorganic growth, if I may say that? Will you look at the east? By that I mean, will Bhushan Steel be a strategic fit for Tata Steel or will we look at moving to the west and will Essar Steel, once both these two assets are up for grabs, will Tata Steel look at either of these assets?
A: All I can say is we look at all opportunities; east or west does not matter. If the opportunity is good we will certainly look at it because not only do we sell steel in the east, we sell steel in the west as well. So from that point of view, we would look at any opportunity which comes our way. We will also evaluate those opportunities vis-à-vis the organic growth opportunities we have because at the end of the day, there is only that much we would like to spend per million tonnes of steel capacity that we get. So all these factors would come into play and then we will take a call as and when the time is right.
Q: What about funding? We are talking about organic growth; we are talking about inorganic growth. The debt pile, it has been more or less constant at around that Rs 75,000-80,000 crore or thereabouts. What are we looking at in terms of funding? Could we look at tapping the equity markets? Will it be debt? What would be that mix?
A: We will take that call at the right time because even if we go ahead with Kalinganagar, it is not that we need the money just now because we would need money slightly later and obviously since Kalinganagar is already producing and selling more than 200,000 tonnes a month and it is generating cash flows because for most of the last five years we were spending money rather than earning money.
So from a free cash flow point of view, we are certainly better-off today than we were last year or year before that. The India business is generating enough cash to take care of its own growth requirements. And so, certainly the debt situation should get better as we go along, but depending on the opportunities, we will decide what the best way to finance it is.
Q: I also want to talk about global steel prices. What a superb rally we have seen in the last couple of months and steel prices are at multi year highs. Is this sustainable and also give us a sense about domestic pricing. Post the monsoons; is there enough headroom for us to take some price increases?
A: If you look at international prices, while it has gone up in the last six weeks or so, but even today, it is lower than the average of the last 10-15 years. Typically, if you look at hot rolled coil prices, for most of the time, till two years back, it was USD 600 plus. So it went down to about USD 400 or USD 375 and even lower than that and that set the tone for our expectations for the last couple of years. But now, it is going back to levels where it should be because if you look at coking coal prices at USD 200 and above and if you look at iron ore prices at USD 75-80 and historically if you look at steel prices when coking coal and iron ore prices were at these levels, hot rolled coil prices were in the region of USD 600 and higher. So, international prices, at today's level of raw material prices, there is actually room to go up further.
What has also happened is China is growing faster than we had thought. So the Chinese steel consumption has actually grown by 10 percent in the last seven months from January to July whereas the production has only grown 5 percent. So as a consequence, China which used to export almost 10 million tonnes a month, is today exporting 5-6 million tonnes a month. And that 40-50 million tonnes coming out of the global markets has shifted the balance a bit and that is why the international prices are going up.
As long as China continues down this path and they acting more than we thought on polluting capacities and they have closed down a fair amount of capacities, so the world's steel industry trade flows is coming to a balance that we had seen before 2013 and so steel prices should also trend towards what it was before 2013.
Q: We had the implementation of goods and services tax (GST) just a couple of months back. How has the transition been? Is demand back to the pre-GST levels? Is there something to gain for those listed players, the Tata Steels, the JSW Steels and the likes post the implementation of GST?
A: GST has helped us or will help us drive greater efficiencies in the supply chain, particularly big players like us and JSW and anyone else who is selling all over the country. Traditionally we have had to set up billing points in different states because of taxation issues. But now, GST allows us to supply from wherever is optimal to supply. So we can drive greater efficiencies in the supply chain. The time taken to reach customers also becomes faster. We can reach material to our customers faster.
I think with demonetisation, GST the formal economy is growing; the informal economy is getting squeezed a bit which is also good for organised players like ourselves. So overall, we are positive about GST and look forward to better days ahead.
Just now, this is seasonally a weak period for steel industry, July to October is when it is monsoon time and construction activity is low, but the full positive impact will be felt after September.
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