Steel realisation to improve, additional royalty burden will be largely solved in Q3: Tata Steel

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We are expecting demand in India to continue picking up as the recovery from the pandemic picks up speed. We expect construction activity to keep increasing post monsoon and the auto industry to pick up as the semiconductor shortage eases. I think in multiple ways we are positive that the next few quarters will be strong from a demand point of view.

From a margin point of view, yes, there will be some pressure because you will see the impact of rising coking coal prices as it flows to other costs. I know prices dropping helps us from a royalty point of view because we pay royalty based on the market price of iron ore. In overall margins, we'll see some shrinkage but not significant.

The way I see it, our forecast for Q3 and Q4 is flattish on a consolidated basis, flattish EBITDA because some geographies will be slightly better and some geographies slightly worse overall.

Volumes will be better in Europe in Q3 than in Q2, India Q3 volumes will be similar to Q2. So, overall we expect the Q3 performance to be similar to Q2. If you just look at the standalone business, it is actually about 40 percent EBITDA margin and can get much better. We can compare if it drops a few points here and there.

I think where the market has been a bit disappointed is, when you look at the consolidated margin of the India business, we had a 1,100 crore hit because of the royalty outflow. This was more than we had budgeted for because the MMDR Act changed and even in legal entity subsidiaries that we own 100 percent or we have majority ownership, there is a royalty payment required now higher than what we had budgeted. So, that hit us a bit in Q2 but not because of fundamental price factors. The price guided was Rs 3,000 and we had better realisations of Rs 3,500. Bhushan realisations were slightly lower because we had extra slabs sold from Tata Steel Bhushan to Tata Steel Kalinganagar.

A big part of the royalty is because of Tata Steel BSL, which is now getting merged with Tata Steel. So, I think 70 percent of the problem goes away. The balance 30 percent of the problem is with Tata Metaliks, which takes iron ore from Tata Steel and Tata Steel Long Products. Now, Tata Steel Long Products, we actually have our own mines, and we are looking to see how we can get more volumes there so that there is no differential royalty on sale. We are working on the best way to optimise this.

The structural changes in global steel prices are here to stay. One is, of course, governments across the world, including India, spending on infrastructure. The spend has just started trickling in, even in India. The infrastructure spend is going to keep increasing.

The world’s steel consumption is growing at 49 percent, largely because of geographies like India, and also the US and places like that. Even Europe is 14-15% higher than last year. So, I think the developed world and developing countries other than China are going to lead this.

Secondly, the cost structures have changed and will stay on a higher level. Coking coal prices are still higher than what steel prices were three years back. So, input costs are high. A lot of consumables that the steel industry buys out of China are going up in terms of prices as China cuts production in those areas.

China is no longer exporting as aggressively as it used to a few years back. So, overall, I think there will be a lot more discipline in steel markets globally. There will be fewer disruptions. There will be volatility — that's the nature of the industry — but at a higher level. What we have guided on steel prices is that India realisations in Q3 will be about Rs 2,500 per tonne higher than in Q2 and Europe realisations will be about 30-40 pounds per tonne higher than in Q2.

So, what's happening is there is already a carbon cost of operations there in Europe. The carbon cost today is going from about 10-15 pounds a tonne to about 65 pounds per tonne. So, already that is going up and is expected to go to 100 pounds by the end of the decade. There is already an incentive to look for greener options, because otherwise you will pay this higher cost.

The second thing is to support the industry and make sure this additional cost in Europe doesn’t work to its disadvantage. The European Union has proposed a carbon border adjustment mechanism so that imports of steel into Europe will also pay the carbon tax. European plants and our own Netherlands plant are one of the most carbon-efficient plants in the world. So, the policy is being framed and shaped in a manner that is not unfair to the local industry.

Third, there is hydrogen infrastructure being built; there’s gas infrastructure being built. So, steel plants that want to substitute coal with gas and hydrogen like us have the infrastructure built by the government and there is the promise of gas and hydrogen supply at reasonable prices. All this is coming in place and hence both in the UK and the Netherlands we are making plans in discussion with the government to transition to a greener future with support from the government. Also customers are willing to pay a higher price for greener steel. So, it will be shared between the government and the customer and we should be able to manage that. The cost is typically about $100-150 per tonne.

The cost will be borne by the industry, government and customers together. European steel prices, because of this reason, will be higher than the world. Technology will also scale up and the $100-150 cost per tonne will come down over time. This is a transition over 10 years, with goals set for 2030.

In India, currently, policies are not creating … the right incentives to transition faster. I expect now that the government has made an announcement about 2030 goals and 2070 goals, the policy will evolve.

When hydrogen is available, you can substitute gas with hydrogen, but we are many years away from there.

I think it's very important to understand what we learned in Europe. People want to decarbonise without killing the industry. In India, the way I see it today, the only way to improve your carbon footprint is to use more scrap. You don't have hydrogen, you don't have enough gas, so you have to use coal. If you use scrap in your steel production, your carbon footprint can go down. It’s in this context that Tata Steel has set up a recycling facility in Rohtak. We will be setting up more recycling facilities in the Northwest and in southern India. So, that's in some sense, our strategic move in anticipation of the changes that will come.

In India, it’s a two-stage process. First and foremost, we are looking to see if we can have gas available in eastern India, where most of our facilities are. If it is available at an economical price and with assured supply, then we can look at creating future capacities using gas. And eventually, when hydrogen is available, you can substitute gas with hydrogen, but we are many years away from there. So, we will try our transition in India keeping pace with the policy that can support this change.

In the last six months, we have reduced it by Rs 11,000 crore. By the end of the year our Net debt/EBITDA will be less than 1.