Koushik Chatterjee, Group CFO, Tata Steel believes the pace of recovery in the metals and mining space seems to be slower than expected as China's slow growth has been hampering demand globally. Therefore, he says, Chinese demand and supply dynamics must be monitored closely.
CNBC-TV18’s guest editor Abhay Laijawala, MD and Head of Research, Deutsche Equities is quite bullish on the outlook for the metals and mining sector, painting a blue sky scenario for the leading companies.
For Tata Steel, the problem has been on the supply side rather than on the demand side. Chatterjee told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy that the company expects sell more to domestic automotive sector, which has been showing early signs of revival.
Tata Steel’s current operations are not affected by Supreme Court’s recent order on coal blocks, says Chatterjee. However, higher iron ore royalties will hit company’s margins slightly.
In addition, he also states concerns over blanket coal block deallocation hitting Indian economy.
Below is verbatim transcript of Koushik Chatterjee’s interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy and their guest editor Abhay Laijawala:
Q: What is the international steel scenario itself? Are you getting a sense that you are going to be bedevilled with lower steel prices for a goodish bit that might put a lid on realisations?
A: A recovery trend is happening both in developed countries and in the emerging markets. The pace of that trend is rather slow and it is rather fragile because of the simple fact that the underlying economic conditions are still very volatile be it in the Europe, UK, US and emerging markets like Russia or India.
So, there is a trend which is on the improved curve but the underlying strength of the domestic demand and steel doesn’t travel so much other than Chinese steel. So, the issue is the resilience of this domestic demand and the way in which the demand will improve over the next four-five quarters or over next two years is important to see.
The other very important aspect, which is influencing the performance of the entire metals and mining space on the ferrous side is how China plays up not only on the demand side but also on the supply side. China is undergoing a kind of transformation in terms of the supply side restrictions especially in the context of the environment issues that has really come to the top of the table. If it continues to look at rationalising capacity then it will certainly have come to a state of net addition being perhaps neutral where there are additions coming in but there are closures also happening or closures being indicated.
Some provinces like Hebi, etc are making or been made to make significant supply side corrections.
The raw material situation is also very critical from a Chinese point of view because moderate China will have a different impact on raw materials like iron ore. Chinese own iron ore has an issue because at a certain price it will become unviable and the environment regulations will put restrictions on usage of inferior iron ore in Chinese mills. So, there will be more need for pallets for example.
So, all of that will have some impact in the spread between steel prices and raw materials. So, if you really look at it there is obviously a lag effect between the steel prices and the raw material prices. However, that has kind of stabilised at a certain level. Both are at fairly moderate, absolute levels and therefore it would depend on the demand triggers rather than anything else at this point of time.
Q: If we were to shift gears from what is happening internationally to what is happening on the ground here in India, Tata Steel has got market leadership in the automotive steel market. How are you seeing the situation evolve over there because now as we all understand the entire expansion at Jamshedpur is up and running so while we were witnessing the transition, we had seen value addition get impacted because the CR and the HR had not yet been fully streamlined. So, what is the situation over the next couple of months particularly with the return of automobile sector demand?
A: As far as Tata Steel is concerned, we have more been impacted by supply side constraints than demand side constraints. I think the company has proven over the down cycle of the last three years that the demand side issues are much less because of the fact that our marketing and sales functions and our production and operating systems are very well aligned and work much ahead of time in terms of understanding market needs and customer needs.
So, even though we have had a higher HR production because of the fact that our 3 million tonne expansion was primarily in HR. However, if you look at the naked HR sales are not that high because we have several downstream opportunities where we have maximised. From an automotive point of view we have shown that we could sell more to the automotive sector even though the sector itself had muted growth, in fact a de-growth last year.
So, I think we would look at increasing our volumes as we move forward every year. For the last three years we have been kind of increasing by about 800-1000 tonne to a million tonne and this year is also a part of the fuller expansion of the 10 million tonne in Jamshedpur or 9.7 million tonne in Jamshedpur. So, I think this is good sign from an automotive recovery because automotive recovery is very important not only for direct auto sales but also for the ancillary sector and we supply them a lot.
So, we look forward to it, we see certainly signs of confidence coming back and we will kind of orient our product mix towards the high value products like in automotive and engineering.
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