Jamshedpur expansion to make Q4 better: Tata Steel

Tata Steel registered nearly 89% fall in consolidated net profit at Rs 597.88 crore in the first quarter of FY13.

In an interview with CNBC-TV18, Koushik Chatterjee, Group CFO of Tata Steel said both Europe and India saw an increase in steel prices in Q1 and domestic operations were supported by higher realisations.
The company is trying to bring down its debt over time and have refinanced USD 1 billion of debt in the current quarter. Moreover, Chatterjee expects Europe to turnaround by FY14-15. He is also hopeful of raw material prices softening ahead.
Going forward, Chatterjee believes steel prices may correct and expansion of the Jamshedpur project will help them clock better results in Q4. Here is the edited transcript of the interview on CNBC-TV18. Q: Steel realizations have been robust this time, perhaps due to the lag benefit of higher contract prices. How do you see the realizations in the months ahead?
A: As far as the steel prices are concerned, it's not only the contract prices, but effectively in India for example, this quarter's steel prices were higher than the comparable periods, both sequentially as well as on a YoY basis.
One of the key areas where we focus on is not only on contract but, on how we sell our products and the premium that we get on our channel value. As far as Europe is concerned, the European steel prices did increase because it follows the lag effect from the raw material prices as well as the earlier contract. So it was expected that in the April to June quarter steel prices will be higher than in the previous quarter.
In Europe for example, steel prices will be a factor of the underlying demand because volume will have an impact on the steel prices as well as on where the raw material prices settle every quarter. So for a period of time in Europe, steel prices were falling faster than the raw material prices and it happens the other way also. But it is important to understand that it is an interplay between the demand situation as well as the raw material prices.
_PAGEBREAK_ Q: Yes of course now it is certainly working to your advantage like the numbers indicate EBITDA per tonne in India improved by about 9% quarter-on-quarter sequentially. Do you see this positive trend sustaining?
A: India EBITDA numbers were higher compared to the previous quarters, but it is not on account of the raw material price lag because it is more on account of the underlying domestic situation. In India we have our own raw materials. As far as iron ore is concerned and partly for coking coal, it has more to do with contracts and the way in which we get premiums better than market
You talked about the cost issues. There were some one off costs which are more specific to the quarter. For example, there were more gratuities provisioning because of the discount rate effect. There was a mark to market on account of raw materials as well as on account of the convertible bonds that we have.
There were also other impacts which came in and there was higher royalty paid on iron ore and coal. All these together contributed almost Rs 300 crore. This could not be there in the futures quarter and some of it also depends on external market conditions for example forex. But, I think on an underlying basis, on an operating basis the margins have been holding. Q: HRC prices off late have softened a bit although, they were largely steady with the rupee depreciation and a lot of the domestic steel makers that we speak to, your peers have indicated the inventory levels have actually gone high. Are you expecting domestic prices to inch lower from current levels?
A: Yes, prices have softened since June and we see some of these effects in the market. We are on contracts and that part of the volume helps. Some parts of the segments like projects are slower and we need from a industry or a country perspective bigger projects to come on line. I think that this softening. Hopefully, that is more temporary than permanent. Q: What about Corus, this time EBITDA per ton is USD 42 and it is pretty impressive but, again we have seen prices correct across Asia, Europe and raw material costs haven't gone down. Does that mean that Corus' margins may have peaked out this quarter?
A: If you really look at it the iron ore prices have softened, the coal prices haven’t softened to the extent iron ore prices have softened because coal is structurally much more constrained than iron ore. Steel prices react on the movement of iron ore prices much faster than one would expect. That is where we have seen some amount of misalignment between the steel prices and iron ore prices.
Going forward, especially in Europe we have summer season at this point of time, we see slowdown in economic activity which in turn impacts the underlying demand and volume which finally results in more subdued steel prices. Q: Are you on track to commission your Jamshedpur facility in Q3 and if you do that, what will it contribute in full year terms to production?
A: As far as Jamshedpur is concerned, some of our facilities have already been commissioned. A few of them have already achieved rated capacity. For example, the blast furnaces are almost at rated capacity and is running very well. We took the opportunity to undertake some plant shutdowns in other furnaces.
As far as the balance facility is concerned, it will progressively get commissioned. The coke ovens is one of the critical facilities to get commissioned later in the year and once that happens, the benefits of fixed cost will certainly come into Jamshedpur for the 3 million ton expansion.
Towards the end of this fiscal year, we should effectively be able to ramp it up to somewhere near the rated capacity and next year we should be moving towards that.
_PAGEBREAK_ Q: If you could give some color on the recent production ramp up at Benga coal and also your domestic coking coal availability post your recent expansion?
A: Benga coal will be used for the initial part after the commissioning coal is exhausted on a sustainability basis. We should be more towards Europe than India, but we will have to do the optimization depending on the kind of coal that comes out and the properties that the coal have. We have to optimize between which facility is better suited for use.
In the first instance Benga coal will be about 1.7 million tonnes of the total capacity. We should get about 40% of the coking coal as part of our off take. As far as Jamshedpur is concerned, as the ramp up happens the percentage coal of the larger capacity will be lower because of capacity constraint. Subsequently, when the blocks that we have had in the past opens up it will rebalance it a little bit more, but it will have a lag effect towards that. Q: Just a question on the financials. This time around the tax rate have been very high, on a consolidated-basis about 60%, the street is expecting domestic operations somewhere around 35%. Do you think that is sustainable or is that a fair assumption, 35% for this year?
A: There is a bit of a fallacy which is difficult to explain because India is where the profitability is highest and the tax rate is about 30-32%. But if you look at the European operations also the consolidated tax rate is perhaps what you are mentioning as 60% because it involves the consolidated earnings of the entire group, which is much lower and the tax is much higher in comparison.
So arithmetically it looks to be at about 60%. Effective tax outgo is still at about 32%. I think there has been some deferred tax impact, broadly effective taxes in India continues to be at 32%. With more capitalization, it will go down. Q: Basically, we have this domestic slowdown, the macro slowdown and there is some problem pushing products through. Product prices have declined and the feeling on the street is that margins have likely peaked both on the Indian operations and in Corus because raw material prices aren't going down much while steel prices are correcting. Do you feel that we have seen the best in terms of margins at least in this quarter and they could decline for the rest of this year in FY13?
A: I have a view that Q4 will be much better because I think that's when both our European production levels on account of rebuilding blast furnace 4 will be more efficient and a newer blast furnace with lower cost structure will come in. Also from an India perspective, it will see the full impact of the expansion in Jamshedpur.
I think that is where my focus is. As I said, in Europe we have summer slowdown in this month and the winter shutdown in December. But, I think we continue to focus on our internal initiatives, which are not market-related, but focused on efficiency cost and operational improvements. In India it is clearly focused on beating the adversity in the market which should help us in sustaining ourselves.