Domestic demand on a strong wicket: Tata Steel

UK continues to be a challenge. We expect EBITDA to be negative, but moving towards a better number, but still negative during this quarter. So, challenges remain in Europe and will get resolved only from Q2 onwards.

Staying on Europe, your commentary talks of the stress test for UK, you're expecting it to be adversely impacted. A letter of support has been extended by the parent company to the UK operations. How will this impact your consolidated EBITDA? Also, what are the factors playing out there, including recession fears.

So, Europe EBITDA numbers are what we have reported. We don't report UK and Netherlands separately. But largely for the year, UK was negative. I mean, UK was negative and Netherlands was positive. That's largely been the story for most of the last 10-12 years. The Dutch business has always been cash flow positive and EBITDA positive. So, the challenge continues. I think, the larger point for us and which is a conversation with the UK government is that the assets as they are in the UK cannot survive for long because they're coming to end-of-life. And in the next year or two, we'll have to take a call because you can't run them as it is. Hence, our proposal was to transition into a different process route, a greener process route, and seeking support from the government, because, again, the cash flows of the business do not allow us to fund that transition. The government has come back with a proposal which is not close to what we have asked for, and so that conversation is going on.

Is this proposal from the government a more recent one or is it the same that we had discussed a quarter ago?

Yeah, I think pretty much the same one. They're trying to see what they can do. Obviously, that's a conversation which is going on in the government.

Could you give us a best case scenario and a worst case scenario for Europe?

The best case scenario is if the government supports the transition, you can transition to a new process route. Obviously, we will need to syndicate this with all the stakeholders, including the unions, but a fundamental point is UK is scrap surplus. UK exports a lot of scrap, and the greenest way of producing steel today in scale is by recycling scrap. So, why should a country which has scrap and is exporting so much scrap not leverage that and use more scrap in steelmaking. That's what our proposal was. And it helps the UK government also meet the targets on CO2 emissions for the country. Hence, it is not just about supporting a business which is losing money, but about creating a business which is greener and more sustainable, and we believe very important for the industrial supply chain in UK.

The worst case scenario is we don't get the support we seek, and then as and when the assets come to end-of-life, we'll have to close it because you can't run an asset if it's not safe.

How many years before it hits the end-of-life?

Well, different assets are coming to different stages of end-of-life, but clearly in the next two years some of the critical assets, the heavy and the upstream assets, which are coming to end-of-life. The downstream assets are good. They can continue running.

At a macro level, how do you see recessionary fears for US, Europe, a couple of other markets play out in terms of the overall demand for steel, as well as prices this financial year?

Actually, more than what happens anywhere else in the world, what matters is what happens in China, because that's 50 percent of the steel consumption. So, to me if China recovers well, that's good for the industry. But we are conscious that China's moving away from investment-led growth to consumption-led growth. So, the steel intensity of Chinese growth, going forward, will be less than the steel intensity of Chinese growth in the past. We are conscious of that. The US with the Inflation Reduction Act is going to invest a lot of money and that's positive. In the US, prices of hot rolled pipes even today is more than $1,000 a tonne. American steel companies are amongst the most profitable in the world. So, the US is quite strong.

So, if China is strong and the US is strong, these are the two largest economies, that has a huge impact. In Europe, the way I see it, if gas and energy prices settle as they are today, obviously, economic activity will pick up because a lot of industries have been suffering due to high gas and energy prices. If there is any near-term chance of reconstruction in Ukraine, that's again a positive. Inflationary pressures are there and rising interest rates are certainly going to be a dampener from that point of view. For Indian exporters, the fundamentals of these markets are going to be important. But otherwise, for companies that are dependent largely on domestic demand in India, I think, we are on a pretty strong wicket given the fundamentals, given the money being kept aside for expenditure on infrastructure, and given that elections are coming up next year. We expect some of these expenditure to get accelerated.

Give us a little more detailed commentary on China. China did surprise the street in the last three months in terms of lesser-than-expected demand. What is your expectation in terms of China’s impact on raw material costs and steel demand and supply?

China went through a tough year because of the COVID restrictions. When the COVID restrictions were removed in December, there was a lot of positive sentiment, maybe in excess of what needed to be there. Everyone thought it's just going to take off, which it didn't, because China, like I said, is fundamentally making a correction and shifting more to consumption-led growth. So, automotive demand is back to two million cars a month, (that’s) 24 million cars a year. But if you look at construction activity, it is no longer as strong as it was before. The property sector is rebalancing itself. So, you have that kind of a situation playing out in China. Steel production has been very strong.

China has been producing all out. In fact, the March production was probably among the highest. It was about 96 million tonnes, which is among the highest it has done in the recent past. But if coal imports have not been high, that's because China has adjusted itself to domestic coal and other sources of coal beyond Australia, because they have not been buying any Australian coal for the last few years. I think, coal import is more a reflection of the changes that China has made in terms of sourcing coal. I'm sure they're buying a lot of coal from Russia, more coal from Russia than before. Steel production ramped up because everyone was positive about demand.

(But) demand didn't ramp up as much as they expected. And steel exports went up in March to about eight million tonnes, which is higher than what you'd like it to be; five to six million tonnes is fine. Eight-10 million tonnes is not so great. But we expect that to be a temporary phase because China Iron and Steel Association has already requested its members to cut down production as Chinese steel companies are again back to not making any money. And hence, they can't sustain at these prices (or) if they drop prices and try to get the volumes. So, I think, China economically will do reasonably well this year. From the point of view of steel, (it) will do okay. But in the past, if the Chinese economy grew at 5 percent, we'd expect steel consumption to grow at 8-9 percent. That's not going to happen because the structure of the economy has changed. But still I expect China to probably surprise in a positive way during the year.

Take us through your debt reduction plans. And specifically, how do you plan to strategise the cost of capital?

Yeah. After we announced a billion dollar (debt reduction plan) a year, we actually reduced it by about Rs 50,000 crore. So, we did far more than that in three years. Then last year, we acquired Neelachal, and because of coal prices going up from $250 to $650, working capital really sucked in a lot of cash. That's why last year our net debt went up, because Neelachal and Rohit Ferro and some of the other ferro alloy units meant about Rs 10,000-12,000 crore of expenditure more than in a normal year, and then working capital was at least Rs 5,000-6,000 crore more than in a normal year.

That is what is reflected in the net debt going up because we continued with our capex. We spent about Rs 14,000 crore in capex last year, in addition to all this. So, going forward, we are back to the $1 billion goal. And we think in FY24, we are on track to reduce our debt by a billion dollars, because our working capital will be back to normal. The slab stocks that we built up in Europe in anticipation of the blast furnace shutdown will get used. And we don't have a Neelachal kind of situation this year. So, we're not spending that kind of money. The capex will continue to be what it was. So, we are quite confident we will get back to that path on debt reduction.

Any acquisitions on the table for this financial year?

Nothing is planned.

What's the capital expenditure number?

I think, it's about Rs 16,000 crore for the year, Europe and India both put together. India – Rs 12,000 crore, balance would be in Europe, mainly in the Netherlands for the blast furnace steel lining.

One final question. Give us some colour on your India operations. What are you expecting this financial year? How much will it help you cushion all that's happening worldover?

Yeah. Obviously we are expecting this year to be stronger than last year. Last year, we had a standout quarter in terms of Q1. But the other quarters were less than great. Q4 was not bad. But we expect more stable operations this year, hopefully picking up towards the second half of the year as the spend by the governments, both in India and overseas, (return) to track. So, we are expecting volumes also to be higher this year, both India and Europe put together about a million, million-and-a-half tonnes higher than last year, because in India, Neelachal volumes will play out in full for the full year. We will continue to de-bottleneck. And then in Europe, we'll have the blast furnaces running fullout in the second half of the year. And the sentiment in Europe should be better this year than it was last year. So overall, we expect this to be a better quarter unless something very unexpected happens.

And are you expecting a pause in the rate hike cycle?

Yeah, let's see how it goes. I think, inflation has come down. It has come down to below the band. So, I think if we want growth back, maybe another 25 basis points (bps). But I think beyond that, I'm sure the RBI is thinking about it. But given the global kind of situation, we have to really make sure that India demand is strong. All the more reason for us to hope that growth gets a bit more precedence and inflation is under control.