MC Interview | In talks with UK govt over ‘green steel’ package, says Tata Steel’s Narendran

TV Narendran, Managing Director of Tata Steel.

Tata Steel’s Chief Executive Officer and Managing Director T.V. Narendran spoke about the company’s loss of Rs 2,224 crore in the quarter ended December 2022. In an interview with Moneycontrol, Narendran attributed a significant portion of the loss to the UK pension fund-related deferred tax adjustments. Edited excerpts:

First, take us through the numbers and what the Street is calling a surprise loss of Rs 2,200+ crore. What has led to this loss? Is the fourth quarter looking better?

If you look at our Q3 numbers, you know, the India business has continued to improve, though the prices in Q3 were lower than the prices in Q2 by about ₹2,000 per ton, but the costs were also lower because there was a $90 reduction per ton in coking coal costs. So that has a big impact on the input costs. So overall, you saw margin expansion in India. I think the challenge was in Europe for multiple reasons. One is, if you see in Europe, demand and prices have continued to drop. In Q3, the realizations were about £160 per ton lower than in Q2. While the input costs had come down, like in India, because the coking coal cost have dropped by about $90 a ton, iron ore prices have dropped by about $20 a ton.

But we have had high value stocks from Q2 where we took an NRV (Net Realisable Value) loss. And that resulted in overall costs going up actually about £31 per ton in Europe. So you had a drop in realisations and an increase in cost because of the NRV loss that we booked. So that was a part of the losses that you saw. But 70 percent of the loss that we reported for the last quarter was largely because of the pension fund adjustment. We are trying to de-risk the pension funds. It's going over to insurance companies because that's the better thing to do. Over the long term, we are de-risking the company from pension issues. But as we do that, there is a deferred tax credit, which is lying in our books and that gets adjusted. And so most of the Rs.2,500 odd crore loss that you saw is because of the deferred tax adjustment that we made last quarter. It's a non-cash adjustment.

Are you expecting more of this in the coming quarters?

Yeah. So as of now, what we've done is about 60 percent of the pension has gone to the insurance companies. We have 40 percent left, which we will do in the first half of next year. So there will be some more adjustments maybe in Q1 of next year, as we do the rest. But we believe that structurally this is the right thing to do, and in the long term, the company would be in better shape as we insure all the pension liabilities that we have.

How are demand and costs in Europe shaping up?

The operating performance in Europe will improve this quarter compared to the last quarter. Volumes will be higher. The prices will be lower this quarter, but the cost will be even lower because we will not have the NRV adjustment that we made last year. So we are expecting the prices to be lower by about £70 per ton this quarter compared to last quarter. Though the spot prices have gone up, our long-term contract prices are lower. But we are seeing the costs go down by at least about £100 per ton. So margin expansion in this quarter may not be enough fully to cover the negative EBITDA(Earnings Before Interest, Tax, Depreciation and Amortisation)  that we had, but we're still working on it. The volumes will be higher in Europe this quarter compared to the previous quarter.

When you spoke to us a few weeks back in Davos, you mentioned you expected Q2 to be the worst one for India and Q3 to be worse for Europe. That does that stand? And are we seeing better times for the next few quarters?

Absolutely… we knew that the worst was behind us in India by then and we knew the worst was Q3 in Europe. So that's exactly how it has played out.

And how does demand look for steel, both domestic and export-wise, especially the fact that we don't have the export duty in place now? So how does that pan out for the company?

The international markets are basically watching what's happening in China. A lot of the activity in the steel industry in the last four weeks has been because of the opening up of China. So we expect that the Chinese demand will not shrink. Let's put it that way. If GDP (Gross Domestic Product) is going to grow at 5 percent, steel consumption cannot be shrinking, right, that is one. Secondly, globally, the World Steel Association forecast for steel consumption growth is about 1 percent to 2 percent – largely led by India, Southeast Asia, Middle East, Africa, etc. And in that assumption, the Chinese growth of steel consumption is assumed at 0 percent. So anything which happens in China is only going to add to that. International prices have gone up, like I said, and hence, export opportunities are available for Indian exporters. We ourselves booked orders that maybe $100 higher than what we'd booked maybe two months back. But having said that, from a Tata Steel point of view, always 85 percent or more of our steel production is sold in India. So we'll continue to do that. Exports have never been more than 10 percent to 15 percent of what we produce. But as an industry, I think the Indian companies will leverage the opportunities that there are to export to Europe, to the Middle East and to other countries. So I see far more exports this year, thanks to the export duty being removed, than we saw last year.

And would you like to put a percentage for your India operations? How much of that would be exports?

Like I said, not more than 15 percent. I think it will be in the 10 percent to 15 percent range. We would export to some of the markets where we have kind of a strategic presence… if there's an inventory buildup in any kind of product, then we will look at (that) – ‘can we use export markets to reduce the pressure on inventory.’ But currently, I see India demand is quite strong. I don't see any problem with inventories in India. So I don't see us exporting more than maybe 12 percent to 13 percent.

And take us through your capital expenditure numbers. Your press release mentions ₹3,632 crore spent in the December quarter. So at what number do you end the current financial year and what would be the target for the next financial year?

So what we have guided (for) is (that) our capex will be about Rs 12,000 to 13,000 crore. It will be at that level. Eighty percent or more of it will go to India. A lot of it is going to the Kalinganagar expansion which is at its final stages. So next year's guidance will also be clearly in that range. We will look at our projections on cash flows and decide, because we also have deleveraging goals and then we will balance our deleveraging goals with our capex and other requirements for cash.

And would some of this be towards Neelachal Ispat in the next financial year? Any expansion that we see starting there?

So what's happening in Neelachal is we're focused in the last six months to get the plant started. It was closed for close to three years. I'm happy to report that pretty much all the operations in Neelachal, except the coke ovens, which will start in July, are functional. In fact, yesterday we had the highest ever production in Neelachal at 3,000 tons, so that's the rated capacity – 3,200 tons. So we are producing at a million tons a year kind of level. Beyond this, taking it from 1 million to 5 million will take two to three years. In the next six months, we will go to the board with our proposal. And once we get that cleared, we will expand that. But not much money needs to be spent on Neelachal next year. Whatever we needed to spend, we spend this year to get the plan started.

So not a huge capex coming there for the next financial year or so?

No. Most of the capex in India will be for Kalinganagar because the project is coming. The cold rolling mill is ready. The pellet plant is ready. The other facilities will get ready over the next 12 to 14 or 12 to 18 months. So a lot of the capex spend will be there, as well as to expand our raw materials, because to keep pace with our steel consumption growth or steel production growth, we also want to expand our mining activity so that we can feed the iron ore for our steel plant.

Take us through that plan of expanding on the raw material side. What are you looking at both domestically and internationally?

So, we have iron ore production largely in India. We have a small mine in Canada. But most of our iron ore mining activity is focused on India. We are already producing close to 35 million tons. We will continue to grow this. We produced basically for our own requirements. And the plan is over the next few years to take it from 35 million tons to about 60 million tons as we grow our steelmaking capacity. So we will keep pace with our capacity expansion in steel.

So these would be acquisitions or would this be through mining leases?

Existing mines. All are existing mines. We already acquired a few mines. One is by participating in the auction, as well as we got mines when we acquired Neelachal. We got mines when we acquired Usha Martin. And we got mines when we acquired Bhushan Steel. So we have those mines as well to develop which are already producing, all of them; at least two of them, which is the Neelachal mine and the Usha Martin mine, are already in production. The Bhushan Steels mine – we have just got all the clearances and will start production soon.

This quarter?

Not this quarter. It will take some time because it's a mine which has not been operational. We've just got all the clearances. So sometime next year, we will probably start.

So moving to your UK business, two questions. There are news reports of UK Government considering a £600 million package for incentivizing green steel (steel that’s manufactured without the use of fossil fuels) for the two steel makers there, you being one of them. How do you see that package? Is that enough for you to go ahead with that green steel plan?

Well, it's obviously less than what we've asked for. So we are in a conversation with the government to see what can be done because we feel that the steel industry should be a very important part of the transition plan for the UK government. We also think the steel industry plays a very important role in the manufacturing ecosystem in UK. But obviously, any transition plan, whether in UK or in the rest of Europe, has to have enough support from the government so that it's a viable plan. And I think that's a conversation we're having with the government. We have given them a proposal. They got back with a counterproposal. So let's see where it ends. So we are in discussion.

Are you optimistic on that being addressed in there?

Well, we've been pursuing with the government for the last three years and we're glad that there's some progress being made now.

And how do you see this green steel discussion back home in India?

I think it's a very important journey in India, because one thing to be kept in mind is a lot of steel capacity which is going to come up in the next 10 years or 15 years is going to come up in India. Okay. So, most of the countries are not adding incremental capacity. They may be replacing capacity with new facilities, right? Incremental capacity is coming up in India. Secondly, most of the capacity is coming up in eastern India. So there are only two ways to make green steel. One is you either melt scrap and make steel, which Tata Steel has already started doing with the plant that we are building in Ludhiana. But there's only that much scrap available in the country and the operational expenses on that also depends on energy costs. The second way of making green steel is to substitute coal with gas or gas with hydrogen, right? We are a few years away from availability of hydrogen. Gas also, while it's available in India, not much gas is available in eastern India.

So we need to build the capability or the infrastructure to supply new steel plants coming up in eastern India with gas, so that they can make the process choices. You know, they can choose gas-based steel making instead of coal-based steelmaking. So I think there needs to be a more coordinated effort between industry and the government. If you look at Europe, there are also incentives. There is a carbon price that we pay, which acts as an incentive to emit less carbon. So there is also a carbon border adjustment mechanism coming up to protect industries from imports of carbon and efficient steel. So I think a number of things need to come together, and we are in discussion with the government so that on a more holistic way we can plan this.

One final question, if you could wrap the next financial year for us in terms of what are the challenges you see on the demand side… What are the opportunities you see on the demand side? And what kind of capacity commissioning are you expecting from Tata Steel? And debt reduction plans?

So I'll answer the last one first. I think the debt reduction journey continues. We had three years back said that we are committed to reducing (debt by) at least a billion dollars a year. So we are committed to that. We missed it this year, but the commitment is there and we will plan to do that next year. That's one. The second part is, you know, overall, I see the India business continuing to grow from strength to strength. We had a difficult few quarters because of export duty and high coal prices. But that's behind us. Demand is also coming back quite strongly. Our capacity expansion, which is a 5-million-ton expansion in Kalinganagar, different facilities will get commissioned at different points in time. Like I said, the cold rolling mill and pellet plant are ready, and many of the other facilities will start getting commissioned, but you will get the full benefit of volume only in the next, not in FY24, but more in FY25.

In the next two years, we plan to complete our electric arc furnace-based facility in Ludhiana. Next year, we will get the benefit of Neelachal running full out. This year, you know, we've got the benefit only in the last quarter. We will also, through de-bottlenecking, get some additional volumes in all our sites. So I'm very positive over the India growth story. I'm very positive on Tata Steel's performance in India over the next year. Europe – we have some challenges, but I see Europe next year stabilizing because  gas prices and energy prices would have settled down, and hopefully some of the demand will come back because if China opens up and recovers, a lot of economies in Europe stand to benefit because they export a lot to China, particularly countries like Germany. So I'm expecting Europe, also as a geography, to have a better year next year, and hopefully, we'll be able to derive some benefits out of that strategy.