MC Interview | India demand will be strong, Netherlands will see recovery from the current quarter: Tata Steel MD

Q. Talking of operational performance, your India EBITDA was quite strong in Q3, while the UK and Netherlands reported losses. What’s the outlook for the Europe business?

In the Netherlands, traditionally we've been EBITDA-positive, cash-positive, but we've had four or five bad quarters for two reasons. One, we had a cold rolling mill upgrade that we undertook towards the end of the last financial year, which took longer than expected to ramp-up; that impacted the product-mix.

Two, in the UK we took down blast furnace 6  in April for relining, and that too took longer than expected; this accounts for 50 percent of our production there. We were operating for most of last year on one blast furnace, and we were using steel slabs we had made the previous year when energy prices were high. These were high-cost slabs. Now the blast furnace relining is complete and it should be back in production next week.

Over the next few quarters, we'll go back to the production levels that we expect in the Netherlands. Gas and electricity prices have dropped, so we expect to have the Netherlands back in positive territory next year.

The UK has been challenging as the spreads are low, which is what we’ve experienced over the last 12 months. That’s why we are restructuring the UK operations, which will take place over the next 9 months or so. Only then will you see an improvement in operational performance in the UK. But you could see an improvement in financial performance, in the spreads, because the spreads in Q3 were the lowest in a very long time in Europe. In the last few weeks, we've started seeing the spreads and the prices in Europe go up because of the geopolitical situation around the Red Sea and the Suez Canal.

Q. Domestic revenue was marginally higher on improved volumes and steel realisations. Infrastructure spend has been at full throttle in India. With India getting into election mode and concerns over a slowdown in projects due to the code of conduct kicking in, what’s your outlook on India?

I think we're quite positive about India. Steel consumption has grown at over 10 percent in the last calendar year. For the last two-three years, we’ve said that we expect steel consumption in India to grow faster than the GDP because India is moving from consumption-led growth to investment-led growth, which is more steel intensive. So, steel consumption should typically grow at 1-1.3 times the GDP growth rate. We've seen that happen and we stand by that.

While there may be a brief slowdown in some construction activity, there is still a lot of investment going on in railways, gas pipelines, and many other areas. Private sector investment is also starting in warehousing and  in industrial buildings. Auto has been strong. Normally during elections, you see a pickup in commercial vehicles, etc., because they’re used to move people around. So, we are quite bullish about India.

Q. And what kind of demand growth are you expecting in India? Also, on the prices front, do you expect some more price revision in the rest of the financial and the calendar year?

I am conscious that if demand has grown 10 percent in the last calendar year, you're working with a higher base. Going ahead, I wouldn't be surprised if India's steel consumption grows at 8-9 percent, assuming GDP grows at 7-7.5 percent. Prices, of course, will reflect what's happening in the international markets. And there's a big China element at play. China production was strong last year. When their production is strong, raw material prices are high. That's why iron ore prices have been in the $125 to $140 range. While coal prices dropped below $300 per tonne, they quickly went up above that.

Because Chinese consumption was low, China exported more steel because they produced more than they could consume. When China exports 5 million tonnes per month, we can live with it. In 2015, they were exporting 10 million tonnes a month. Now they’re exporting 8 million tonnes a month. So that's had an impact on steel prices internationally. There is a squeeze between higher raw material prices because of higher Chinese production, and lower steel prices because of higher Chinese exports. But I don't expect China to export 90 million tonnes this year. They are trying to stimulate domestic demand and are not very keen to export lots of steel and leave a big carbon footprint. I expect this will lead to some correction over this year, which will help international prices. And if the demand in India is strong, that should help prices in India. Specifically, we have guided that this quarter, on average, we expect realisations to be Rs 1,000 / tonne less than last quarter for multiple reasons. We will know better after the Chinese New Year.

Q. When can we expect some improvement in EBITDA and a turnaround in the UK and Netherlands?

You will start seeing a turnaround in the Netherlands from this quarter. Because the blast furnace will be in operation in February and March. Secondly, you will also start seeing better numbers because of lower energy costs from this quarter. The third point is, because of tension in the Suez Canal and Red Sea, a lot of steel which traditionally goes from Asia to Europe is not making its way there. As a consequence, we've seen European steel prices go up by about Euro 30-40 (per tonne) in the last few weeks.

Q. You have highlighted in the press statement after Q3 results that the capex plan is on track to clock an output of 40 million tonnes per annum (MTPA) by 2030. Given the weakness in the global environment, and the oversupply, are there concerns that margins may be under pressure once the capacity comes up?

The advantage with organic growth is that we can pace it as we want to. We can pace it based on our appetite, balance sheet, and demand. We have all the options available to us.

Q. Last quarter you told us that you have not given up on the target to reduce debt by $1 billion in fiscal year 2023-24. Where do we stand on that now? 

That doesn't look very good. We've not been able to bring it down as much as we would have liked. Our performance in Europe has not helped. Let's see how much better we can do in this quarter. We are committed to debt reduction and deleveraging. We are committed to being very cash-flow focused, but this has not been a good year so far.

But we are not abandoning the plan. Even if we don't achieve it, we won't abandon it. We’ll try our best till the end of the year to reduce it from where it is today. But a $1 billion reduction looks very far away now.

Q. Tata Steel announced last week that up to 2,800 jobs would be cut as part of the  plans to close Port Talbot’s two huge blast furnaces and replace them with an electric arc furnace. How are the discussions with the different stakeholders coming along?

We had an understanding with the government on the basis of which they promised us support. With that, we went to the unions, and shared our plans with them. They shared an alternative plan. We’ve incorporated some of their suggestions in our plans. And kicked off discussions on this new plan last week with the announcement.

Obviously, the unions don't like the outcome, because there are jobs at stake, and we are committed to seeing how we manage it in the best possible way. But we are also keen to create a business which is not always standing on the edge of a cliff, always struggling to survive. We want to make sure that at the end of this transition, where we are putting in Tata Steel’s money and the British taxpayer’s money, we have a business which can stand on its own. There is a formal consultation process which will go on for at least 45 days.

Q. Tata Steel has been accused of “gross hypocrisy” as it prepares to open a new blast furnace in India, while citing a cut in carbon emissions as the reason for shuttering two blast furnaces in south Wales, costing thousands of jobs. How would you react to that?   

We need to understand the context in different geographies. At a broad level, Europe, including the UK, has a carbon tax. Europe has committed to net-zero by 2050. The policies have been brought in. There's a carbon border adjustment mechanism (a tariff on carbon-heavy products imported into the EU).  There is a roadmap, and there is a target that the governments have set on how much carbon they want to reduce by 2030. The steel industry is a big part of that journey. Governments across Europe are discussing with steel companies as to how they can transition. The governments are supporting industry because they need to meet their carbon reduction goals, and without that support, the industry can't transition with their own cash flows. Others, besides us, are also moving away from blast furnaces.

Secondly, we've been losing money in the UK, and over the last 15 years, we’ve supported the UK to the extent of about GBP5 billion. So, it is not a sustainable business. There was no support from the government last year and even this year, we'll know from the quarterly numbers how much we've lost in the quarter in the UK. If  we don't do anything, we will have to shut down anyway. What we see is a way forward, where the government is willing to support us and we are willing to put in money. At least we will have an electric arc furnace in the UK, leveraging the fact that the UK is the second biggest scrap exporter in the world after the US. It's natural to use scrap available in the UK  to make steel in the UK, rather than bring iron ore and coal from across the world to make steel in the UK, pay a carbon tax, and lose money.

India is a different story. India aims to be net-zero by 2070, not 2050. We don't have a carbon tax in India, and the regulatory framework is different. India is a growing market and we need to build more capacity. If you don't build capacity, you lose market share. We have not said that we will not build any blast furnaces anywhere in the world. We have said that in Europe, both in the Netherlands and in the UK, we will replace blast furnaces with other units in line with regulations. In India, as and when regulations incentivise reducing the carbon footprint and there is gas available, we will switch.

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