Metals major Tata Steel's managing director and CEO, T.V Narendran, and executive director and chief financial officer Koushik Chatterjee said in an interaction with Moneycontrol that the company expects to be largely immune in its Indian operations from US President Donald Trump's imposition of a 25 percent tariff, plus an unspecified penalty on Indian exports to the US.
Narendran observed that Tata Steel exports no steel from its Indian operations to the US, and any secondary impact, from other Indian manufacturers across sectors using steel made by the company, is expected to be limited.
For its European operations, however, the company may see some impact, despite both the UK and the European Union agreeing trade deals with the US that lowered the tariffs on most exports. Tata Steel's management said that it is seeking exemptions in order to route most of its sales to the US through the UK, which has a lower tariff burden compared to the European Union.
The UK-US bilateral trade deal implies that nearly all UK exports will be tariffed by the US at 10 percent, including steel, with a condition that the steel must be fully produced in UK facilities. Tata Steel currently does not produce crude steel in the UK, due to its Port Talbot blast furnaces being shut for a GBP 1.25 billion green transformation project. Tata Steel's Netherlands facilities produce crude steel, but the US still charges a 50 percent tariff on steel produced in the EU.
On July 30, the Tata group firm reported a strong set of financial results for the April-June quarter, despite a 3 percent drop in revenue and a decline in delivery volumes over maintenance-related closures. The 12 percent safeguard duty by the Union government on some grades of imported steel provided price support for domestic steelmakers, resulting in profits for the company more than doubling year-on-year to Rs 2,078 crore for the quarter. The results were also supported by cost savings, Tata Steel's management said.
Edited excerpts:
What is the overall impact that you see from President Trump's announcement regarding the 25 percent tariff on Indian exports to the US, or in the company's EU and UK operations due to the ongoing tariffs?
T.V. Narendran: As far as India is concerned, there is no great impact because we don't export steel from India to the US, and even if you look at our customers who may be exporting products made out of steel to the US, that impact on Tata Steel is very limited. So I don't see a material impact.
In the UK and Netherlands, of course, there's a lot more trade with the US as far as steel is concerned. About 3-4 percent of what we produce in the UK goes to US and about 10 percent of what we produce in Netherlands goes to the US.
Those (operations) are impacted because they produce high end steels. The good news is many of those steels are not made in the US, so we are able to continue to supply and pass on some of these costs to the customers there. But the policy uncertainty and the changing tariffs doesn't help in planning our business.
UK has settled on a 10 percent duty for steel with the US, but there's a discussion on what is called the melt-and-pour condition, which means that the US requires that the steel is produced in the UK. Currently we are not producing steel in the UK because we have shut the blast furnaces and are building the new electric arc furnace. So we are seeking some exemptions for supply of steel either from India, or from Netherlands to the UK to make those deals for the US.
In the Netherlands, about 10 percent of what we produce goes to the US. Again, these are high end steels which are normally not produced in the US. There again we are looking at mitigation actions. The duties were 25 percent which has become 50 percent.
While the EU has agreed on 15 percent duty, as of now, it seems like steel stays at 50 percent. But we are waiting to see if there are some developments on that, because the last time when President Trump was in office, there were exemptions given for some of these deals. Because, like I said, they are not produced in the US, and hence some of these import duties hurt the customers in the US.
On a slightly macroeconomic level, your financial results for the quarter were strong. What are the key takeaways for the economy? Are we seeing a transition from the low volumes in the past few quarters?
Narendran: If you look at the last two years, what had been relatively weak was a rural economy, which we are seeing is changing, because over the last six to eight months the surrogate measures, for instance, motorcycle sales, which is indicative of the rural economy, has picked up quite a bit. We look at tractor sales, which have also picked up. That tells us that rural economy is better off than the urban economy in some sense.
We've seen that otherwise we are very dependent on government spending because government spending on infrastructure has a huge impact on steel consumption and construction activity. There, we did see a tightness in liquidity which has started easing up a little bit, but there's been a tightness there, because it's not just the centre, but also the states. If the states or the centre do not pay the contractors, that has a cascading effect. We had seen that the MSME sector last year was also struggling a bit more on liquidity. I think things have improved a bit.
Some other sectors which have been strong have been commercial vehicles, though that has slowed down more recently. Passenger vehicle sales were strong again, but slowed down a little bit. Railway expenditure has been strong, as well as water systems. So most parts of the economy has been quite strong, which is why India has been able to grow the steel consumption by 10-15 percent last year and take care of all the additional capacity that has been set up in India in the Indian market itself. Because international markets have been unremunerated for more than a year now.
I think macroeconomically we are getting slightly better, but having said that, we will not be immune to what's happening in the rest of the world. We cannot assume that we will be an island of growth when everyone else is struggling. There will be an impact over a period of time. We should be cautious about that and continue to do enough to keep the domestic demand strong and ticking.
Do you see the private capital expenditure cycle turning, going by recent indications?
Narendran: One of the biggest sectors investing contributing to private sector capex is steel. If you just look at the capex plans of JSW, Jindal Steel and Power, ArcelorMittal, and us, it is at least Rs 50,000 to Rs 60,000 crore a year, maybe more. Otherwise there are not so many sectors spending that kind of money.
There's a lot of investment happening in supply chains, warehousing, etcetera, but that doesn't give the numbers. The other big area is electronics, where thanks to the PLI scheme, that's an area where there's been a lot of investment. For private sector capex to truly revive, there should be optimum capacity utilisation, and the investment should be profitable.
The company's debt has remained on the higher end...
Chatterjee: ...Bear in mind that we have had the peak capex spend on the Kalinganagar expansion, where the total project cost is close to Rs 27,000 crore. Large part of it has been spent, with the tail end spend to be done this year.
And then we had a big restructuring in Europe, especially UK. We had to take out a lot of people. We had to terminate contracts and the last conditions that happened in UK, and in Netherlands, because we had a difficult blast furnace relining, where we had to spend much more than what we had envisaged, which burned a lot of cash. Then we also bought Nilachal Ispat Nigam Ltd (NINL) for around Rs 12,500 crore.
If we take market conditions into account and look at the cash flows left to itself, Tata Steel would have been OK. But if you add all these together, then the debt obviously had climbed up. Last September we were almost about Rs 90,000 crore in terms of net debt, which we brought it down to Rs 82,000 crore. In the second-half of last year, we have taken out almost Rs 6,600 crores of debt.
We had lesser volumes due to planned shutdowns, which is why had an increase (in net debt). But our biggest issues had been on our overseas business, in which Netherlands now generates free cash flow.
And UK has reduced its burn. The UK spend is mostly on its capital projects, which is the EAF project which we are co-funding with the government, and once the losses come down even further, we will continue the journey.
Our target never stops in terms of de-leveraging. We will continue to do so. Market's been very volatile, in which case we find it difficult, but once we finish the Kalinganagar phase two project, before we take on the next growth project, we will have opportunities to bring down the debt again.
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