H2 will be much better than H1, says Tata Steel MD

11 months ago 19

TV Narendran, MD, Tata Steel, says in Europe high energy prices have impacted a lot of the mid-sized and smaller companies and many of them may be vendors, many of them customers and they are a bit fragile and that has an impact on steel consumption as well. Inflation is still persistent and so central banks are increasing rates. The forecast is that next year will be much better than this year because inflation will have settled and the rate hikes over.

Narendran further said that “China after a long time has started exporting about 8 million tonnes of steel a month. If it comes back to 5 million level, steel prices will stabilise at $600 or higher whereas if they start exporting 8 or 7 million tonnes as they are doing now, then steel prices will be in the $530 to $580 range.”

Tata Steel’s consolidated net profit fell 92% year-on-year to Rs 634 crore for the first quarter ended June. The company had reported a profit of Rs 7,765 crore in the year-ago period. What caused this fall?
If you look at it globally, the recovery in steel prices has been weaker than we thought simply because the recovery in China has been weaker than we thought. When we were in the last quarter, that is Q4 of last year, the thinking was that Chinese recovery will be strong and hence steel prices will look up but that did not happen and as a consequence, international prices were soft and that has had a pressure on margins.

So while the coking coal prices dropped, last quarter we used coking coal which was bought a quarter before that and so the consumption cost was higher than the previous quarter, steel prices could not make up for that higher consumption cost and hence margins dropped sequentially.

As far as India is concerned, the demand has been reasonably strong. The auto industry is doing well, construction has not been as great as we thought but still not bad. India’s numbers have been strong, if you look at India numbers we have had more than Rs 4,000 crore of PAT, EBITDA on an underlying basis is over Rs 16,000 per tonne.

In Europe, we have had challenges simply because in the Netherlands we have a planned blast furnace shutdown with relining going on and we had guided last time that for two quarters the production in the Netherlands will be impacted and that is why the Netherland’s numbers have been weaker than normal. The UK has always been a challenge when steel prices are not great and that is what is reflected in the UK numbers. We have done obviously better than what most people thought but worse than what we did the last quarter and last year this quarter.

I remember I was talking to you last quarter as well and you had indicated that the given few issues, the early signs are that European business is likely to turn around if some conditions are met. Do you think those conditions are becoming clearer now or one cannot say right now whether the worst for European business is over?
Do you mean for Tata Steel or mean in general for Europe?

For Tata Steel European operations, UK and Netherlands put together?
When I said last time that the worst seems to be behind us, I was referring to the fact that the overhang of the Russia-Ukraine conflict which had played out very strongly last year was reducing because energy cost has really shot up and started stabilising and that is good for us from a cost point of view.

The auto industry was picking up in Europe and so overall conditions are better than it was in the previous year. Internally for us, we had a blast furnace relining as I mentioned which was going to disrupt production in the Netherlands. But overall while the energy prices, the electricity prices, the gas prices are settling down, we will see the full benefits of it only in H2 because we do a forward hedge and so we are still carrying forward some of the hedges that we did maybe two or three quarters back.

So we will see the full benefit of the energy prices in the second half and if the EU is expected to grow better next year than this year, we expect the economic activity to slowly pick up in the second half of the year. We expect H2 to be much better than H1 from here.

I wanted to scratch that point a little more. What are the key monitorables you are looking at right now, the macro indicators? China is trying to engineer a saving plan for the economy domestically but it is under pressure and the data shows it. Talk of stimulus is also coming back on the table. What exactly are you monitoring over there which will tell you with much more clarity how the second half is likely to pan out on prices?
Firstly in China, we look at different sectors of the economy. The auto sector has been quite strong in China. They are back to selling and consuming, I mean buying 2.5 million cars a month. So they are back on track on auto.

But construction accounts for 60% of the steel consumption in China. It has not yet recovered and any stimulus that has been given has gone towards more completion of projects rather than starting new projects. So the property industry, the real estate market, which really drove a lot of the economy is no longer where it was and that is reflected in the fact that the consumption of steel in China is not really as strong as it was expected.

A consequence of that has been that China after a long time has started exporting about 8 million tonnes of steel a month which is a pretty high number. When we had big issues with China in 2016, they were exporting about 10 million tonnes a month. After that for most of the last five years, it has been $5 million tonnes a month which is okay.

The world can live with it but over the last two-three months, it crossed 8 million tonnes for the first time after 2016. Last month it had dropped to 7 million tonnes. I hope it drops further. If it comes back to 5 million level, steel prices will stabilise at $600 or higher whereas if they start exporting 8 or 7 million tonnes as they are doing now, then steel prices will be in the $530 to $580 range and so that is where it is.

We always watch out for what is happening in the Chinese economy and what are the signals we can pick out of that and the lag indicator is how are steel exports out of China, how high is it and obviously that has an impact on steel prices.

What indicators are you looking at to gauge demand in the European side? What is the extent of the weakness? Is it likely to worsen or has it stabilised and will gradually start improving?
The auto sector is still quite okay. Auto customers continue to buy as they did before and so auto is coming back on track. Construction activity is not so great but there is an expectation that as and when the rebuild in Ukraine starts, that will give a fillip to a lot of economic activity in that region.

What we are seeing is that the high energy prices, high costs etc. have impacted a lot of the mid-sized and smaller companies and many of them may be vendors, many of them customers and they are a bit fragile and that has an impact on steel consumption as well. ‘

Of course inflation is still persistent there and so central banks are increasing rates. The inflation is persistent because labour markets are tight, unemployment is low and that is reflecting in a sticky higher inflation level leading to central banks increasing interest rates.

The forecast is that next year will be much better than this year because inflation will have settled and the rate hikes over.

One last word on your debt reduction status and roadmap?

We started the year with debt at Rs 67,000 odd crore and we finished the first quarter at Rs 71,000 crore because capital expenditure has gone as planned. The EBITDA was a bit lower than what we had thought and on top of that, the creditors came down because the prices of coal came down. So while the gross working capital remains the same, the net working capital has gone up a bit. But we stay committed to reduction and deleveraging. The goal we had set ourselves about three-four years back is a billion dollars a year. Apart from last year, we did it on all other years.

In fact, we did more than that in the previous years. Let us see how it goes. It has been a more challenging year than we had thought but we certainly expect H2 to be much better than H1.

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