Hit by the global economic downturn and the slump in demand for steel soon after it acquired the Anglo-Dutch steelmaker Corus in January 2007, Tata Steel decided it would need to slash costs drastically if it had to turn around the business. So, in late 2008, the world?s sixth largest steel manufacturer came up with two cost-cutting programmes called ?Weathering the Storm? and ?Fit for Future?.
Steel prices had begun to fall and Tata Steel, which had forked out $13 billion for Corus, had piled up a huge debt. To add to its woes, production costs at Corus were high, thanks to spikes in iron ore and coking coal prices in 2007 and part of 2008. Not surprisingly, Tata Steel’s consolidated profits for 2008-09 shrank to Rs 4,951 crore, a third of the Rs 12,350 crore it reported the previous year.
Weathering the Storm was estimated to yield ?600m in cash benefits in the six months to March 2009, while ‘Fit for the Future’ focuses on long-term measures and was expected to yield ?300 million every year. B Muthuraman, then managing director of Tata Steel, had told a media briefing in June 2009, ?Given the rate at which we are moving today, we believe the saving at Corus will be in excess of ?800 million or $1.2 billion.? By then, Tata Steel was also going through a rough patch at home; its net profit for the three months to June 2009 had declined to Rs 790 crore, down 47% from a year ago. The cost-cutting initiatives apart, Corus also announced in January 2009 a series of strategic measures aimed at divestment and asset restructuring.
Tata Steel was determined to improve efficiencies across the company and keep overheads in check so as to become more competitive. The strategic initiatives were designed to bring about improvement in Corus’ operating profit by more than ?200 million a year. However, there was also the touchy issue of human resources: of the total 42,000 employees, the new initiatives put about 3,500 at risk. But with Corus contributing two-thirds to Tata Steel’s total capacity of 30 million tonnes, the job had to be done.
As HM Nerurkar, MD, Tata Steel , later recollected: “Strong measures can never be easy. It is very difficult to adopt such steps. But such things have to be done differently. Keeping the communication channels open and explaining the situation is very vital.?
As the efficiency drive began, Tata Steel started acquiring iron ore and coal mines aggressively to secure raw material supplies to Corus. Next, as part of the divestment strategy, Corus put on sale its aluminium smelters in Germany and the Netherlands. It also streamlined downstream distribution. Corus kicked off a company-wide efficiency review to reduce costs, especially in support functions like IT, finance and human resources, by around 20%.
While demand for steel bounced back in late 2009, the credit for recovery in European operations goes not only to higher steel prices?which rebounded on the back of better demand from the automotive space?but also to the management that has reined in costs. Indeed, it has been a remarkable turnaround for Corus, which had reported a loss even in the September 2009 quarter but turned in an operating profit per tonne at $94 by the March 2010 quarter against a loss of $107 in the year-ago quarter.
The worst seems to be over for the company. European markets have recovered in early 2010 and steel prices are on the rise. Kirby Adams, MD & CEO, Tata Steel Europe, said recently that steel prices had moved up by 25% after January. Observing that the preceding 12 months had been a period of huge transformation and challenge for the company, Adams said cost reduction initiatives would fetch the company an additional ?250 million in the current year and these would relate mainly to staff and other expenses. Incidentally, Corus’s staff strength has fallen from 42,000 to 35,000 in 2009-10, resulting in a sustainable fixed cost reduction of ?280 million.
Industry analysts point out that the company’s earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne during the March 2010 quarter was higher from a sequential reduction in fixed costs by $38 per tonne and lower variable costs of $15 per tonne. Of course, realisations were higher by $17 per tonne. That resulted in Tata Steel?s consolidated profits coming in at $542 million (Rs 2,434 crore), way above the $105 million (Rs 473 crore) reported in the three months to March 2009.
Looking ahead,demand for steel in the Indian market remains robust and is expected to rise by about 12-14% to 72 million tonnes by December 2010.The outlook for the European market, however, may not be as rosy, though demand should be stable. Nevertheless, Tata Steel believes capacity utilisation at its European subsidiary could increase to 85% in first half of 2010-11 from 80% in the March 2010 quarter. That should boost profitability. All in all, it has been a fine effort.