Tata Steel has had a rough September quarter with steel prices in Europe coming off by more than $100 per tonne in the last six months. The consolidated profits pre-exceptionals and post minority came in at just R362.4 crore, a fall of 75% yoy and way below consensus. Tata Steel group chief financial officer Koushik Chatterjee says that the short-term visibility in the European market is a challenge though back home demand appears to be sustaining. Chatterjee tells Shobhana Subramanian prices of key inputs like coal are expected to remain elevated unless there is an event risk in China. Excerpts:
How do you see the demand for steel in the European market?
The macro economic conditions in southern Europe looks fairly challenging in the short-term given the uncertainty. After all, buyers and sellers work on the basis of perceived and real demand-supply conditions and one cannot ignore the fact that the economic conditions in Europe today are very heavily dependent on political and economic actions by the policy makers. This is bearing down on the real economy. Even in stable conditions, the demand for steel in Europe always have a seasonal pattern with the second half of the calendar year being slower. On top of that we have the macro uncertainty that has a significant overhang on the short-term demand scenario. But the severity of the slowdown this time around so far is less than what it was back in 2008, post Lehman. Hopefully political clarity will emerge soon in Europe, but at this point it?s too early to tell what 2012 will be like. Some countries in Europe will have to go through structural overhaul before they can regain their competitiveness.
Demand seems to be slowing down in the home market too?
There are pulls and pressures, but some data points are showing that India Inc?s aggregate top line across sectors is still growing at around 8% net of inflation compared to the previous year. Compared to the rest of the world, the demand scenario is still better despite an uninterrupted course of interest rate hikes by the Reserve Bank which to my mind hasn?t achieved the objective it was aimed at. The first two quarters this year have been on expected lines for Tata Steel on a stand-alone basis and I see similar trends going forward adjusted for the variabilities in coal prices, rupee depreciation which are issues faced by the industry today.
How are you reading coal prices?
We believe coal prices will remain elevated unless there are major adverse events in the global economy. The average long-term prices of natural resources like coal and iron ore will hold because of the consolidated nature of the industry and will fluctuate within a band based on underlying economic conditions. We have seen iron ore prices falling some 20-25% last month and then climbing back again. So I don?t think we are in for a structurally lower level of prices, unless there is an event risk like Chinese hard landing. Our purchases are largely biased towards annual contracts though we do some spot buying.
How are you seeing the structural problems relating to the mining of iron ore in the country?
The regulatory framework obviously needs some revision which is what is happening. It also needs to ensure that the competitiveness of Indian manufacturing, including steel, is intact because we are working in a value chain where we need to be effective and competitive.
The onus is also to mine efficiently such that we optimise resources and comply with the regulatory framework. Equally important is the availability of infrastructure; transport bottlenecks make production costlier.
What do feel about mining profits being used to redevelop the local population?
If the aim is to ensure redistribution of wealth and social sector development the cause is certainly noble, important and critical because a sustainable local environment is very important in the long run. As a company, our DNA has always been to work with the communities and invest in social infrastructure and development of the communities around our operations much beyond what the regulations have required so far.
This approach has been followed by the company much before sustainability became a fashion statement in the corporate and financial community world over. So there is obviously great alignment in the principle, but the mechanics of the proposed deployment process has to be robust, leak proof and balanced to make real change to the lives of the community.
The framework should also ensure a fair and equitable economic benefit for the contributors in terms of tax deductibility and offset against the corporation tax and should not be pursued as another source of revenue to bridge the fiscal deficit of the country.
So, the channel of deployment needs to be efficient and accountable and in my personal view if the resources are not deployed as per the agreed charter it should be refunded to the contributors. Therefore, the journey actually starts with the regulatory announcement and doesn?t necessarily end with legislative announcements.
How does the financing situation look like in the current economic scenario?
While we have no major loan repayments in the immediate term in the next two years, we have been actively pre-paying debt both in India and overseas to create balance sheet capacity for the large organic growth plans in India. This year we have pre-paid around $1.3 billion of debt and we should be somewhat around our target long-term net debt to equity of 1.1 times. For a company that is growing organically in India through multi-billion dollar capex investments and also managing a global portfolio of business in times of macro uncertainty, the capital structure strategy and liquidity management are very strategic and critical.