Tata Steel may have gained a European presence by acquiring Anglo-Dutch steel major Corus, but that may not help it cash in on the big market for automotive steel at home. ?Corus produces steel products for the European car industry, but they are not suitable for Indian market conditions. Tata Steel has not been able to leverage its European experience with high-end products for the Indian operations,? notes Motilal Oswal.
Which is probably why, Tata Steel decided to collaborate with Japanese steel giant Nippon Steel. Otherwise, it may not have been able to cash in on the growing demand for steel from the automotive industry at home. The idea was to be able to produce high quality, continuous annealed cold-rolled sheets to cater to the needs of the Indian auto market. And the best way to do this was to team with the Japanese who remain, without doubt, among the leaders in the automobile steel space.
Industry watchers are of the view that Tata Steel has worked with Nippon before, and given the relative strength of the Japanese in automotive products, it may be a good strategy to set up a new joint venture with it. The primary reason cited for Corus acquisition, on the other hand, was to access the European markets. To that extent, the strategic options exercised by Tata Steel appear complementary.
Says Dipesh Dipu, metals expert, ?India has been stated to be an automotive hub in the making. With low-cost labour and possibly, captive raw material sources, setting up an automotive steel product manufacturing facility makes perfect sense, complemented well by the know-how of one of the largest manufacturers in the world. Also, considering that the Tata Steel seems financially a little stretched due to the Corus acquisition, a joint venture may be the best way forward,? he adds. In other words, Nippon brings to the table its automotive product technology to complement Tata Steel?s efficient and low-cost manufacturing base in India. Meanwhile, Corus has a strong reach across Europe and Tata Steel?s iron ore and metallurgical coal sources would be available to it. Also, Tata Steel will be able to access the lucrative European market, which was always the intention.
Demand for steel in India is expected to grow in double digits over the next three to four years, and it?s possible there won?t be enough local supply to meet this demand. One reason for this is that a couple of major greenfield projects have not been able to take off mainly because of land acquisition problems. Moreover, following the slowdown in industry in 2009, producers were reluctant to add capacity, given that they were already highly leveraged. As such, brownfield expansions, too, have slowed down. The shortage of supply may keep steel prices firm and allow steelmakers in India to command premium valuations, relative to global peers.
But in Tata Steel?s case, analysts are closely watching the performance of its subsidiary Corus. The world?s eighth largest steel manufacturer reported a consolidated net profit of Rs 470 crore after three consecutive quarters of losses. The strong performance was led by a turnaround in its European operations, which reported an Ebitda (earnings before interest, tax, depreciation & amortisation) of $142 million, driven by a better product mix, higher realisations (+6% quarter-on-quarter) and cost savings of $104 million. Moreover, capacity utilisation at Corus improved sequentially to 81% from 75% in the second quarter. ?We are finally coming out of recession in Europe but growth rates are barely 1-2%,? observes Kirby Adams, Tata Steel?s chief executive of its European operations.
The company?s consolidated net sales during the December 2009 quarter, at Rs 26,100 crore, are up 3% quarter-on quarter, driven by an increase in steel prices. Macquarie notes that Corus reported an Ebitda of $37 per tonne during the quarter, compared with a loss of $52 per tonne in the September 2009 quarter. Going ahead, the company could increase prices, especially for flat products, and continue to focus on cost reduction. Tata Steel has also announced that it will be mothballing its Teesside operations at the end of this month which, experts say, is a step in the right direction for the sustainability of Corus? operations. But there?s pressure from higher input costs. Observes Adams: ?We are seeing pressure from our raw material suppliers to pay them more and there?s a possible cost-push from raw materials this year. It is impossible for us to forecast what might happen to raw materials?
According to KirbyAdams, industrial capacity utilisation has hit a low of around 70% in the United States and Europe, and there is still a lot of unutilised capacity in the manufacturing and steel sector in Europe. But Goldman Sachs, surprised by the pace of the recovery, expects Tata Steel Europe to report a positive ebitda in the March 2010 quarter led by cost savings and higher realisations.