TV Narendran, CEO and MD, Tata Steel, tells Shubhra Tandon that the company has communicated to the UK government of reaching a solution sooner than later, however, no time lines can be fixed as yet.
The whole philosophy is to create a long product entity separate from the parent Tata Steel
After being unsuccessful in forming a joint venture with Thyssenkrupp for its European steel assets, Tata Steel is making another attempt at pruning its European business, by divesting just the Netherlands business this time. The company has begun discussions with Swedish steelmaker SSAB for a possible transaction. The steel maker is also separating the Netherlands and the UK businesses to follow separate strategic steps for both. While the Netherlands business will be divested, the fate of the one in the UK hinges on the support of the UK government. TV Narendran, CEO and MD, Tata Steel, tells Shubhra Tandon that the company has communicated to the UK government of reaching a solution sooner than later, however, no time lines can be fixed as yet. He also talks about deleveraging, commodity prices and restructuring in India businesses. Excerpts:
Given that Ijmuiden plant is the crown jewel of Tata Steel Europe, what will its sale mean for the rest of the European business?
We will still have the 3-million-tonne UK plant in Port Talbot. As we are splitting Tata Steel Europe into Tata Steel UK and Tata Steel Netherlands, it gives us more strategic space in the UK. We are in conversations with the UK government to see what it can do because we believe that to make that site sustainable in the long term, there needs to be some support from the government. Let’s see where it takes us.
What kind of support are you seeking from the UK government for the operations there?
I can’t get into specifics. We have discussed multiple options and it depends on the appetite that the UK government has and their long-term objectives. They have also engaged different third parties, consultants etc to examine this proposal. So that is the conversation going on just now.
Has there been any breakthrough so far? By when do you think some concrete outcome could be seen?
As mentioned, conversations are going on. We are obviously wanting to find a solution sooner than later. But we also have to be sensitive to the fact that the government will take its own time to decide on something like this. We have only conveyed to the government that we would like to come to a conclusion sooner than later.
Is exiting the UK business an option for Tata Steel?
Too early to say. Let’s wait to see what are the responses from the government. We have been in the UK for 13 years now and invested a lot in trying to turn the business around. It has certainly done better over the years, but not yet at a stage where it can stand on its own. We are hence waiting to see what the government says.
Would there be any further investments that you would be making in the UK business?
We have basically said that our European business should stand on its own and be self-sufficient. Teams there are working hard to come as close to self sufficiency as possible. Netherlands has been reasonably self sufficient, so there is less of an issue there. The issue is more in the UK, and that’s why we feel that some support is required from the government if we have to make this business self-sustaining in the long term.
What is the outlook on steel demand for the rest of the year given that some states have again announced partial lockdowns and more could come?
So far the lockdowns have not significantly impacted the industrial areas where our customers are located. It has not impacted any of the construction sites that we supply to. However, the risk of the pandemic is still there and we do not know if it gets worse. But for now we stick with our guidance of a positive outlook.
You mentioned on the recent earnings call that the worst is behind us, but with uncertainties around Covid, do you expect disruptions to business again?
Not yet. Depends on how many cases and whether the situation gets much worse. But so far the problem seems to be concentrated in a few areas. We are not seeing it across the country, at least in the eastern part of India, Jharkhand, Odisha we are not observing an increase in the number of cases, it pretty much seems to be trending down rather than picking up.
What is the outlook on steel prices and raw material prices for the rest of the year?
Iron ore prices are quite strong, in the range of $125-130, because China has recovered quite well. Also, the recent numbers that the World Steel Association has announced, the consumption in China has grown 12% in October compared to last year, which is why the iron ore prices are quite strong. The coal prices had softened simply because of the geopolitical issues between China and Australia. China has informally discouraged buying coal from Australia, and as a result more coal is available in the world market from Australia. India being an important market for Australian suppliers, we are seeing coal prices softening a bit because they are trying to substitute what they are losing in China. So, raw material prices, I think, will remain flat. Steel prices are very strong. International prices and Southeast Asian prices in the last 10 days have gone up by about $40, which is getting reflected in India also. So, it is on track to what we guided, there could be a potential upside rather than the downside.
What would this mean for the realisations in Q3 and Q4?
For Q3, it will be Rs 5,000/tonne more than Q2 and we stick to that guidance for now. Let’s see how that progresses. However, the risk of being below Rs 5,000/tonne is less and chances of more than that are higher. It will be too early to comment on Q4. However, the order books are pretty full even till January. The overall demand supply situation currently is in the favour of the producers and international prices are strong.
What is the update on the auto contracts that were coming up for renewal?
Pretty much all contracts have been negotiated and these have been for six months. Approximate increase has been in the range of Rs 6,000/tonne higher than first half of the year.
What are your plans to deleverage for the remaining year?
In addition to what we get out of the transaction in Europe, we will obviously use the cash flows that we generate out of India to deleverage. In the first half of the year itself, we have deleveraged by about Rs 8,000 crore. We were also helped in the first half by the working capital release, which we will not have in Q3 and Q4. But certainly the profitability of the India business continues to be strong. So, we will continue to deleverage in second half also. I would not like to give a guidance by how much.
What was the rationale behind having long products as a separate entity and what are the plans for the other three clusters formed as part of the restructuring exercise in the India business?
The whole philosophy is to create a long product entity separate from the parent Tata Steel, which is focussed more on flat products. Kalinganagar, Angul, Jamshedpur are 70% flat products, so long products company in our view has to operate in a different space, have a different business model, maybe look at distributed production facilities, look at the recycling business. There are many possibilities in the long products area, and we wanted Tata Steel Long Products to explore all of these possibilities and not be constrained by being just a part of the parent. The idea is also to make it into having a decent size balance sheet, scale, and take out a lot of overlapping corporate costs which exist in these companies. As for the remaining three, mining cluster is already created, we have a company called TS Alloys which is now Tata Steel mining. The utilities cluster and the flat products downstream cluster will take some more time.
Would these clusters be listed at some point in time?
I would not like to comment on that. The idea is not to list but to have fewer listed companies. Long Products is already a listed entity, for the others the idea is not to have too many listed entities. We will look at those options once we reach there.