Resources will test Tata Steel Europe revival

Finding raw materials could challenge overseas subsidiary’s strategy to be fit for the future.

One of the biggest challenges that Tata Steel Europe faces today is a dearth of captive raw materials. At a time when the market is still sluggish, control over feedstock has a direct bearing on a company’s profitability. But that is still a two-year wait.

Even so, Tata Steel Managing Director Hemant Nerurkar and Group CFO Koushik Chatterjee are not losing sleep over it. They have braved a bigger storm in Europe over the last two years and the turnaround is still a work in progress. But raw material linkage is strategic for long-term stability, as many would argue that until then Tata Steel’s vulnerability to market fluctuations will persist.

From 2012, the European operations will begin their journey to achieve a target of 25 per cent raw material security, from nil currently. “Iron ore from the Canadian project and coal from the Mozambique project will start coming to the plants. Obviously, the iron ore will go to Europe and the coal will primarily go to Europe until a time it becomes a very large mining operation, when it will also cater to India,” said Nerurkar, adding, “So, whichever way it goes, we will start having our own.”

The company’s iron-ore project in the Ivory Coast also holds a lot of promise. Exploration work is slow, but Nerurkar is happy with his team’s efforts, given the conditions outside Tata Steel’s control. He says, “Exploration is going on under a trying situation. We need to have patience in these kinds of projects. There is no port and we may have to set up a slurry pipeline to transport the ore to a port. To justify all these investments in the project, we should get at least 15-20 million tonne of ore every year. Fixed costs, otherwise, are very high. So, we must have these kinds of volumes.”

Interestingly, Tata Steel Europe has stumbled upon a forgotten coal mine close to its Port Talbot operations in the UK. The company, with active support from the Welsh government, is now looking to identify the deposits and ways to extract it. Nerurkar says, “The coal was in that area, but over time when coal prices were $60-70 a tonne, no one took notice of it or the need to mine it. It is now when hard coal prices are at over $200 a tonne that we are re-evaluating the feasibility of extracting it.”

The reserves, however, are definitely not of the size that could fulfil all of Tata Steel Europe’s needs, but any captive resource is better than none. However, raw material security is crucial, but not critical. “Our first step is to reach best-in-class Ebitda margin consistently and a lot of work is going on to drive that objective in the near future. If that happens, Tata Steel Europe will be a different animal altogether. It is how you can stand up to be the best value-creating companies with market access, high-quality products, value-added downstream products, a very lean manufacturing process and tight and disciplined costs. Those things set the base and on top of it if you have raw material security, it is even better,” explains Chatterjee.

Chatterjee adds that the company will now be making the capital expenditure in Tata Steel Europe that was on hold for the past two years on the pretext of conserving cash. “For the past two years, we haven’t spent in Europe what perhaps was needed. So, we are refocusing our investment direction in Europe,” he says. The board recently approved £185-million capital expenditure at the Port Talbot operations and the company is now looking at other value accretive investments that have a short payback.

With good times knocking, the strategy to be fit for the future and weather all storms could not have come at a better time for Tata Steel’s European operations. The company posted an Ebitda of $501 million in the first half of the current fiscal, against a loss of $813 million for the corresponding period last year. And with parent company Tata Steel changing gears and putting money into Europe to expand and better place itself among peers, the journey has just begun for Tata Steel Europe to recreate its niche.

At home, partnerships are helping
In India, it’s a whole different story for Tata Steel as far as captive resources are concerned. Although the company has fully integrated iron-ore reserves and 60 per cent security in coking coal, the company is still actively looking for more raw materials and is actively pursuing partnerships.

Tata Steel is in two joint ventures, with Steel Authority of India (SAIL) and NMDC, both government-owned entities. The joint ventures with SAIL (S&T Mining) and the MoU with NMDC to scout for raw material are both long-term initiatives for the company.

Chatterjee says that SAIL and Tata Steel might be competitors in steel, but that both companies have similar requirements and objectives in raw materials, especially in coal and that’s why they have tied up. “S&T Mining is run independently, is bidding for projects and very soon you may hear some announcement.”

With NMDC, however, the company has a slightly longer-term view. “For such JVs to fructify in the metal processing space takes time. With NMDC, we are discussing how to collaborate in raw material security and for steel projects.  We will take this forward when it meets the objectives of both companies,” Chatterjee says. There is already buzz in the market that in one of the greenfield projects of Tata Steel in Chhattisgarh, NMDC will be the joint venture partner.

"It makes sense for Tatas to team up with NMDC in India for raw materials and even for a steel plant. For overseas ventures, I am not sure what value add NMDC will bring to the table. Tatas are capable of doing their own thing," says an investment banker who has worked with the company on many occasions on condition of anonymity.

Another long-standing association that the company is taking forward is with Nippon Steel. Chatterjee says they have a very strong technical relationship and they are continuing to explore what more they can do together.

But why explore synergies with Nippon when Tata Steel Europe already has a similar technical edge? “Europe and India use different kinds of auto steel. In Europe, more galvanised steel is used because of corrosion. In India, it is more continuous annealing steel. Some of the requirements of auto steel in India and Europe are inherently different,” Chatterjee responds. However, in other downstream and value-added products, the power of European capability and integration benefits on Indian operations would be evident in the future.