EU to relight Tata Steel furnace

Anti-dumping duty on Chinese steel bodes well for its European operations at a time when coal costs are on the rise

The European Union’s (EU)’s decision to impose anti-dumping duty on Chinese steel imports has come as a breather for European steel players including Tata Steel Europe. Already reeling under low steel demand owing to slowdown, European manufacturers’ challenges were compounded with low-priced Chinese imports impacting realisations. The EU has now imposed anti-dumping duties of 13-23 per cent on hot-rolled steel and 65-74 per cent on heavy plates imported from China into the EU. This definitely comes as positive news for European steel manufacturers such as Tata Steel Europe.

Tata Steel has already been trying to streamline its European operations to cut losses. The company had reported an operating profit of Rs 856 crore in its European operations in the June 2016 quarter versus a loss of Rs 578 crore in the March 2016 quarter. However, analysts’ concerns remained elevated on rising coal costs that were to impact the operating performance in subsequent quarters. In fact, the coal spot prices have almost doubled during the September 2016 quarter. Thus, imposition of anti-dumping duty will boost realisations and lead analysts to revise upwards their forward operating profit estimates for Tata Steel.

Credit Suisse estimates that 60 per cent of Tata Steel’s Europe output is sold in the EU and more than half of that is in hot-rolled form (the rest is value-added). Thus, duty on hot-rolled steel will definitely provide boost. Analysts estimate the duty to add about $100 per tonne to landed prices, which is substantial looking at the fact that Tata Steel reported per-tonne operating profits of $50 in the June quarter. Of course, not all benefits will flow to earnings before interest, taxes, depreciation and amortisation (Ebitda) as the costs are also on the rise. Nevertheless, analysts at Credit Suisse say that even a $10 per tonne higher Ebitda is meaningful as it adds 12 per cent upside to the stock price at seven times enterprise value/ Ebitda.

The depreciation in British pound is another factor as it is likely to accrue gains. An analyst at a domestic brokerage says the recent depreciation in pound after Brexit (Britain’s vote to exit the EU) materially improves the UK operations profitability outlook, while Credit Suisse says a five per cent fall in the pound leads to $5-a-tonne improvement in operating profit as their earnings per share estimate rises six per cent on higher European profitability assumptions. They have raised their Ebitda per tonne estimate to $50 against $44 earlier.

Meanwhile, more positives can accrue if the company can resolve the pension issues related to the European business. Tata Steel is believed to be in talks with the pension regulator for helping it carve out its pension liabilities from the core business. If regulators and members agree to the changes, the pension issue could get resolved, paving the way for an eventual merger of company’s European operations with ThyssenKrupp, say analysts.

Meanwhile, in the domestic arena, the company has already reported strong volume numbers for the September quarter with sales growing to 2.66 million tonnes (mt) from 2.33 mt in the year-ago quarter. Analysts remain optimistic on the outlook for domestic business. The realisations remain strong and steel demand is also growing. Analysts at HSBC say their revised growth estimate still implies steel demand will continue to grow strongly at 7.5 per cent (as seen in September 2016) for the second half of FY17.

Not surprising, Tata Steel’s stock continues its northward journey and hit a 52-week high of Rs 420 on Monday before closing at Rs 417.40. Some analysts have a target price of Rs 500 for the stock.