Tata Steel's integrated reporting breaks new ground

A balance sheet could provide true insight into a company's response to a sudden collapse in demand for its products, as well as how it is using the difficult times to become more cost-efficient and build new capacity for better days, provided the management is open to this. The financials and other tangibles are easily accountable. But what are the best ways for a company to account for the use of human and natural resources, intellectual capital and its dealing with the market and competition?

In a maiden attempt at capturing the fair value of an organisation for the benefit of its shareholders, Tata Steel has used integrated reporting in preparing the 2012-13 balance sheet. As the company has been operational for about a century and due to the foresight of past managements, it has the advantage of owning large volumes of steelmaking raw material such as iron ore, coal, chromite and manganese ore. Captive use of raw materials for steel making has enabled Tata Steel to remain in the lowest-cost quartile globally. But whatever its riches of resources, is Tata Steel's approach to mining of various minerals in line with the sustainability goal of extending the life of mines by progressively going into the earth's lower depths and making inferior ores useable?

The company went for expansion of 2.9 million tonnes (mt) to make the Jamshedpur plant a 9.7-mt crude steel capacity unit; it also built a six-mt upstream pellet plant. The upstream unit is in response to the supply of lump ore becoming increasingly scarce, while all iron ore mines in the country must be able to evacuate mountains of accumulated fines to sustain normal mines production. The feedstock for a pellet plant is extra-fine ore, after its benefication. The presence of pellets in what is called the 'ideal prepared burden' would lead to improvement in productivity of the new 3.05-mt blast furnace, among the largest in the Indian steel industry. The furnace is at the centre of the last round of capacity expansion at Jamshedpur. Large-scale pellet production would yield benefits for Tata Steel in two ways: First, extract value from fines which, if left in the open, would be environment-disturbing and second, result in higher blast furnace efficiency. In any case, Tata Steel, at the forefront of the campaign to conserve iron ore resources for local use, should be among the leaders in pellet making.

Also, in the changes on the marketing front for ferro chrome, the alloy used in making stainless steel, Tata Steel has shown it is fleet of foot. Incidentally, the company is India's largest miner and producer of chromite and ferrochrome, respectively. The company's balance sheet said it had "increased its focus on domestic sales of ferrochrome, recognising a shift in the pattern of global production on account of increased chrome ore exports from South Africa to China". Tata Steel is the country's first to introduce branded steel products and its success has encouraged other producers to follow the branding route. It has also made a success of 'Tata Silicomag', the maiden branded ferroalloy product.

Even while China is totally bereft of chrome ore, the country went on to become the world's largest producer of ferro chrome in 2012, producing 3.06 mt, leaving power-deficit South Korea well behind (2.8 mt). The Chinese ferrochrome production was sustained by imports of 9.29 mt of chrome ore, of which South Africa's share was about half. At Sukinda valley in Odisha is 97 per cent of India's estimated chrome ore resources of 203 mt. Tata Steel, owing to its commitment to "sustainable mining and conservation of natural resources", is developing underground mines at Sukinda---another proof that a difficult market for steel has not distracted the company from its stated goal.

Tata Steel Chairman Cyrus P Mistry has said volatility in raw material prices and "systemic weakness in demand in key markets" would make the "next 18-24 months...challenging" for the company. In the first half of 2013-14, car sales fell 4.7 per cent, the sharpest decadal setback. Infrastructure companies are forced to sell assets to reduce unsustainable debts. Mistry, however, is confident his company would emerge stronger at the end of the current industry downturn, owing to its investment in "select facilities, product rationalisation and right sizing of manufacturing assets".

The expansion at Jamshedpur would record total fruition in 2014-15, giving the company unassailable presence in cold rolled steel. The fact that Tata Steel is readying itself to produce high-strength automotive steel, a product offering major scope for import substitution, in a tie-up with Nippon Steel, should be a game changer. Now, the company's energies are focused on commissioning the first phase of the six-mt steel plant at Kalinganagar in Odisha by March 2015. The Odisha venture would add a lot more value to Tata Steel than mere capacity addition by way of strengthening the product portfolio and rebalancing steelmaking capacity across the group. Mistry says investments in the Odisha plant would generate "life cycle returns for its shareholders". With more capacity and a richer product portfolio, the company is on course to taking advantage of the next upturn in steel.