Europe ops will be out of woods only in next FY: Tata Steel's T V Narendran

European operations pulled Tata Steel into the red in the third quarter (Q3) of 2022-23 (FY23). Chief Executive Officer and Managing Director T V NARENDRAN, in conversation with Ishita Ayan Dutt, says the challenges in Europe may persist for a while. Nonetheless the situation will improve on-quarter. Edited excerpts:
 
The net loss in Q3FY23 came as a surprise.

There were two big reasons particularly linked to Europe numbers.
 
The first and foremost is the pension fund adjustment. That was something that had to be done but couldn’t be guided because we were talking to insurance companies about how much of the pension fund they could take on. These are non-cash adjustments but secure the company for the future.
 
Two, we have a blast furnace relining coming up in the Netherlands in April this year. As a build-up to that, we wanted to keep slab stocks — some of this was produced in the first and second quarters (Q2) when coking coal costs were high. Since steel prices in Q3 in Europe were lower than in Q2, we had to take a net realisable value adjustment for the stocks. Hence, Europe had a negative earnings before interest, tax, depreciation, and amortisation (Ebitda) more than people perceived.
 
The India numbers were par for the course. Of course, when the quarter started, we didn’t think steel prices would drop, but they did. We had said during the Q2 analyst call that it would be the worst quarter for India and Q3 the worst for Europe. In some sense, that played out.
 
Is the worst behind you?
 
Yes, it is.
 
When do you see Europe coming out of losses?
 
The margins will improve in Europe this quarter because gas prices and energy costs have started to trail off. Steel prices in the spot market have started going up, long-term prices are lower. This quarter, we see realisations in Europe dropping by about £70 per tonne and costs by about £100 per tonne.
 
In the Netherlands, where we are always Ebitda- and cash-positive, we have a challenge next quarter because of blast furnace relining. I expect the situation in Europe to keep improving on-quarter. We will be out of the woods only by Q2 of 2023-24.
 
The UK government has reportedly indicated a support package of £300 million for Tata Steel’s green transition. Is that enough to save Port Talbot from closure?
 
It’s not enough compared to what we had asked. Given that this is what the UK is offering, we are looking at several possibilities for making the site sustainable. It’s a complex assessment. What we had asked for is something which should have fixed it for good; this is a little sub-optimal.
 
What was the ask?
 
I cannot assign a number; it was much more than this. But not as much as what was reported.
 
How much will the transition in the UK cost?
 
It depends on the process route to be followed. But the principle of support that most steel companies are seeking from the relevant government is that 50 per cent of the capital expenditure for the transition should come from the government as some form of grant. Otherwise, there is no business case for the transition.
 
Moreover, there should be some operating expense support because you are shifting from using coal to hydrogen or gas.
 
We have to ensure there is a level playing field. There should be some sort of carbon border adjustment mechanism to ensure we don’t have unfair competition in Europe.
 
What is the timeline you are looking at?
 
Europe, including the UK, has made commitments on how green they will be by 2030. The clock is ticking and ideally one should take these calls in the next year or so.
 
Does it mean that the closure of Port Talbot is a closed chapter?
 
Any option we exercise has a cost and benefit. Even if you decide to exit, there is a cost attached to it. We have to always look at all these options in a holistic manner and take a call.
 
Will Tata Steel India have to extend support towards the UK this year?
 
There is some support that we had to extend because it is Ebitda-negative.
 
Net debt at the end of December was Rs 71,706 crore. Is it likely to come down this quarter?
 
It should because we will be releasing working capital and there is margin expansion going on.
 
Will you be able to meet your $1-billion deleveraging target this year?
 
No, we started the year at Rs 51,000 crore. We are a long way from there. Even if we give this year a skip, we are going to be chasing it from next year.
 
Tata Steel stayed away from submitting an expression of interest for NMDC (formerly National Mineral Development Corporation).
 
We have adequate flat product capacity and enough opportunity to build more capacity. Fundamentally, we believe that having fewer sites with larger capacity potential per site is better and more efficient. We also believe it is better to have sites closer to the sea.