At current steel prices, margins don't justify investments: Tata Steel CEO

T V Narendran tells that in many ways second quarter of FY25 was the worst, but Q3 also comes with challenges

A bunch of factors were at play in the second quarter of FY25 for Tata Steel — restructuring in the UK, Kalinganagar expansion, and weak market conditions. In an audio interview, T V Narendran, managing director and chief executive officer (MD & CEO), Tata Steel, tells Ishita Ayan Dutt that in many ways, this was the worst, and that Q3 also comes with challenges. Edited excerpts:

 

Q: Cheap imports and weakness in global markets are weighing on your Indian and European operations. What is the outlook for the December quarter?

 

We are not out of the woods yet. We are still in a fairly challenging market situation. We have guided that realisations in this quarter in India will be about Rs 2,000 less per tonne compared to Q2. In the UK, we will be about 50-55 pound lower and in the Netherlands, about 70 pound lower.

 

On the cost side, the coking coal cost will be about $20 per tonne lower in India, and in the Netherlands, it will be about $10 lower. So, there is still pressure on the margins for Q3.

 

I hope things will get better going forward. At least in steel prices, the low point was about $450 per tonne in August internationally and now it’s around $500 per tonne. Hopefully, if the Chinese stimulus works a bit, then the exports will drop, which can help the prices.

 

I also think with the outcome of the US election, more steps will be taken to strengthen Europe in terms of investments, protection, etc. That should help us. But this is going to be a challenging quarter.

 

Q: Losses in the UK have widened despite closure of blast furnaces. When do you see a turnaround?

 

There are some costs which reduce when the blast furnace is closed. For instance, maintenance expenses in the heavy end. But a large part of the fixed cost had to do with the people. Executing voluntary and compulsory redundancy is going on. We are supposed to reduce the workforce by 2,500 in the next 18 months. About 2,000 people opted for voluntary redundancy.

 

There is a legally prescribed process, which is ongoing. We expect that there will be a reduction of about 1,800 by March. As that happens, the fixed cost will come down in the UK.

 

In some sense, Q2 has probably been the worst one. This is simply because we were running the blast furnaces, so we had iron ore, coal. We imported slabs so we had a lot of working capital in the system and then we were carrying the fixed cost, but operating like a downstream. We will see negative Ebitda (earnings before interest, tax, depreciation and amortisation) reducing and by the June quarter next year, we should be Ebitda-neutral, or Ebitda-positive.

 

Q: Are you saying that the worst is behind you now?

 

Yes. Unless steel prices drop further, which is not in our hands. But at current steel prices, this is the worst.

 

Q: In the last one year, your gross debt has increased from about Rs 89,723 crore to Rs 99,392 crore. Is it going to weigh on your growth capex?

 

For multiple reasons, this is potentially the peak point. One is, we are spending more and more on Kalinganagar because we have come to the end of the project. But we are not yet getting the benefit of the volume because the blast furnace has just been commissioned. Over the next few quarters, you will see the benefits of the expenditure in Kalinganagar coming back to us in terms of cash flows.

 

For the Netherlands operations, last year was the worst, at least in our history. Now, the operations are back to normal, but the markets are not great. And in the UK, we are going through restructuring. So, we have all these elements coming together at the same time and then poor market conditions.

 

That's why the gross debt is up and net debt has increased to about Rs 88,000 crore. We want to bring net debt back to Rs 70,000-75,000 crore. For net debt to Ebitda, we want to chase 2.5 times.

 

Next year, you will also see the Kalinganagar volumes coming and the bleeding in the UK stopping. And hopefully, market conditions will be slightly better than that this year.

 

Q: Do you see the capex momentum continuing and how confident are you of achieving 40 million tonne (mt) capacity by 2030-31?

 

We will play it by ear. We have the capability to do it now. But it will also depend on if China is going to continue exporting 100 million tonnes of steel. What we are doing currently is going through the process of getting environment clearances (ECs).

 

We have a public hearing for Neelachal expansion end-November. The immediate focus is on Neelachal expansion from 1 mt to 5 mt, for which the engineering work is being done. Once we have the EC, we will go to the board.

 

We have the option to grow Kalinganagar from 8 mt to 13 mt, and the Angul plant from 5 mt to 7 mt, all in the next few years. So, if the market conditions improve in the next six months, then we can go back to the board. The advantage we now have with multiple sites is that we can grow sequentially. But we will take a call based on market conditions and profitability of the businesses. The last thing you want is to build capacities for export markets. The international markets will continue to be under pressure unless China reduces exports.

 

Are cheap imports going to be a factor in deciding on expansion?

 

Yes, if the profitability continues to be under pressure in India because of unfairly priced imports. That has an impact on cash flows and the business case for fresh investments.

 

That's our point with the government also, they need to look at it. It's not just us, I am sure others are also looking at these numbers. If steel prices stay at today's level for the next five years, I don’t know how many of my peers will want to build capacity endlessly. Honestly, at these levels, the margins don't justify the investments. The return on investment won't be there at these prices. Even the Chinese steel industry can’t sustain at these prices. So, like in every cycle, if it comes down, it will also surely go up.

 

In the Netherlands, you are engaged in discussions with the Dutch government on support for decarbonisation. So, what is the likely capex?

 

We have put in a submission to the government, but it's too early to make those numbers public. But roughly, a billion pound for the electric arc furnace (EAF) and related facilities. And another billion pound for the DRI (direct reduced iron). That’s the range. There are other things like coverage of raw material yards. All this is in discussion with the government and like in the UK, it will depend on the support that we get from them.