Cashing in on cost differential tough

THE TATA-CORUS DEAL

The acquisition of Corus by Tata Steel has once again brought to focus the cost differential between producing steel products in India and that of Europe.

For instance, Tata Steel, one of the lowest cost producers, incurs a cost of around $160 for producing a tonne of slab, while for Corus it is $320 a tonne.

At a press conference in London, both sides highlighted the potential synergies from the acquisition. Analysts, however, point out that in the short term, the ability of the Tatas to reduce costs at the European plants is limited.

That's because strong domestic demand has led to virtually no potential supply of slabs that could be diverted from India to Europe, for converting into higher value products.

This situation is not expected to change even when Tata Steel completes its 1.8 million tonne capacity expansion, given no signs of weakening in domestic demand.

Analysts point out that synergies with the European operations could start, when production of slabs starts from Jharkhand's greenfield projects, which is still several years away. In CY05, Corus' operating margin was at 7.1 per cent compared with 39.2 per cent for Tata Steel in FY06.

Owing to these differences in efficiencies, Corus gets an enterprise value per tonne of about $550, while Tata Steel's domestic business gets a valuation of over $750 per tonne.