The balance sheet of Tata Steel is becoming better with more incisive analysis by the year. The statement by chairman Ratan Tata captures well the “dramatic shift” in the economic power from developed countries, bruised badly by memory’s worst recession and now on recovery path, to Bric countries and its implications for the world steel industry. Tata Steel is the world’s 10th largest producer of steel, but is the second most geographically diversified only after Arcelor Mittal. Tata is readying the company to be a producer of up to 50 million tonnes in the coming years when its global footprints will further spread.
A group seeking such a big profile in steel will necessarily be seeking security in two principal raw materials – iron ore and coal. This, no doubt, has gained in urgency following the success of miners to substitute annual benchmark price by spot price-based quarterly contracts. The new arrangement virtually thrust upon steelmakers is, however, not in sync with steel sold to many bulk users on long-term contracts. What is worse, the market for iron ore and coal may henceforward see greater price volatility sending more and more steelmakers to use swaps to hedge risks in minerals.
Tata Steel group informs that it too will be developing “hedging strategies” to navigate through an expectedly high volatile market. Whatever happens in steel relevant minerals market, the responsibility will rest principally with Vale, BHP and Rio. In his characteristic display of straightforwardness, Tata says the trio “continue to opportunistically elevate prices that can never be passed on to the customer in these depressed times.” That his prayer for “better sense” befalling miners will go unanswered is not to be doubted.
Tata, therefore, is striving hard to ring fence group plants in the UK and Europe from raw materials uncertainty through “acquisition of iron ore and coal resources.” And as the group production gets progressively expanded to 50 million tonnes from 22 million tonnes last year, this is to be backed up by “integrated mining operations in several geographies.” The group’s participation in the development of Benga coal project in Mozambique through its JV with Riversdale Mining of Australia and also iron ore properties in Canada in partnership with New Millennium should be seen as the beginning of seeking more such properties in different parts of the world.
All such ventures are to be seen as what Tata describes as the “importance given to raw material security through acquisition of iron ore and coal reserves to feed (the group’s) UK and European plants.” Thanks to steel demand collapse over the past two years, the group had to take some “hard” and “painful” decisions for steadying its European operations.
The Management Speak chapter in the balance sheet says the “weathering the storm” programme for the European operations led to savings of 866 million pounds during 2009-10 while the launch of “fit for the future” restructuring programme will allow the mills there to ride out any demand and price downturn in future with some facility. Tata Steel Europe’s turnaround in 2009-10 second half showing an Ebitda of 297 pound has got much to do with production planning, inventory management and belt tightening.
Having put European operations in shape, what mills there now sorely need is protection from the capricious behaviour of mining behemoths. As a kind of legacy of over a century old Jamshedpur steel mill which will have its capacity raised to 10 million tonnes during this financial year, it has good raw materials backing, particularly iron ore, chromites and manganese ore. The mill, figuring among the world’s least cost steelmakers, will become increasingly valuable with creation of coated and packaging products in the downstream in conformity with the group policy to steadily increase the share of value added items in its product portfolio.
In the meantime, raw materials have become such a major concern that all Tata Steel greenfield ventures like the six-million-tonnes project in Orissa in two phases will be conditional upon getting access to adequate iron ore deposits. The government should see to it that whether it is captive or merchant mining, all such operations are to be on large scale to facilitate use of best technologies and environment protection.
Volume came to Tata Steel in one go with Corus acquisition. Challenges thereafter are in integrating key functions across the group and seamless knowledge exchange among mills. Such integration happened well earlier with ArcelorMittal. Tata Steel informs that as many as 17 performance improvement teams covering areas like making of iron and steel and flat and long rolling with men drawn from across the group are making significant contribution to manufacturing improvements in multiple locations.
Synergistic benefits are derived by consolidating groupwide functions like procurement and quality management. Procurement skills spread across the group are getting integrated through cross-sourcing of contracts for raw materials, bulk shipping and IT. Last couple of years were particularly difficult. But the group did not flinch from making investments in R&D and human resources to secure cost competitiveness while seeking progress in proprietary knowledge.
