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Tata Steel: Buying inputs

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Shobhana SubramanianVarun Sharma Mumbai

Higher stakes in coal blocks will help the steel major bring down the tab for raw materials bill.

As access to key raw materials becomes crucial, companies are scouting around for assets that they can own. TataSteel has just increased its equity stake in Riversdale mining, which owns coal blocks in Mozambique, from the existing 35 per cent to 42.3 per cent at a price of $121 million. Currently, Tata Steel sources about 20 per of its raw material requirements in-house and further access to coal blocks can bring down its raw materials bill.

That would be particularly helpful at a time when steel prices are expected to come off. International prices of hot rolled coils are believed to have corrected by about 10 per cent, to around US $ 1,006 per tonne, in the last one month , according to Bloomberg. The immediate cause is understood to be higher exports from China, where demand is believed to have weakened.

 

A slowdown in the US and European markets is anticipated, say industry watchers, who believe prices could fall further. However, realisations for Corus, the UK subsidiary of Tata Steel, estimated to have been around $1,388 per tonne in the June 2008 quarter may not suffer too much because it enters into long-term sales contracts. Corus which, increased prices by about $150 per tonne in July, is far less profitable than its parent with operating profit margins estimated to be around 10 per cent compared to 49 per cent for Tata Steel.

Domestic prices of HRC have also corrected from their peaks in April 2008 of Rs 48,000 per tonne to Rs 43,000 in August. Again, with a significant portion of sales based on long-term contract, steel producers will not be immediately hit. The Tata Steel management says that global demand, forecast to grow at 6.5 per cent, this year, is somewhat lower, because of the slowdown in the US housing sector.

However, it points out that the anticipated supply of 60-70 million tonnes may not come in, so that even if demand is lower, the supply may not be adequate. Also, while spot prices have softened, average realisations remain firm. Besides, with economies in the middle east and China growing, the steel cycle this time around, it feels, could last longer.

The management points out that a large part of its domestic portfolio comprises sales on a contract basis and should not, therefore, be affected. Since early July, the Tata Steel stock has come off by 30 per cent and at the current price of Rs 486, trades at just over 3 times its estimated FY09 earnings.

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First Published: Sep 25 2008 | 12:00 AM IST

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