Tata Steel Europe could do better in the next two quarters
Tata Steel posted its best quarterly performance in the first quarter, making more profits than last year. In a conversation with The telegraphKoushik Chatterjee, executive director and chief financial officer of Tata Steel Group, said the market will remain strong despite falling iron ore prices that led to a sharp correction in steel inventories on Friday over fears that prices for the steel does follow. He says the company is likely to reduce its debt by an amount similar to last year. Tata Steel had reduced its debt by $ 4 billion in 2020-2021.
Tata Steel recorded more profits in the first quarter than the full year 2020-21. Analysts have also revised their target prices for Tata Steel. How do you analyze the changes in the context of the industry for the rest of the year?
Indeed, we had good operational and financial performance during the quarter and reported an after tax profit of Rs 9,786 crore for the quarter. This was the result of stable operating performance, a focus on cost reduction, favorable market conditions and business performance. There have been several structural developments in the steel industry over the past few years that have manifested themselves in significant ways recently, the main one being the changes on the supply side which are here to stay.
Given the volatility of iron ore and steel prices, how do you see the performance axis of the European company?
Tata Steel’s underlying performance in Europe was sequentially better than the previous quarter and the increase in revenue was broadly in line with the market. The European business has a mix of longer-term contracts and, as they are renewed, we expect the increase in spot prices to be reflected in a lagged manner in the performance of the second and third quarters.
Recently there has been a sudden drop in iron ore prices. Do you think this will impact the industry trend in the near future?
Yes, international iron ore prices have fallen by around 40% from the peak in May 2021. Basically, the production trend in China has slowed down as there is some sluggishness in some sectors and exports. steel also declined month over month in July, even though the China-EU spot price differential is around $ 600 / tonne. There is a general estimate that China will produce around 50-70 million tonnes less compared to the same period last year before the Winter Olympics and also from climate management. As China is the biggest consumer of iron ore, it reacted to news of production cuts. But this is unlikely to have an impact on world steel prices, as we do not believe that China is aggressive in the maritime market. Consequently, prices in Europe, the United States and the rest of the world continue to be strong and sustainable, in particular due to very strong political interventions on imports in certain geographies.
The company managed to reduce debt by $ 4 billion in the past fiscal year. Will the pace of deleveraging slow down this year? What is your orientation?
Focusing on free cash flow and balance sheet management will remain a priority for us and we have repaid approximately Rs 5,800 crore of principal debt during the first quarter. Our objective will be to prepay a significant debt much earlier than expected this year and to achieve a level of deleveraging similar to that of the previous year.
The company’s working capital requirement increased this quarter. Can you explain why, and if it will stay at this high level?
Yes, in some ways it is natural for the prices of raw materials and steel to be high. The impact is greater in Europe because we buy both iron ore and coal and the average price of steel is higher than in India. Thus, the impact in value is very high in the increase in working capital, while the physical stock has remained globally at the normalized level. Inventories of finished goods will continue to decline in the second quarter in India as we will sell more than in the first quarter.
How do you see Indian demand for the rest of the year? Are there signs of improvement?
Demand conditions were impacted during the peak of the second wave, especially for long products, but since early July, we have seen a normalization of demand. The demand segments of flat products such as automotive tubes etc. are strong enough. There are certain segments such as automotive which, aside from the semiconductor issue, have a strong order book and are expected to be strong during the next holiday season. The current quarter is seasonally a slower quarter for construction, but it is hoped that after the monsoons it will resume. Government public spending on infrastructure will be a critical factor in maintaining the demand profile for the remainder of the year.
How does Tata Steel envision sustainability over the next decade?
Sustainability is a very solid foundation for Tata Steel around the key themes of climate change, water, circularity and biodiversity. We have set our targets and goals for 2025 and 2030 and our internal processes have been deeply rooted around these goals. We have developed a long-term decarbonisation path, pursuing low-carbon technologies, deploying a responsible supply chain policy and adapting global reporting and disclosure standards. We have developed the strategy and actions based on a scenario-based approach to build sustainable growth for the company in India. In Europe, we are deeply committed to developing the decarbonisation path for the future.
What are the key points of Tata Steel’s financial strategy?
Our financial strategy is based on maintaining balance sheet resilience, benchmarking financial measures against investment grade levels, developing a green finance framework and maximizing return on invested capital. These are key themes upon which all of our business and financial plans for the company are based and over the past 12 months we have made progress on each of them, including strengthening the balance sheet. cycle and we are currently already at 1.6x. This is essential as it provides strategic space in our balance sheet for future growth.