Tata Steel suffers from recession

Tata Steel is a victim of its ambition. Its result illustrates how India and Europe have fared differently during the period which many call the worst ever since 1929.

A severe demand contraction in the European market and lower margins saw Tata Steel record a drop of 61 per cent in its consolidated net profit at Rs 4,951 crore for 2008-09 against Rs 12,350 crore in the previous year. The company's net sales were up at Rs 1,45,686.32 crore (Rs 1,31,090.8 crore) and total income was up at Rs 1,47,329.20 crore (Rs 1,31,533.63 crore). But the margin has been under severe strain in the year under report.

The board of the company has recommended a dividend of Rs 2 per share on cumulative convertible preference shares and Rs 16 per share on ordinary shares for 2008-09. The earnings before interest and depreciation at Rs 18,495 crore (Rs 18,287 crore) was marginally higher and the company's turnover was higher on account of higher prices but net profit margin was down at 3.36 per cent (9.4 per cent).

The company's profit from operations before net finance charges and exceptional items was at Rs 14,127.95 crore (Rs 14,121.34 crore). On a stand-alone basis, Tata Steel reported a net profit of Rs 5,201.74 crore (Rs 4,687 crore) on a total income of Rs 24,315.77 crore (Rs 19,691 crore).

Tata Steel expects demand for steel in the country to remain buoyant despite the recessionary trend in the global markets. The company’s deliveries increased by 9 per cent to 5.23 million tonnes (mt) in financial year 2008-09 from 4.78 mt in FY'08. Steel deliveries of the Tata Steel Group for FY’09 were at 28.54 mt (31.68 mt), lower by 10 per cent compared with last year.

B Muthuraman, managing director, Tata Steel, said raw material cost has eased substantially, especially that of coal which was quoted at $300 a tonne in 2008 but had fallen to $120 in 2009 while iron ore dipped to $60 a tonne from $100. “I foresee the steel demand in India to be strong with the Government’s plan to invest huge amounts in infrastructure.We will sell 20-25 per cent more this fiscal,” he added.

The steel maker’s balance sheet was bloodied by a one-time restructuring and impairment charge of Rs 4094.53 crore as it struggled to cope with the severe contraction in demand for steel in the US and the UK.

The company announced plans to cut around 2,045 jobs at Tata Steel Europe —the subsidiary created out of the $12-billion Corus acquisition in early 2007. Tata Steel said it would soon start consultations with the employee unions there. The recession dealt a severe blow to the faith workers of Corus had at the time of acquisition that Tata would save their jobs.

Tata Steel did not provide the figures for the fourth quarter. But calculation based on the company’s performance for nine months ended December 31, 2008 showed that it had suffered a loss of over Rs 4,500 crore in the January-March quarter. However, full-year net profits at its Indian operations rose almost 11 per cent to Rs 5,201.74 crore compared with Rs 4,687.03 crore the year before.

Tata Steel said that the restructuring costs arose from the Fit for Future programme at Tata Steel Europe. Under the programme, Tata Steel plans to sell its aluminium smelter operations in Germany and the Netherlands, reconfigure its strip products business in the UK, create a new business model for its engineering steels business, and streamline its downstream facilities in Europe.

re in Europe in FY09 through the two programmes-Weather the Storm and Fit for the Future. Koushik Chatterjee Group CFO, Tata Steel, said, “We had raised $1.04 billion through non-convertible debentures and an un-drawn bank facility of $1.3 billion. The consolidated cash and cash-equivalents stand at $2.1 billion as on June 20, 2009.”

Muthuraman ruled out job cuts at its Indian operations. During the year, consolidated net sales rose to Rs 145,686.32 crore, up from Rs 131,090.81 crore. Muthuraman said steel production at the European facilities had been cut by 47 per cent to match the slump in demand. Steel production for the whole group, including Indian operations, had shrunk by 40 per cent.

He added that India and China were the only two countries in the world where demand had grown marginally over last year. “The sharp fall in world steel demand looks deeper than what we thought six months ago,” he added.

Although there were some positive features in the form of lower raw material prices, Muthuraman said the revival of the steel industry would depend on the stimulus packages drawn up by various nations. Tata Steel MD disclosed to the media that this year Tata Steel would sell 20-25 per cent more steel than in 2008-09 largely due to Jamshedpur capacity expansion from five million tonnes to 6.8 million tonnes annually. He said the company was able to bring down manufacturing costs by $47 a tonne in the second half of 2008-09.

“We are targeting a cost reduction and performance improvement benefits of Rs 1,000 crore in the current year.” He said there was a severe contraction of steel demand globally from October 2008 with US and European demand down by 40 per cent. Only India and China saw a demand pick-up of 2-4 per cent.

The company’s consolidated net profit at Rs 4,849 crore (Rs 12,322 crore) in FY09 would have been lower by Rs 5,496 crore and it could have slipped into the red had it charged the actuarial losses on funds for employee benefits of Tata Steel Europe, to the profit and loss (P&L) account. Tata Steel swung to a loss in its fourth quarter after incurring costs to reorganize operations at its UK unit Corus. The loss was Rs 4,530 crore in the year ended 31 March, compared with a Rs1,230 crore profit in 2007-08.

Tata Steel charged the losses to the balance sheet, according to IFRS (International Financial Reporting Standards) as followed globally. Further, consolidated net profit would have taken a Rs 899 crore hit, had it followed the practice of charging the loss from foreign exchange transactions, to the P&L account.

Though turnover at Tata Steel UK (Corus) increased 9 per cent to Rs 109,570 crore, EBITDA was down 2 per cent at Rs 8,906 crore FY09. Mr Kirby Adams, CEO, Tata Steel UK, said, the economic revival in Europe is going to be a slow process, contrary to the belief of a rapid recovery six months ago.
“What we are witnessing now is a technical recovery in metals and some revival in confidence. However, de-stocking is behind us and there is no evidence of further collapse. The European markets will enter into summer holidays from next week and businesses pick up only in September," he added. Tata Steel UK is in talks with potential buyers for its stressed asset Teesside Cast Products which has stopped taking any orders.

“We are moving some of the slab orders from Corus to Teesside. We have initiated talks with few buyers and will finalise a deal soon,” he added. Kirby, while announcing the FY09 results said the production cut in Corus for the June 2009 quarter was at the same level as that in March 2009 quarter, which is at an average of about 47%. “Corus’ iron and steel division is working at 47 per cent of the total capacity whereas its engineering and steel businesses are working at about 25-30 per cent of the capacity,” said Adams.

Sluggish demand in Europe had forced Corus to cut its crude steel production to 40%. For FY09, steel deliveries and liquid steel production of Corus fell by 14 per cent and 20 per cent to 19.69 million tonne (mt) and 16.21 mt, respectively, reflecting a weak second half of the year, the company said. However, the turnover increased by 9 per cent to Rs 1,09,570 crore. EBIDTA decreased by 2 per cent to Rs 8,906 crore in FY09 against FY08.

Corus has identified 2,045 jobs being at risk, of which 1,500 will be at its production facilities, 800 in engineering steel sites at Rotherham and Stockbridge and 370 in Corus Tubes in the UK and the Netherlands and 375 at downstream rolling and finishing plants in Teesside and Scotland. Around 2,000 European jobs were at risk and these were largely at the company’s long products business which made engineering steel, rods and bars and tubes in the UK and the Netherlands.

Tata Steel had indicated that it might shut its Teesside Cast Products unit in the UK, threatening 2,000 jobs after Marcegaglia SpA, a privately-held firm, Dongkuk Steel Mill Co. Ltd, South Korea's third biggest producer of the alloy, Duferco Participations Holding Ltd and Alvory SA abandoned a purchasing contract to buy 78 per cent of the products.

A demand revival for Tata Steel in India, aided by infrastructure spending, failed to offset waning revenue at Corus, which provides at least two-thirds of Tata Steel's output. Corus admitted that any demand recovery in Europe was some time off.

"Demand remains muted especially in countries where Corus sells most of its products," according to analysts a rebound is unlikely in the next couple of quarters.

Meanwhile, Tata Steel has signed a share purchase agreement with Ryerson Holding (India) Pte Ltd to acquire the entire equity interest of Ryerson in Tata Ryerson Ltd, a 50:50 joint venture between the two companies. The deal is for a consideration of $49 million.

The company said it has embarked on a massive cost-savings initiative in its European operations, which could include steep job cuts. “Since these initiatives were announced in January, some European operations have continued to experience deteriorating market conditions. As a result, Corus is today announcing additional measures to align production and manning levels in those areas with existing and anticipated demand levels,” a company statement said.

During the current quarter of financial year 2009-10, Tata Steel has raised long-term debt of around $1,040 million through a mix of term loans and non-convertible rupee debentures. These have a tenor of five-and-a-half years to ten years and the company intends to deploy the proceeds for its various expansion plans and general corporate purposes.

The Tata Steel Group continues to have strong liquidity and has no material repayment obligations or refinancing requirements in the next 12 months. As on June 20, 2009 Tata Steel Group's cash and cash equivalent stood at about $ 2.1 billion and the group had an un-drawn bank facility of about $1.3 billion, the management reiterated.

Asked about the status of the Teesside plant and Kirby Adams, the CEO of Tata Steel Europe said the company is in talks with potential buyers, including those four who cancelled the contracts. Under the 2004 agreement, the consortium-comprising Marcegaglia of Italy, Dongkuk of South Korea, Brazil's Duferco and Alvory, a subsidiary of Latin American steelmaker Ternium - were to buy under 78% of the plant's production for 10 years, underpinning its future. However, they have not reached any conclusions at the moment, he added.

Tata Steel and its Canada-based partner New Millennium Capital Corp (NMC) is starting the feasibility study of the Direct Shipping Ore (DSO) project and have set up a joint steering committee to monitor its progress, which NMC is scheduled to complete in the July-September quarter of 2009. Tata Steel holds a 19.9% equity stake in NMC, a listed Canadian company.

The world's sixth largest steel company has, by virtue of its stake in NMC, the option of participating in the DSO project and the LabMag taconite project. Taconite is an iron bearing, high silica, flint-like rock.

While DSO properties have estimated reserves of around 100 million tonne (mt), termed "historical resources" (mainly, iron ore), LabMag contains 3.5 billion tonne of "proven and probable reserves", 1 billion tonne of "measured and indicated resources" and 1.2 billion tonne of "inferred resources". Tata Steel believes that once developed, these deposits can supply a large part of its requirement for pellet feed in Europe.

The Canadian company has, working closely with Tata Steel, already completed optimisation studies that were designed to maximise the commercially desirable characteristics of the product.A joint "steering committee", comprising three members each of NMC and Tata Steel, has now been formed to monitor the progress of the feasibility study and provide necessary direction to ensure its timely completion. NMC's technical team is supposed to work closely with engineers from Tata Steel's Global Mineral Resources Group and its R&D centre.

However the company has no option but wait for a global recovery before it can breathe freely. The pangs of global recession has hit the Indian multinational steel giant rather badly.

Reality of Recession

  • Tata Steel posted a dip of about 60% in its consolidated net profit in FY09

  • Steel deliveries & liquid steel output of Corus fell by 14% and 20%

  • Production cut in Corus in June quarter was around 47%

  • Experts believe that Europe is showing no signs of revival

  • This will continue to impact Tata Steel's consolidated numbers

  • Corus has identified 2,045 jobs being at risk...

  • Corus restructuring Rs4,530 cr loss for Tata Steel in FY09
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