Koushik Chatterjee, chief financial officer at Tata Steel Ltd, speaks in an interview about efforts to revamp the company and to add capacity in a depressed-demand economy. Edited excerpts
What is your assessment of the global steel demand? Do you believe there is a case for a bounce-back?
I think you have to see steel demand across the globe in two-three buckets. The first one is the country which produces and consumes the biggest steel, which is China, and that obviously the demand and consumption in China determines significantly the shape of the cost curve of raw materials, for example, as well as how this steel demand pans out. China typically has been producing steel for its own consumption barring some percentage of exports and that’s been a self-sufficient play largely. If you look at the OECD (Organization for Economic Co-operation and Development) countries or the western European countries as well as in the US, it’s going through very significant market contraction that has happened in recent times.
It will take structurally sometime to come back to a level which we can call close to the pre-2007 crisis level. In the US there have been commentators who have been talking about a faster comeback. Indeed, the US prices have been at a premium to the Chinese export prices. As far as other countries are concerned, for example in India, we did have a very good run. It became a little tentative towards the end of last year. It’s remained largely around the same level and India still imports 5-6 million tonnes (mt) of steel of different mixes and grades. Therefore, I think if the global GDP (gross domestic product) is going to be about 2.5-3% this year, then you will possibly see a similar kind of numbers overall as last year as far as demand is concerned.
So I would say that there are pockets within which it will be fairly robust, and there are pockets where there have been contraction, and there are pockets, which includes China, where there has also been some expansion. That’s the model.
What about domestic demand? If you look at India and India’s share in the global steel pie, it seems to be less than 5%. Do you see that increasing for Tata Steel? Do you see domestic demand sort of coping or making up for the slowdown elsewhere in the world?
I think Indian demand has been structurally quite attractive and on the upward trend. So while it may have diverted from normally what we used to call as 1.3 times GDP growth, in recent times and in recent quarters, it’s not happened. But even then, 7% growth of steel demand in India is not something which is very high, it can with some bit of policy efforts on infrastructure and other areas, it can certainly come closer to the double digit number. I don’t think structurally Indian demand is in any risk of not growing... The trajectory and the speed of the growth may vary between say 5.5% or 6% to maybe 8% at the best case.
What about domestic steel prices at this point in time? We saw them cool off a little bit in June. How do you see them behaving?
If I look at it from our perspective, steel prices have actually held quite firm. First, because of the way we sell steel through the way in which the channels have been developed over many years, and the way in which we distribute steel, as also the OE (original equipment) sector with whom we have significant long-term relationship. So, I haven’t seen much softening or any softening to that extent in recent months. Also, the fact that given where the rupee is, the import parity has kept it fairly high.
I want to talk about Europe. A large chunk of your production happens there, a large chunk of your revenue comes from there, there is a larger problem in the European economy. What is your view on how Europe is shaping up and do you believe steel demand is going to be muted for a long time to come?
To answer your second question first, there is significant over-capacity in Europe in the context of where the underlying economy is concerned. As far as the underlying euro zone economy is concerned, it is fair to say that it’s been through a challenging time, the political direction is not yet clear, and so we are moving from election to election of certain countries to decide how does the fiscal union remain in Europe. We got over France and Greece recently, but structurally the issues have not been addressed. The banking system is really fragile and needs perhaps a significant capitalization. There are asset qualities in these banks which will hinder them from giving significant credit. The Basel norms that are coming in will also have its own impact on capital requirements, which all means that the availability of capital, which was the basis on which the expansion of euro zone happened between 2003-2008, has contracted severely. And if that contracts, the pace at which the economy grows will also be reflected in the same manner, and that I think is an issue. Therefore, we need stronger political direction and consensus on how EU (the European Union) will function going forward or the euro zone will function going forward.
What about your own operations?
In view of this background, obviously, one has to take into account the market effects of the operation and we are, therefore, looking more internal to revamp, restructure and rework our organization and our business...To look at asset configuration, to look at supply chain issues, to invest in renewal of critical assets, to ensure that we are flexible with the market, and to ensure that we are able to produce based on market demand.
When you say you are looking internal, are you reviewing your own cost at every level, are you looking at restructuring your employee base?
Absolutely, that’s been an ongoing process for sometime. We have had no new announcement to this effect but we have been looking very significantly at our cost, at our productivity levels and the levels at which we will want to invest in certain parts of business and so on.
Coking coal prices have cooled off, iron ore spot prices have more or less stabilized. How do you see prices of both behaving?
I think it has softened significantly since the last year. At this point of time it’s more range-bound, which reflects the underlying global economy and the need for raw materials. As I said in the beginning that China is a big determinant, it consumes more than 50% of the global iron ore produced and, therefore, it actually determines the cost curve.
So, if China does not pull so significantly or we have newer volumes coming into play, I would imagine that the consensus forecast for raw material is only more downwards than upwards going forward. Coal may be a little different story because the physical availability of coal is not that much as iron ore and, therefore, it may hold back to its level of around $200.
You have stated publicly that you are going to be expanding your production domestically. Are you expanding in India and what is the target that you are looking at?
What we have just now is the facility at Jamshedpur, which will be about 10 mt (million tonnes) this year and at the end of this fiscal year we would be at a run rate of around 10 mt of crude steel, or thereabouts. And our next project is in Orissa, where we are looking at building up a 6 million tonne greenfield project, 3 mt each. So, in the next few years we will have that completed, the first phase of 3 and then the 3. So, we should be at least 16 mt in the next few years.
How much money is being invested in these expansions?
As far as the next say 4-5 years, we will be spending around $7-8 billion on greenfield projects.
How much of what you’re talking about will happen this year? And if you were to give me a split between the greenfield and the brownfield?
Our brownfield expansion is almost complete; there are a few facilities that needs to be commissioned in Jamshedpur. Orissa one is completely greenfield. We have given guidance that we will be spending about $2 billion on capex for the next few years.
On your debt levels, you publicly said that you want to maintain 1:1 debt-equity. Is that on track? Have you been working on reducing your debt?
We have been very active in managing our debt books; 1:1 remains a stated objective. We have been in the last financial year at about 1:1… If you are putting in some $7-8 billion of assets in the next four-five years, we obviously have to rely on taking external debt. But once we do that, it is going to be incremental and we keep managing our debt portfolio actively so that we pre-pay sometimes debt to manage the levels at which we are.
What is your assessment of the global steel demand? Do you believe there is a case for a bounce-back?
I think you have to see steel demand across the globe in two-three buckets. The first one is the country which produces and consumes the biggest steel, which is China, and that obviously the demand and consumption in China determines significantly the shape of the cost curve of raw materials, for example, as well as how this steel demand pans out. China typically has been producing steel for its own consumption barring some percentage of exports and that’s been a self-sufficient play largely. If you look at the OECD (Organization for Economic Co-operation and Development) countries or the western European countries as well as in the US, it’s going through very significant market contraction that has happened in recent times.
It will take structurally sometime to come back to a level which we can call close to the pre-2007 crisis level. In the US there have been commentators who have been talking about a faster comeback. Indeed, the US prices have been at a premium to the Chinese export prices. As far as other countries are concerned, for example in India, we did have a very good run. It became a little tentative towards the end of last year. It’s remained largely around the same level and India still imports 5-6 million tonnes (mt) of steel of different mixes and grades. Therefore, I think if the global GDP (gross domestic product) is going to be about 2.5-3% this year, then you will possibly see a similar kind of numbers overall as last year as far as demand is concerned.
So I would say that there are pockets within which it will be fairly robust, and there are pockets where there have been contraction, and there are pockets, which includes China, where there has also been some expansion. That’s the model.
What about domestic demand? If you look at India and India’s share in the global steel pie, it seems to be less than 5%. Do you see that increasing for Tata Steel? Do you see domestic demand sort of coping or making up for the slowdown elsewhere in the world?
I think Indian demand has been structurally quite attractive and on the upward trend. So while it may have diverted from normally what we used to call as 1.3 times GDP growth, in recent times and in recent quarters, it’s not happened. But even then, 7% growth of steel demand in India is not something which is very high, it can with some bit of policy efforts on infrastructure and other areas, it can certainly come closer to the double digit number. I don’t think structurally Indian demand is in any risk of not growing... The trajectory and the speed of the growth may vary between say 5.5% or 6% to maybe 8% at the best case.
What about domestic steel prices at this point in time? We saw them cool off a little bit in June. How do you see them behaving?
If I look at it from our perspective, steel prices have actually held quite firm. First, because of the way we sell steel through the way in which the channels have been developed over many years, and the way in which we distribute steel, as also the OE (original equipment) sector with whom we have significant long-term relationship. So, I haven’t seen much softening or any softening to that extent in recent months. Also, the fact that given where the rupee is, the import parity has kept it fairly high.
I want to talk about Europe. A large chunk of your production happens there, a large chunk of your revenue comes from there, there is a larger problem in the European economy. What is your view on how Europe is shaping up and do you believe steel demand is going to be muted for a long time to come?
To answer your second question first, there is significant over-capacity in Europe in the context of where the underlying economy is concerned. As far as the underlying euro zone economy is concerned, it is fair to say that it’s been through a challenging time, the political direction is not yet clear, and so we are moving from election to election of certain countries to decide how does the fiscal union remain in Europe. We got over France and Greece recently, but structurally the issues have not been addressed. The banking system is really fragile and needs perhaps a significant capitalization. There are asset qualities in these banks which will hinder them from giving significant credit. The Basel norms that are coming in will also have its own impact on capital requirements, which all means that the availability of capital, which was the basis on which the expansion of euro zone happened between 2003-2008, has contracted severely. And if that contracts, the pace at which the economy grows will also be reflected in the same manner, and that I think is an issue. Therefore, we need stronger political direction and consensus on how EU (the European Union) will function going forward or the euro zone will function going forward.
What about your own operations?
In view of this background, obviously, one has to take into account the market effects of the operation and we are, therefore, looking more internal to revamp, restructure and rework our organization and our business...To look at asset configuration, to look at supply chain issues, to invest in renewal of critical assets, to ensure that we are flexible with the market, and to ensure that we are able to produce based on market demand.
When you say you are looking internal, are you reviewing your own cost at every level, are you looking at restructuring your employee base?
Absolutely, that’s been an ongoing process for sometime. We have had no new announcement to this effect but we have been looking very significantly at our cost, at our productivity levels and the levels at which we will want to invest in certain parts of business and so on.
Coking coal prices have cooled off, iron ore spot prices have more or less stabilized. How do you see prices of both behaving?
I think it has softened significantly since the last year. At this point of time it’s more range-bound, which reflects the underlying global economy and the need for raw materials. As I said in the beginning that China is a big determinant, it consumes more than 50% of the global iron ore produced and, therefore, it actually determines the cost curve.
So, if China does not pull so significantly or we have newer volumes coming into play, I would imagine that the consensus forecast for raw material is only more downwards than upwards going forward. Coal may be a little different story because the physical availability of coal is not that much as iron ore and, therefore, it may hold back to its level of around $200.
You have stated publicly that you are going to be expanding your production domestically. Are you expanding in India and what is the target that you are looking at?
What we have just now is the facility at Jamshedpur, which will be about 10 mt (million tonnes) this year and at the end of this fiscal year we would be at a run rate of around 10 mt of crude steel, or thereabouts. And our next project is in Orissa, where we are looking at building up a 6 million tonne greenfield project, 3 mt each. So, in the next few years we will have that completed, the first phase of 3 and then the 3. So, we should be at least 16 mt in the next few years.
How much money is being invested in these expansions?
As far as the next say 4-5 years, we will be spending around $7-8 billion on greenfield projects.
How much of what you’re talking about will happen this year? And if you were to give me a split between the greenfield and the brownfield?
Our brownfield expansion is almost complete; there are a few facilities that needs to be commissioned in Jamshedpur. Orissa one is completely greenfield. We have given guidance that we will be spending about $2 billion on capex for the next few years.
On your debt levels, you publicly said that you want to maintain 1:1 debt-equity. Is that on track? Have you been working on reducing your debt?
We have been very active in managing our debt books; 1:1 remains a stated objective. We have been in the last financial year at about 1:1… If you are putting in some $7-8 billion of assets in the next four-five years, we obviously have to rely on taking external debt. But once we do that, it is going to be incremental and we keep managing our debt portfolio actively so that we pre-pay sometimes debt to manage the levels at which we are.
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