Tata Steel Ltd expects its European operations to underperform in 2012-13 in terms of production, as its output is affected by its modernisation plans. That would leave the heavy lifting for the year to be done by its operations in other markets, such as India and South East Asia. That may appear as a negative development at first, as Tata Steel Europe contributes 57.8% of total deliveries. But a slackening in output is visible across steel-makers in Europe, as they react to the deteriorating market conditions in the region. What it does is help them contain supply in the market.
Rising raw material prices too provided a floor under steel prices. This combination has helped create a more favourable environment for profitability.
In the March quarter, Tata Steel’s consolidated revenue rose by 2.7% quarter-on-quarter to $6.7 billion, while deliveries rose by 6.5%. Earnings before interest, tax, depreciation and amortisation (Ebitda) rose by 68% quarter-on-quarter (q-o-q), chiefly because Europe recovered from a massive $153 million loss (at the Ebitda level) in the previous quarter.
India continues to shoulder primary responsibility for profitability, contributing 87% of Ebitda during the March quarter, aided by its cost advantage, better realisations in the domestic market, and the positive effect of a depreciating rupee on the cost of imported steel.
Also See | Financial performance (PDF)
The Indian operations will continue to play a key role during 2012-13 as well. The company expects to produce about 1 million tonnes more of steel as its new facilities come on stream. That should see its contribution to revenue and profit increase significantly during the year.
Europe, however, will see production slacken during the first half, and then improve towards the end of the fiscal when its revamped facilities come back on stream.
The key to a steel maker’s profitability are, of course, raw material costs and product prices. Tata Steel’s domestic operations are largely insulated from input cost fluctuations due to captive facilities (except to the extent it imports coal). But its overseas operations, especially in Europe, depend on purchased inputs. Now, raw material prices have been easing, especially that of iron ore—chiefly due to slack demand as steel-makers idle facilities. In the current situation, one can expect that Tata Steel’s profitability will improve in 2012-13, even if deliveries may not sparkle, especially at the consolidated level. Easing raw material cost pressures are positive too.
But there is some uncertainty on which way steel prices will go, which depends on questions such as: Will global production cuts affect supply enough to ensure firm prices, and will China’s huge appetite for steel actually wane as its government steers its economy to a soft-landing? While the current market environment appears to favour Tata Steel’s ability to improve its profitability, a weakening of steel prices could change that.
Graphic by Yogesh Kumar/Mint
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