Home / Companies / People /  Tata Steel to cash out of Mozambique asset: TV Narendran

Jamshedpur: Tata Steel Ltd has decided not to make further investments in its Benga coal asset in Mozambique and is looking to sell its 35% stake in the mine, the alloy producer’s managing director for India and South-East Asia T.V. Narendran said.

Last year, Tata Steel took a one-time impairment charge of 1,577 crore on the Benga investment after the Rio Tinto Group sold its controlling stake in the mine at a huge loss to an Indian mining consortium led by Steel Authority of India Ltd (SAIL).

“We don’t want to spend more money on this asset," Narendran said in an interview, adding that Tata Steel has made its decision known to SAIL. “For them, there may be an upside because they got in cheap...whereas for us, it is only a commercial call (on when to exit)."

Tata Steel’s decision to exit the Benga coking coal project illustrates the difficulties that the company is facing in mining and evacuating coal from overseas mines for steel plants located in India and Europe. Instead, Narendran plans to focus on expanding Tata Steel’s steel manufacturing and mining interests in India, given the Tata Group’s position and brand equity in Asia’s third-largest economy.

The Tata Steel management’s focus now is to get the Kalinganagar plant in Odisha running. It has already spent 25,000 crore on this yet-to-be commissioned unit, which is to be eventually scaled up to produce 6 million tonnes of steel—twice its initial capacity.

The controversy over the project has taught Tata Steel many lessons. “You cannot take people’s trust for granted despite your track record of working closely with tribal communities," said Narendran.

The Kalinganagar project was mired in controversy after locals protesting against land acquisition were killed in police firing in 2006. Delayed by five years, the plant is set to start production this year.

The company is now investing in building relationships with local communities in Chhattisgarh and Karnataka, which it sees as potential sites for expansion. And according to Narendran, this exercise shall go on for years before the company starts any kind of business development in these states. Edited excerpts:

Commodity prices are weak across the world. Is it an opportunity to acquire raw material reserves?

Mines are not going to be cheap unless they are in distress. People are not going to sell, at a loss, quality assets in which they have invested. It’s a pity that India still has to import iron ore. We should ask ourselves, why should we import something we have in plenty? To my mind, acquiring iron ore assets overseas does not make sense.

It makes more business sense to invest in coal mining, but investing in raw material reserves is more about laying railway tracks and building port connectivity. For mining, you need to work closely with the local government. We have not been successful in Africa.

Given the Tata Group’s brand equity in India, it is easier to work in India than in other countries. We have presence in Africa, too, but it’s not the same as in India—you can’t operate there as easily as in India though, in many ways, the difficulties are similar.

But then, the question for me is, would you go through the difficulties of mining coal or rather buy it? You would go through the difficulties if you think there’s going to be a shortage and the only way of securing coal is by owning mines.

We are closely watching the situation in India. If India allows mining leases for coal, we will evaluate opportunities of investing in Indian coal assets, though the coal in India is of inferior quality.

As the plant at Kalinganagar gets ready to be commissioned, is the ground situation there completely under control?

It is not perfect, but far more peaceful than it was previously. We still have to bring under our control around 900 acres of the project site of 3,000 acres, but the ground situation is easing because people are beginning to see the changes that we have brought about in the region.

We got off to a bad start, and that cost us five years.

The key lesson from Kalinganagar is that if you are interested in a site, you need to start building trust there before you start building the factory walls. But typically, we do exactly the opposite: we start engaging with the community only after we have acquired the land and built the factory walls. But by then, people become suspicious.

We have already started doing some work in Chhattisgarh and in Karnataka, seeing them as potential sites for expansion. Ideally, we should be doing it for a few years—connect with the people to build trust—before we start any business development at these sites.

When you live and work in Jamshedpur, where you already have a healthy relationship with the local community, you take people’s trust for granted. You know the community, and the community knows you; you promise to do things, and the community believes you, but that happens here because you have kept your promises for 100 years.

But it does not necessarily mean you are going to get the same treatment when you go to a new place. It takes a while to build trust.

Also, we need to be sensitive to the fact that people do not always welcome change, more so in developing countries where people are transiting from an agrarian economy to an industrial economy.

Have the two acquisitions in South-East Asia from a decade ago fulfilled Tata Steel’s internal expectations?

NatSteel was our first overseas acquisition, which we bought at a time when we were hungry for growth. Downstream products—fabricated steel cut and moulded to size as required at construction sites—are its core strength.

It had, at that time, presence in six countries and a production capacity of two million tonnes. We bought the asset for around $300 million, which wasn’t expensive. And within a few years, Tata Steel recovered the money it spent on acquiring NatSteel.

But NatSteel operates on a thin scrap-rebar margin (because it produces everything out of scrap). Scrap accounts for almost 70% of its input costs and the company has traditionally had an operating profit margin of 5%.

Running the battle between scrap and rebar prices wasn’t seen to be going on forever because we had thought of supplying semi-finished steel to NatSteel from India. The story was the same with the Thailand acquisition as well.

But what happened was demand in India started to firm up, and though we raised production capacity by 2-3 million tonnes in India, we found that it was more profitable to sell in the domestic market than to export semi-finished steel to South-East Asia.

We could never build capacity in India fast enough to feed our operations in South-East Asia, so in that sense, could not support these operations in the manner we had originally envisaged.

But having said that, NatSteel didn’t make losses for years even after the 2008 collapse of Lehman Brothers when all other steel companies were struggling. Only in the last couple of years, we had a few challenges.

We had grown quite fast in China, where we have a plant. We had some lease agreements with partners in China, and took a hit when our partners landed in financial difficulties. We were exposed and we had to take a write down in the December quarter.

But by now, we have recovered some money that we had previously thought we had lost in China. Also, we have exited from the asset in Australia where we were losing money.

If an opportunity like NatSteel were to arise again, will Tata Steel go for it?

If such an opportunity is found in India, we will go for it, but may be not if it is outside India.

What are your takeaways from heading NatSteel?

When you work for a large enterprise such as Tata Steel, which operates on a healthy Ebitda margin of 40%, sometimes you don’t appreciate what it is like to work in a company that routinely operates on a 5% margin.

I had only months earlier taken over as the CEO when, following the Lehman Brothers collapse, we had an overnight situation: we had inventory and the price had crashed. From a healthy situation, there was a complete reversal and the key concern immediately was how to pay our workers.

The dynamics of working for such a company are very different and they teach you to be far more alert than at large organizations. Tata Steel, too, has always been a very cost-conscious company, but at NatSteel, it was always a matter of life and death on a monthly basis. It is somewhat like coming from a wealthy family versus coming from an underprivileged one.

We have seen how the closure of Tata Steel’s mines impacted its earnings. What did it do to the organization?

It taught us to encourage close collaboration between people. There are situations when people need to work as a team, irrespective of how good they are on their own. Tata Steel has always been a hierarchical organization—one where reporting structures are very clear. But there are times when you have to go beyond your brief for the sake of the organization.

For the first time in 100 years, Tata Steel saw all its mines closed. But we managed to keep the steel plant running. At one point, we thought we will have to scale back production by 50%, but we ran the plant at 80-85% even when all our mines were closed.

And logistically, we are not geared to work with imported raw material. There is hardly any port in eastern India designed for import of iron ore. There was a problem with the railways, too, because it could not decide tariff for imported iron ore.

Even Dhamra port, which we had built, was intended for export of iron ore and import of coal—the conveyors there were not designed to receive iron ore from ships.

Also, we are not geared to keep 10-15 days’ stocks of iron ore—we typically keep stocks for 2-3 days. It was a nightmare from the operations point of view. But the team worked together beautifully to deal with the situation.

Does it mean that you are better prepared to deal with such a situation if it were to arise again?

What takes us to be competitive in the future is not necessarily what has kept us competitive in the past.

I keep telling that because we have had our raw materials available from captive sources, we sometimes feel we are more competitive than we actually are. We were operating at 30% Ebitda margin when our mines were running full steam; but our Ebitda fell to 20% when we were forced to buy iron ore.

Even with an Ebitda margin of 20%, we were among the top 2-3 steel producers in terms of profitability.

So, we have said that over the next few years our aim is to have an Ebitda margin of 25% with raw materials at market prices. That’s the goal that we have set for ourselves. We don’t know yet how to get there. But unless we set that goal and work towards it, we can’t be competitive 10 or 15 years from now.

We started this a year ago, when our mines were still in operation. Some people initially thought that we were bracing for a hypothetical situation, but when our mines were shut, they realized it could someday become a reality, too.

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