European operations pulled Tata Steel into the red in the third quarter (Q3) of 2022-23 (FY23). Chairman and CEO and Managing Director NARENDRAN TVin conversation with Ishita Ayan Dutt, says challenges in Europe could persist for some time. Nevertheless, the situation will improve during the quarter. Edited excerpts:
The net loss in Q3FY23 was a surprise.
There were two big reasons particularly linked to the European figures. The first and most important is the pension fund adjustment. It was something that had to be done, but could not be guided because we were talking to the insurance companies about what part of the pension fund they could support. These are non-monetary adjustments, but which guarantee the future of the company. Second, we have a blast furnace relining in the Netherlands in April this year. As a complement to this, we wanted to maintain inventory of slabs – some of this was produced in the first and second quarters (Q2) when coking coal costs were high. As Q3 steel prices in Europe were lower than Q2, we had to make a net realizable value adjustment for inventory. Therefore, Europe had negative earnings before interest, taxes, depreciation and amortization (Ebitda) greater than people perceived. India’s numbers were tied for the course. Of course, at the start of the quarter, we didn’t think steel prices would fall, but they did. We said on the Q2 analyst call that this would be the worst quarter for India and Q3 the worst for Europe. In a certain sense, it played out.
Is the worst behind you?Yes it is.
When do you see Europe coming out of losses?Margins will improve in Europe this quarter as gas prices and energy costs have started to decline. Spot market steel prices have started to rise, long-term prices are lower. This quarter we are seeing European realizations fall by around £70 per tonne and costs by around £100 per tonne. In the Netherlands, where we still have positive Ebitda and cash, we have a challenge in the next quarter due to the relining of the blast furnaces. I expect the situation in Europe to continue to improve quarter over quarter. We won’t be out of the woods until the second quarter of 2023-2024.
The UK government has reportedly indicated a £300m support package for Tata Steel’s green transition. Is this enough to save Port Talbot from closure?It is not enough compared to what we asked for. Since this is what the UK offers, we are looking at several possibilities to make the site sustainable. It is a complex assessment. What we asked for is something that should have settled it for good; it’s a bit sub-optimal.
What was the request?I can’t assign a number; it was much more than that. But not as much as reported.
How much will the transition to the UK cost?It depends on the course of the process to follow. But the principle of support that most steel companies seek from the relevant government is that 50% of the capital expenditure for the transition should come from the government in the form of a subsidy. Otherwise, there is no business case for the transition. Also, there should be operating expense support because you’re switching from using coal to hydrogen or gas. We have to make sure that the rules of the game are fair. There should be some sort of carbon border adjustment mechanism to make sure we don’t have unfair competition in Europe.
What’s the timeline you’re looking at?Europe, including the UK, has pledged to go green by 2030. Time is running out and ideally these calls should be answered within the next year.
Does that mean the closure of Port Talbot is a closed chapter?Any option we exercise has a cost and a benefit. Even if you decide to go out, there is a cost attached to it. We should always look at all of these options holistically and take a call.
Will Tata Steel India need to extend its support to the UK this year?There is some support that we had to extend as it is negative for Ebitda.
Net debt at the end of December was Rs 71,706 crore. Is it likely to drop this quarter?It should be, because we’re going to free up working capital and there’s margin expansion going on.
Will you be able to meet your $1 billion deleveraging goal this year?No, we started the year at Rs 51,000 crore. We are far from it. Even if we give a jump to this year, we will continue it from next year. Tata Steel refrained from submitting an Expression of Interest for NMDC (formerly National Mineral Development Corporation). We have adequate stable production capacity and enough opportunities to build capacity. Basically, we think it’s better and more efficient to have fewer sites with more capacity potential per site. We also think it is better to have sites closer to the sea.