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Below are Views On Capacity expansion to accelerate By Mr. TV Narendran, Managing Director, Tata Steel - Motilal Oswal

Steel cycle here to stay for long

Mr. Narendran expects higher infrastructure spending across the globe to boost steel demand. This, coupled with the focus on de-carbonization in China, would lead to a reduction in exports from China. It expects major exporting nations such as Japan and Korea to follow suit over the medium term, thereby tightening global steel trade. A growing focus on de-carbonization in Europe and China would lead to higher costs, in turn supporting pricing. In the near term, he expects higher coking coal costs to offset lower iron ore prices and keep steel prices elevated.

Capacity expansion in India may accelerate

TATA aims to double its steelmaking capacity in India to 35-40mt by CY30 from 19.6mt currently. With the resumption of the 5mt expansion at Kalinganagar (KPOII), it has already taken the first steps in this direction, which would take its capacity to ~25mtpa by FY25. It would pursue the remaining 15mtpa of capacity expansion through a mix of brownfield expansions at Kalinganagar/Angul/Jamshedpur and inorganic growth opportunities for long products such as RINL and NINL. It has scope for 2mtpa long steel capacity expansion in Tata Steel Long Products at Joda. With strong cash flow generation, it may accelerate its capacity expansion plans.

Balance Sheet deleveraging to remain a key focus area

Consolidated net debt fell by USD4.3b (~INR322b) to ~USD10b (INR747b) over the last 12 months. With free cash flows expected to remain strong, the management would look to reduce debt significantly in FY22. Deleveraging the Balance Sheet remains a key focus area for the management.

Higher steel spreads to boost margin in Europe

Steel spreads in Europe are expected to remain higher than other regions due to an increase in steel prices, supported by robust demand and import quota tariffs. Renewal of contracts at higher prices would lead to the realization of spot spreads into margin, thereby resulting in significant margin improvement in for the rest of FY22.

Not looking to divest European operations

With an improved profitability outlook for its Europe operations, there is renewed confidence in running this business as cash flows are expected to turn significantly positive in FY22E. The management is, therefore, not actively pursuing divestment and investment from a strategic partner in its the Netherlands or UK operations.

Carbon border tax to create a level playing field in Europe

The European Steel industry continues to seek support in the form of a carbon border adjustment tax – as the carbon reduction program would lead to a cost increase, in turn reducing its competitiveness against imports. Imposition of carbon border tax in the EU will provide a level playing field among European Steel producers, compensating increase in the cost of production with higher steel prices. TSE’s carbon costs are expected to remain low in FY22 as the carbon credit shortage in FY21 was transactional in nature (credits sold in UK in 1QFY21 to support the post-COVID cash shortfall).

Recycling and re-rolling

TATA is evaluating adding rolling capacities, alongside its scrap recycling facilities. The recycling and rolling model would be a lower capex model and would be carbon efficient compared to the traditional blast furnace route, thereby helping it achieve its carbon footprint reduction.

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