What led to the surprise loss in Q3?
In Q3, performance of Tata Steel in India was reasonably strong. Maybe we thought it would be better because we didn’t expect steel prices to drop during the quarter, which it did.
In Europe, we had two-three big events. One, we are in the process of moving the pension fund into insurance. So, 60% of the fund is already moved to the insurance company. On account of that there was a deferred tax credit on our books which needed to be reversed and it was around Rs 2000 crore of non-cash impact.
The second part was that the Q3 realizations in Europe were about £170 lower than Q2 because the economy was slowing down a bit. Parallelly, we were building up slab stocks in Europe because we have a blast furnace relining coming up in the Netherlands in April this year. So, to ensure that our customers are serviced even when the blast furnace is down, we had to build about 700,000 tons of slab stocks. Normally we have hardly 70,000 tons of slab stocks. Some of these slabs were produced when the coal prices were $450-$500 (compared to around $300 now). So, the cost of these slabs is high. When the steel prices dropped, we had to take an adjustment to the net realisable value (NRV) on account of these stocks.
What is your outlook for Q4?
We expect the fourth quarter numbers to be better than the third quarter numbers because India will continue to improve. And I think the worst is behind us as far as Europe is concerned because the demand is coming back a bit and energy prices are down. We don’t have to take any NRV losses.
I think the Netherlands will be back to its normal performance level from Q2 of next year. The UK is a little bit more vulnerable to energy prices because the UK uses a lot more energy from the grid. But the good news is that the energy prices have come down very significantly. So, Q4 will be better than Q3, but will still be negative in the UK.How far have the negotiations with the UK government progressed for capital support in upgrading the Port Talbot plant?
The UK government has come back with some capex support, but not enough to justify the full transition. So, we are now trying to see if there is a different configuration we can look at. Like, can we kind of shrink what we want to do? So, we are looking at various ways of having a proposal which is closer to (the capital assistance that) they are willing to offer and that will take a few more months.
Are you concerned about rising steel imports?
See, there is always a risk with imports that whatever you book today will come after three months. And if you look at today, the general principle is in a volatile environment, reduce your risk and have a shorter supply chain. When you buy from the domestic market, the advantage is you book today and you’ll get it tomorrow. There will still be traders who will speculate on imports, but I don’t see it as a big threat, honestly.
And earlier imports were also a problem because we were not exporting due to the (temporary) export duty. Now that option to export is also there. And today if you look at steel prices in Europe, they are quite attractive.
Iron ore and coking coal prices are going up again. Are you concerned?
Iron ore is not (a concern) for us because we have pretty much our own captive sources. Coking coal prices going up does impact us. But if coking coal stays at $350 (a tonne), steel prices will certainly go up too. So, if the economy and the demand remain strong, the cost can be passed through.
