Tata Steel's first quarter results have missed expectations, hit by weakening demand and prices in its main European market, which offset a solid performance at home. The company has reported an 88 per cent drop in its net profit in the quarter ended June. International subsidiaries, led by Tata Steel Europe, continue to report losses.
Kaushik Chatterjee, CFO, Tata Steel, told NDTV Profit that the company is witnessing a fall in the raw material prices. “Steel prices will take time to stabilize. We will do some re-financing in September 2012,” he added.
Below is the complete interview. Also watch the accompanying video.
Q: What's your sense on profitability at Corus? How do we read the numbers?
- A: You have to look at it in a context of two important numbers. One is where the markets are, in terms of steel demand and consumption from the end customer perspective. And also how the raw material perspective is panning out… We should also look at declining global growth and regrowth from China. For a company that we have in Europe, where it really plays the profitability, the starting point of the profitability is a spread between raw material prices and steel prices. On the top comes the convergence cost and the benefits that comes across from the management initiatives. So, what you see in this quarter essentially is a better performance compared to the last two quarters. It has happened on an account of two factors. Firstly, it is the much more stable production level. Secondly, we have been very hard on our management initiatives, namely restructuring in our long products business, etc, which is starting to come through. For the beginning of the quarters, the spread between raw material prices and steel prices was better than what was it at the end of the quarter. The European market situation is uncertain and volatile, primarily because of the sovereign problems there.
- Q: So, let's talk about the spread. What is your sense? The spread is likely to weaken or firm up?
- A: I think the raw material prices have been falling significantly from where they were earlier in the past year and that provides the expansion to the spread. But it is equally important to understand that steel prices also follow the trend. So, there are points of inflection before they stabilize into a certain band. For example, if raw material prices increase suddenly then steel prices lag that and therefore, you would have a contraction. Our sense is, as we move forward the spread will be impacted by the steel price more than the raw material price increase or decrease because these price levels have come to a rangebound level.
- Q: If you look at the fall in steel prices, the quantum and the pace of fall, the fall in raw material prices has not been in proportion to that fall. That's why i asked you your thoughts on the spread....
- A: That is where the whole perspective changes. The steel prices have been falling ahead of the raw material prices. Now we have reached a level where it may remain in that particular range. But it will be impacted by the underlined demand. So, if you have less volume in the market, the steel prices will perhaps remain a lot more stable. If you have more volume, then they will tend to remain biased towards a downside. So, I think we need to look at them for the broader perspectives. I think the market is where it is. We have also been focusing on internal initiatives, both on operational and cost side.
- Q: Analysts have pointed out about a potential for about €21 increase in hot-rolled coil steel prices post September. Do you see that happening?
- A: I won’t be able to comment on a specific number. The summer period, which is the current period right now, is slower. Post summer holidays and a shutdown that goes in all of Europe, one expects and hopes that steel prices increase towards the end of September, which will then have an impact on the spread of all converting companies.
- Q: Let's come to India. What’s your sense for the rest of the year? Also, any indications you can give us for FY14 in terms of India profitability?
- A: India profitability has been quite rock-solid for many years. It always tends to improve, direction-wise. Directionally, our internal operating environment initiative always works on a principle of beating inflation and beating cost increases. If you look at the quarter and the quarter before that the price that we get in the Indian market has been significantly higher and that is a lot to do with the manner in which we sell products, which are not contract related sales. We are getting a significant premium over the last few years.