Tata Steel surprised the street by posting a 9 per cent growth in operating profit in the June quarter compared to the same period last year. This could be achieved despite muted demand thanks to improvement in its European operations.
The slowdown in demand from key user industries — auto, consumer durables and infrastructure — is worrisome for Tata Steel’s prospects. The recent liquidity tightening measures by the RBI will only further dampen demand for steel, driving down realisations.
The global steel outlook is even bleaker, with excess supplies (in particular from China) and subdued demand exerting a pressure on prices. The World Steel Association expects demand in Europe to contract further.
Supplies in the domestic market are set to rise as all major Indian steel manufacturers have capacity expansion plans for the coming years. Tata Steel India raised its production capacity to 9.7 million tonnes per annum (mtpa) last year. It will also commission its 6 mtpa Kalinganagar project in Odisha by the end of 2014-15.
What augurs well
Against this background, the scrapping of projects by ArcelorMittal and POSCO last month augurs well for domestic steel prices. The two together will have added another 18 million tonnes to the existing crude steel capacity of 97 million tonnes.
Margins in Europe are also likely to benefit from lower raw material cost amid easing iron ore and coking coal prices globally. Increased supplies from the Benga coal project in Mozambique and the Direct Shipping iron ore project in Canada are the other positives.
Tata Steel Europe, which accounts for 58 per cent of the consolidated revenue, posted 25 per cent higher operating profits this quarter. Though the external environment continued to remain challenging, structural improvements and cost cutting resulted in better performance. With the blast furnace at Port Talbot fully operational and repair work at the Ijmuiden blast furnace complete, production rose to the highest level ever in two years.
Tata Steel India, on the other hand, showed a relatively modest 4 per cent increase in operating profit this quarter. This is not surprising given the 9-10 per cent decline in net realisations per tonne on flat steel and long steel products. The 2 per cent dip in operating profit for South-East Asian operations is explained by the sharp drop in prices.