We will watch China’s exports closely: Tata Steel chief Narendran

We had a good run in India but in Europe there was some struggle which will last for another quarter and then things will get better. Export duty got lifted late December quarter but did not have much impact. Any orders that were booked after export duty was lifted were shipped out in March quarter. So that changed the sentiment in the domestic market.

Companies with high inventory could ship out material to other markets. After China opened up post-Covid, the sentiment was very positive. There was a feeling that a lot of activity will pick up in China but that has not happened to the expected level. Steel companies in China ramped up production in March to almost 96 million tonnes and exported 8 mt because the domestic demand could not keep pace with the production.

The exuberance in China is getting normalised and this led to fall in steel and coal prices in the last 3-4 weeks. However, fundamentally China will have a strong year, but Chinese GDP is shifting more from investment to consumption led as India moves from consumption to investment lead. The intensity of steel demand in China will be less as it moves to consumption. While car sales in China have bounced back, construction activities have not revived. We will be very watchful of China’s exports. I think globally we expect steel prices to be reasonably stable.

A lot will depend on how China shapes up during the year because even a lot of European countries are dependent on the Chinese economy through exports. The other positive is while inflation is high and there’s a fear of a slowdown in the US, the kind of money they are spending on the inflation reduction act itself will trigger a lot of economic activity in the US. Europe gas and electricity prices have settled. This is good for user industries like us and our customers. Reconstruction demand in Ukraine is some distance away.

It is growing but not as fast as we would have liked. We planted the seeds in services and solutions and new materials business five years back. We have crossed ₹1,000 crore in these businesses. Nest-IN, which provides housing solutions is doing very well. We have done a lot of work on graphene. We have done work on composites. Recently, along with Tata Advanced Tata Auto Components, we got a ₹120 crore order from Indian Railways for doing the interiors of Vande Bharat trains. We should be doing ₹400-500 crore in this business and it is growing in double digits. All these are long-term plays. We would like them to grow faster, but I think we want to build a sustainable business.

Our Europe business should be split into Netherlands and UK. Netherlands business is absolutely fine. It has been cash and Ebitda positive. It can pretty much take care of itself. Of course, we need to spend a bit more capex on transition. This requires some support as the cash flows are not sufficient. We can manage the Netherlands without cash going from India. We have a debt-free balance sheet there. The UK business does not generate cash flows to support the transition and needs government support in the next 12 to 24 months.

 For every tonne of steel I produce in Europe, I have to pay €80 per tonne of carbon generated. One tonne of steel generates 1.8 tonnes of carbon. So, I pay €144. In India, let us say if I am making 1 tonne of steel, emitting 2.1 tonnes of carbon, and paying zero tax. If this steel is allowed to be sold in Europe without any tax why anybody would make steel in Europe? Even if I take out all other costs, it will be much cheaper to make steel in India and sell in Europe. So the carbon border adjustment mechanism is justified from a global point of view. If not, even a carbon efficient steel plant in the Netherlands which is emitting 1.8 tonnes will close down. The US, which was opposing Europe, has started saying that it will measure the carbon footprint of what they import. Companies that are exporting need to accept these things. It can be considered as a non-tariff barrier or whatever, but they will say it is a quality standard.

If I look at it at a segment level, I do not see a slowdown at least steel consuming segments. Auto is still very strong with buoyancy in commercial and passenger vehicles sales. Tractor demand is also strong. Though two-wheeler demand is getting better, it is still less than what it was 3-4 years back. However, in all other automotive segments, we are back to 2019 levels. In construction, infrastructure and industrial are strong while commercial and residential segment is a bit of a mixed bag.

Demand in oil and gas, railways, water supply are all strong. Companies which are dependent on exports are facing slow down. MSME companies are facing a tight liquidity situation due to regulatory tightening. Discretionary expenses are being postponed due to interest rate hike. The poorer sections of society are feeling the pinch of higher medical bills and high Inflation. Joblessness has been there for the last two years, though things are getting better. Household budgets are getting stressed and people are postponing discretionary expenditure. This is somewhat reflected in motorcycle sales. If people were looking at replacing a motorcycle after 5-7 years, now they are postponing it by two years.

There will be some pressure. This is a volatile industry. You know things will go up and down. It went up between January and April and started coming down a bit. A lot depends on what happens in China. The trigger for fall in prices was from China which produced and exported more as coal and iron ore prices went down. They managed to drop steel prices. However, at the current steel prices I do not think they are making money. If the fundamentals are weak, everything else is temporary. If the fundamentals are strong, then you know there’s a little bit more of a long-term confidence which comes in. Globally, fundamentals are a bit fragile, but in India, I think it is still quite strong.