Saturday, April 20, 2013

Is the Corus diet finally showing on Tata Steel’s health?

The Indian steel giant Tata Steel reported an unexpected quarterly loss, its first in more than two years. While some blame it Corus, the Anglo-Dutch steelmaker, and mention that the real price of the acquisition that Tata Steel made in January 2007 is coming to fore, the real reason could simply be rising input costs and dwindling demand in Europe...

Indeed, Ratan Tata is not given to hyperbole or grandstanding, notwithstanding his “you put a gun to my head and pull the trigger or take the gun away, I won’t move my head” comments. Thus, when he had described the Corus deal (Tata Steel acquired the Anglo-Dutch steel maker Corus for $12.04 billion or 680 pence a share in January 2007) as being a “bold visionary move”, many had praised the move as being the harbinger of India’s rise on the global top ranks.

Of course, that part has surely been true, but what hasn’t and cannot be ignored is that he also seems to have invited discomfiting analogies and criticism on the Corus deal from significant quarters. The sounding board of these critics has become more cacophonous with the current situation of Tata Steel – the company is struggling with weak demand and higher material costs and reported a consolidated net loss of Rs.6.03 billion for the third quarter ending December 31, 2011, against a net profit of Rs.10.03 billion during the same period a year earlier.

Critics forward the proposition that had Tata Steel not acquired the Anglo-Dutch giant, it could have been more resilient in the current economic scenario. While that may well be putting it too plainly, the fact is that the acquisition of Corus brought with itself a debt burden of $6.17 billion on Tata Steel’s balance sheet. The company’s total debt liability has only moved upwards since then and today stands at a whopping $9.52 billion (as on December 31, 2011), up from $8.79 billion at the end of March 2011. While the company maintains that the Q3 losses have surfaced due to the exercise of writing down the value of inventories of raw materials and finished goods at some of its subsidiaries, particularly at Tata Steel Europe, to recognise the fall in market price of these products (the write-down for Q3 FY2012 amounts to Rs.7.41 billion or around $143 million), there is more. Steel prices in Europe have risen by approximately 7% during 2012, while prices of coking coal have declined by over 20% in the past three quarters. Imagine what would have happened had the conditions been the other way round. In fact, Tata steel is not the only company which has suffered due to a wounded Europe.

The world’s largest steel producer, Luxemburg based ArcelorMittal, has also reported a fourth-quarter net loss of $1 billion against a loss of $780 million during the same quarter last year. With European Union’s projection for the economy to contract at a rate of 0.3% for calender year 2012, the chances for steel demand to pick up in the region remains bleak, at least in the near future. To add to the woes, the World Steel Association has projected Europe’s steel demand growth for the year 2012 to be a meagre 5.4% compared to 15.1% growth in the year 2010.

Apart from operational issues, Tata Steel Europe is also facing regulatory challenges. It has got the mandate to lower its carbon emissions by 2013 to meet standards set by the European Commission.
 

Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
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