Tata Steel Ltd’s management gave little indication whether it still intends to sell the UK business, or even a timeline for its restructuring plan for Europe. Its June quarter results may explain why the company seems to be weighing its options carefully, compared to a time not long ago when it seemed keen to be rid of the UK business.
Tata Steel’s European operations have yielded an Ebitda (earnings before interest, tax, depreciation and amortization) of Rs3,384/tonne, compared to a loss of Rs1,996/tonne in the preceding quarter and a profit of Rs1,131/tonne a year ago. Even the UK turned in a profit at the Ebitda level. Brexit gave an unexpected short-term benefit, as the pound depreciated, making its UK steel operations more competitive. In addition, its restructuring efforts contributed to lower costs. The sale of its long products business as of 1 June contributed to a one-time loss of Rs3,297 crore but has improved the region’s profitability.
In India, volume sales declined sequentially and were flat over a year ago, due to maintenance shutdowns. Ebitda/tonne rose by 26.9%, chiefly due to higher prices and a better product mix. In this quarter, the South-East Asia business too benefited from higher steel prices.
The improvement in global steel prices has provided support in varying degrees across Tata Steel’s markets. In Europe, it said the current quarter has seen prices weaken, which is a concern. While iron ore prices are stable, coking coal prices have spiked. That can be a worry, if raw material costs increase but steel prices trend lower. If the European Union’s efforts to get China to limit its steel exports succeed, Tata Steel stands to benefit.
In India, the worry is growing steel output as all major steel companies’ production comes on stream.
Unfortunately, steel demand is not robust enough to absorb incremental capacity. That has limited the increase in prices. However, companies are limiting output due to maintenance shutdowns. Even if new capacity comes on stream, they may limit output at less efficient plants to keep the market balanced. A surge in exports is visible, another good sign, as it ensures that surplus steel leaves the country. These are but temporary measures and unless domestic demand revives in sectors such as real estate and infrastructure, domestic steel prices still face a threat from excess domestic supply.
Tata Steel’s group revenue declined by 4% to Rs26,406 crore over the March quarter, while its Ebitda rose by 65%. That’s a splendid performance, though don’t expect it to repeat every quarter. Its results were declared post-market hours and the 5.3% decline in its share price was due to broad selling, with the BSE Metal index down by 4.3%. Even then, Tata Steel is up by 26% from its level six months ago.
The company’s results should cheer investors. In the near to medium term, news on restructuring of its European operations is a key trigger to watch for. If that is on the back-burner, then there may be some disappointment. Then, it is back to watching the market fundamentals. There, the oversupplied market in India and uncertainty on how China will react to efforts to limit its steel supply are key concerns.
Source: Livemint