Tata Steel's FY09 annual report: A peek - II - Views on News from Equitymaster

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Tata Steel's FY09 annual report: A peek - II

Aug 24, 2009

In the last article, we had reviewed the operating performance of Tata Steel and its subsidiaries and also the chairman’s view going forward. In this article, we will discuss the company’s raw material security plans and expansion projects. Raw material: Iron ore and coking coal are the key raw materials required for the manufacturing of steel. Tata Steel’s Indian operations are self sufficient for its iron ore requirements due to captive mines while coking coal security is around 52% and rest is procured through imports, mainly covered by annual contracts. European operations are completely depended on imports of both the key raw materials as it does not have captive mines of its own. Tata Steel Europe has entered into long term supply contracts lasting typically between three to ten years for these raw materials wherein prices are usually agreed on annual basis. It has implemented a policy of ensuring minimum 60% of raw material requirement through these long term contracts, while balance is procured through one year contracts, spot markets and options that provide flexibility and commercial leverage to the company.

The raw material security of the consolidated entity is around 25%. However, the company has planned to increase self sufficiency in raw materials to 50% by 2015 and over 60% by 2018. For this purpose, it plans to make substantial investments in developing its overseas mining projects in coming years. It is currently pursuing raw material interests in coking coal and iron ore either in terms of virgin sites with significant resource potential or in terms of smaller existing ventures which can be quickly aligned to the requirements in Europe. As a matter of fact, Tata Steel has formed a Joint Venture (JV) with Riversdale Mining, Australia for a 35% stake in two coal tenements in Mozambique. It has off take rights of upto 40% of the coking coal produced from these mines. It is estimated that one of the tenements have around 4 bn tonnes of coal reserves. Tata Steel also has a JV with New Millennium Capital in Canada, estimated to have reserves of around 100 million tonnes of iron ore wherein Tata Steel has an option to acquire 80%. Apart from these projects, the company is also evaluating certain mining projects in South Africa and India in JV with other companies.

Expansion projects: The company is undergoing brownfield expansion project at its Jamshedpur plant wherein it is slated to increase the capacity to 10 m tonnes by 2011. It has committed to invest around Rs 91 bn for the same. It also plans to set up a 6 m tonne greenfield project at Kalinganagar in Orissa. Preliminary work focusing on land acquisition, rehabilitation and resettlement work is already in advanced stages. It is also seeking the grant of the mining lease for iron ore from the Orissa government for the same. Tata Steel has also signed MOUs for setting up greenfield integrated steel plants with the state governments of Chhattisgarh and Jharkhand. It is pursuing the respective state governments for the acquisition of land and allotment of mining leases for iron ore and coal for these projects.

In the next article we will discuss the company’s debt position, change in debt covenants and the future growth strategy.

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