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Tata Steel's latest annual report: A peek - Views on News from Equitymaster
 
 
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  • Sep 1, 2008

    Tata Steel's latest annual report: A peek

    Tata Steel, worlds sixth largest and Asia's first private sector steel maker recently came out with its FY08 annual report. In this article, let us go through some of the important information therein.

    Chairman's message:
    The global steel industry has faced pressure on the margins, arising from cost increases in raw materials. The price levels of iron ore and coking coal, which have risen by 85% and 300% respectively, would dictate the prices of steel for next 2 to 3 years. However, the market absorbed the major part of this price rise through increase in steel prices. The full impact of cost increases on steel producers and higher prices of steel on user industries would be felt in the current year and might also cause a slow down in economic activity and consumer demand.

    Tata Steel's Indian operations are currently self sufficient for its current requirement of iron ore. However, the company has sought mining leases to support its greenfield projects in Orissa, Jharkand, Chattisgarh. The company would also need to invest or enter into contracts with mining companies to secure the availability of iron ore and coking coal for the Corus operations.

    The integration of Corus with Tata Steel is completed. This would bring substantial improvements in operating efficiencies and reduction in costs. The measures such as securing dedicated sources of raw materials (iron ore and coking coal) would enhance the operating margins of Corus.

    India is a net importer of steel and can support a domestic steel capacity expansion to 100 mtpa with domestic consumption of about 90% of the output in coming years. However, this would be only possible if the capacity expansion would be based on maximizing the use of domestic iron ore and coking coal, which could help the country to insulate from runaway price spiral and currency fluctuations that impact investment in infrastructure and industrial capacity.

    Management Discussion & Analysis:
    The global steel production saw a growth of 7.5% and stood at 1.3 bn tonnes in 2007. The demand for steel remained strong and global finished steel consumption reached 1.2 bn tonnes backed by BRIC nations, which registered a growth rate of 13%. The European Union consumption grew by 5% while the output grew by only 2%, taking the imports to higher levels in 2007.

    The production of saleable steel at Tata Steel's Indian operations showed a nominal growth of 1.6% in FY08 mainly on account of shutdowns related to 1.8 m tonnes capacity expansion project. The company plans to raise the production capacity of Jamshedpur plant to 10 m tonnes by 2010. It has also planned 6 m tonnes greenfield project in Orissa by 2011. It is currently self sufficient for its iron ore requirement and 60% self sufficient for coking coal requirement, balance is sourced through imports.

    The steel production at Corus was 20 m tonnes in FY08. It has four main divisions, strips products, long products, distribution & building systems and primary aluminium. Steel division accounted 96% of the total turnover in FY08. It completely sources its raw materials requirement from outside.

    The standalone raw material security of Tata Steel is 80% but together with Corus, the combined security of group stand at 22%. With a view to ensure greater raw material security so as to maintain cost competitive position and to de-risk supplies, the company had entered into three joint venture agreement with respect to coal, iron ore and limestone with large resource base.

    Outlook:
    The demand for steel would continue to grow, as it would be anchor material for construction, infrastructure, automobiles and consumer durable sectors. BRIC nations would continue to consume greater levels of steel in coming years. As per IISI estimates, the global consumption of steel will grow at a CAGR of 4% upto 2016, while on other hand steel consumption in India is expected to grow at 9% in 2008 and 12% in 2009. India is expected to become second largest consumer of steel in world by 2015. Tata Steel group which is second largest geographically diversified and sixth largest steel producer having operation in 24 countries and presence over 50 countries would be able to continue to grow in coming years.

     

     

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