Cost increase to soon hit everyone due to Ukraine crisis: Tata Steel MD

The Russia-Ukraine crisis may lead to margin expansion in the immediate term for Tata Steel before the high cost of raw material sets in, said its top executive.

Russia and Ukraine are major steel- and raw material–exporting countries and the war is fueling price increases on the input side for steelmakers. On the finished goods side, prices are expected to rise on the back of cost increases and supply gaps arising out of the conflict.

Explaining the impact, T V Narendran, Tata Steel managing director and chief executive officer, said that on the input side, all costs have gone up.

“Coking coal went up to $650 a tonne and iron ore crossed $150 a tonne. Not just that, all other elements that go into steelmaking have shot up. So have freight rates. So, there are huge cost pressures,” he said.

Narendran was speaking on the sidelines of Confederation of Indian Industry (Eastern Region) Annual Regional Meeting on Saturday.

But what has also happened, Narendran pointed out, is that Russia and Ukraine together export about 45 MT of steel and that’s gone out of the market to an extent. “It’s not as if demand has taken off, but supply has compressed a bit,” he said.

Total steel exports from Russia in 2021 stood at 30.29 MT and from Ukraine 15.26 MT, SteelMint data showed. Iron ore, pellet and coal exports from Russia were also significant while Ukraine has a fair share of metallic exports.

“A lot of the material from Russia and Ukraine used to flow into Europe. So, that’s why there is a rebalancing of steel prices led by what’s happening in Europe and also translating into South East Asia. That is also getting reflected in the domestic markets,” said Narendran.

On the impact of cost pressure on the company’s margins, Narendran said, things are moving up on both sides.

“In the immediate future you will see margins improve simply because the price increases are ahead of the cost increases. But in the next couple of months, cost increases will start hitting everyone,” he said.

“To the extent you have inventory in the system, you have an advantage for a couple of months. But it will catch up,” Narendran explained.

A major part of Russia and Ukraine’s steel exports is to the European Union. SteelMint data shows, Russia’s steel exports to the EU in 2021 stood at 8.83 mt and Ukraine’s at 6.08 mt. That could well be an opportunity for Tata Steel Europe which is anyway poised to end the year with one of its best financial performances.

Asked about it, Narendran said: “It is an opportunity but what we are also watchful of is disruptions to the auto supply chain there. Some of the gas used to come from Ukraine for making semiconductors for auto. Also, some auto companies used to bring in a lot of spare parts from Ukraine. So, we are waiting to see the impact.”

But, overall prices have shot up in Europe because everyone’s costs have gone up, he added.

The supply gaps in global steel trade is also likely to have a positive effect on Tata Steel’s Thailand operations. “A lot of the competition in Thailand used to import billets. Now, those billets are no longer available,” said Narendran.

The supply disruption is likely to be an export opportunity for Indian steel mills. However, Narendran said, “In India, typically we export 10-15 per cent of what we produce. We will stick to that. It’s more about selling the 10-15 per cent at the best possible price. So, Southern Europe is now a better option than SE Asia.”

On the input side, for Europe and India, Tata Steel used to import 10-15 per cent PCI (pulverised coal injection) from Russia. “From a de-risking point of view, both in Europe and India, we are looking at options beyond Russia for coal. Most of the coal in India comes from Australia. In Europe, we will have to buy from North America.”

Neelachal Ispat

On March 10, Tata Steel Long Products and Tata Steel executed a share purchase agreement for acquisition of Neelachal Ispat Nigam Limited, an asset owned by central and state PSUs.

Narendran said that the transaction will be completed within 45 days. “We need to sort out some of the contingent liabilities,” he said.

But, he added, Tata Steel teams are already preparing so that the business can be turned around as fast as possible.

On further acquisitions, Narendran said, the company is in a comfortable position as far as its growth ambitions are concerned. “Between Kalinganagar, Neelachal and Angul, we can easily grow to 40-45 MT. So, we have sites available for growth and are not under any pressure to bid for any asset.”

The government is likely to come out with expressions of interest for further disinvestment, including RINL and NMDC Iron and Steel Plant.

However, Narendran said that the company doesn’t want to bid for flat products. “We were interested in long products but Neelachal is good for us. We may not necessarily look at other options. We will take a call as and when it happens.”