Excess supply putting pressure on steel prices: Tata Steel’s Narendran

Do you expect slowdown in domestic demand after GST cut-induced stimulus?

Narendran: Demand is strong for multiple reasons not necessarily GST. The biggest driver of demand for steel is the investment in infrastructure such as rail, roads and ports. The steel demand growth will be higher than the GDP growth rate just like in most developing countries. India’s is traditionally a consumption-led growth. Earlier, the steel demand grew lower than GDP growth rate. However, over the last 2-3 years we have come back to what it should be. So if GDP grows at 7 per cent, steel demand should grow at 10 per cent a year. It is the new normal. When in China, GDP was growing at 10 per cent, steel demand was growing at 15 per cent.

Do you expect steel prices come under pressure?

Narendran: Steel prices have stayed at pretty low levels for quite a while, partly because of Chinese exports flooding world markets. So exports from India is not an option. The increase in capacity in India has kind of offset the advantage of demand growth. This was more of concern than the demand itself. We had actually guided steel prices to be lower by ₹2,000 per tonne in Q2 over Q1 and we ended up being lower by about ₹1,700. So we did better than our guidance. For this quarter we are guiding prices to be lower by ₹1,500 a tonne lower than Q3 in India.

What is keeping prices down when demand is good?

Narendran: Prices are not moving up because there was a lot of inventory in the system. There was a lot of supply. While the demand is strong, prices will only go up only if the supply side is also balanced. There is enough supply in the market just now and that is why the prices are not moving up.

Will raw material prices come down? Is there a shortage of coking coal?

Narendran: It was going down till the last quarter. Now it has started creeping up. Coking coal cost in India in this quarter will be about $6 higher compared to Q2. Coking coal is always a tightly balanced market. If there are disruptions or weather events in Australia, then it impacts coking coal prices. We are of course watchful on prices because coking coal cost is 30-40 per cent of the cost in any steel plant. Iron ore has also hit the bottom and started moving up. We hope that steel prices have also hit the bottom. Iron ore is more volatile and liquid. We are watchful of it. We balance our sourcing from multiple geographies, multiple suppliers and multiple blends.

How you managed to save so much on cost?

Koushik Chatterjee: We launched this cost saving programme in the early part of last year and this year the programme has matured to take the tag aggressive target of ₹11,000 crore. The cost saving is mostly on operating side. We have multiple levers now across the three geographies of India, Netherlands and the UK. The cost saving is focused on fixed cost takeout. It is an operating KPI (key performance indicators) improvement on maintenance, stores, inventory and consumption. The incremental improvement programme is very structural across four sites in India. We grew capacity at different pace and time across these sites; there has been areas for harmonisation and this is a programme that has accelerated that process. In UK, we have already taken out about 82 million compared to a target of 75 in the first half. In the first half of this fiscal about ₹5,400 crore of cost was taken out. We will finish this year on target. In the Netherlands, we have an employee restructuring programme which is running late because of the negotiations with the unions. Once it gets negotiated and finalised, including the social plan, we should be there. It is a bottom up, widely deployed programme across all operating entities.

Has the quality control order on imports helped steel industry?

Narendran: There was recently an order or a recommendation from the Cabinet secretary based on the Rajiv Gauba committee report, which wants to reduce the number of QCO. So there is a debate still going on. India is a growing market; even today there’s a lot of poor quality steel being used in construction and many other applications. It is important for the country to devise a mechanism to ensure quality is not compromised and the public is not at risk. We have to ensure consumers are not compromised by poor quality and a right mechanism should be implemented. All countries have various quality standards and they deploy them in different ways. The idea is not to allow anyone who wants to dump anything into India of any quality.