Management

Chairman's Statement

Dear Shareholder,

Global Meltdown

After decades of global growth, the world watched in horror as financial institutions collapsed, first in the United States followed by Western Europe and the United Kingdom. The crisis then spread to nations in Eastern Europe, Asia and other geographies. This global meltdown had a widespread and devastating effect on the world-wide banking system, stock markets, pension funds, individuals’ net worth and ownership of assets. It was a financial crisis of proportions approaching that at the time of the Great Depression of 1929.

In their efforts to restore fiscal stability and credibility of the banks, various governments stepped in with financial packages to assist banks and other financial institutions, with a view to normalising the financial sector. However, in most cases, these funds were used by the receiving institutions to shore up their own balance sheets, and very little reached the “real economy”.

The resultant lack of liquidity in the market, resulted in the drying up of consumer credit and working capital, leading to an unprecedented reduction in demand and the consequent inability of companies to finance their operations. This led to a domino-effect downward spiral in various industrial sectors like construction, automobiles, consumer products and capital goods. The effects of this downturn were initially felt in the industrialised nations but spread quickly to most other countries around the world.

The global downturn also had a major effect on various industries dependant on steel. Major contraction in the construction projects, automobiles, white goods demand from the third quarter of 2008-09 resulted in the global demand for steel dropping by 21% compared to the level consumed in the same quarter of the previous year.

While the economic scenario in India may look similar to that in the West, the situation was entirely different. Unlike the international banks and financial institutions, Indian banks did not hold toxic paper nor had they invested in sub-prime assets. Their loan portfolios were, by and large, healthy. What did happen was that in June 2008, the Reserve Bank of India raised the Repo Rates and the Cash Reserve Ratio of the banks, consciously curtailing liquidity in the system to combat inflation which had reached a level of around 11%. Predictably, the economy began to slow down in several sectors. The corporate sector and particularly small businesses increasingly faced difficulties in running their businesses, due to the lack of available finance and credit facilities. GDP growth declined from a level of 9% to 6.7% as new investments were deferred and output fell.

The situation was compounded when, as a result of the financial crisis in Western Europe and the United States, foreign financial institutions and foreign investors hurriedly liquidated their investments in India, leading to the collapse of Indian stock prices. Therefore from the second half of 2008-09 Indian industry was constrained to operate with very limited access to working capital, an inability to raise funds from market sources and a drastic drop in consumer demand.

The good news is that the economic revival in India is beginning to take place faster than most people expected and with the new government’s plans for increased spending in infrastructure as well as rural development, the recovery in India is expected to be robust. Many believe the US economy has bottomed out, but that UK, Europe and Russia may fall still further. The general view is that an economic recovery in the Western world would probably only be in late 2010.

Tata Steel

The effects of the world economic downturn seriously impacted our Company’s global operations in the second half of the year under review. The demand for steel declined by 26% in the UK and Europe in the third quarter compared to a year earlier and after a further contraction in the fourth quarter, demand had fallen by 57% in the UK and 44% in Europe compared with a year ago. This reflected in a sharp downturn in private construction projects, as well as large falls in automotive and mechanical engineering, amplified by severe destocking by both end users and service centers. Indian operations witnessed a less pronounced drop in demand of 11% in the third quarter, reflecting the reduced activity in infrastructure and commercial vehicles. There are however signs that the infrastructure and road building activities in India are gaining momentum, as a result of some of the government’s actions to revive the economy.

Tata Steel has taken aggressive steps to meet the challenges of these difficult times through major initiatives in cost reduction, process improvement and production rationalisation. The highest priority is being given to expanding steel producing capacity in Jamshedpur, and ensuring raw material security for the European operations which do not have captive iron ore and coal resources. Production rationalisation is also being undertaken in Europe and the UK to right-size manufacturing facilities to be in sync with the lower off-take by the market. The same approach is also being taken in the Company’s Asian subsidiaries.

The past year and probably the next 12-18 months are likely to be difficult and challenging times for Tata Steel. However, the spirit of the Company’s employees, coupled with their commitment to meet the challenges, I am sure, will see Tata Steel come out of this difficult period, as a more cost-effective steel manufacturer with a stronger global market presence and an enhanced capability in producing new grades of steel products to better serve its customers.

In ending I would like to thank all my colleagues and our unions at Tata Steel for their support and understanding through the year. They have collectively made the Company what it is today, and will help lead the Company into tomorrow. I would also like to thank our shareholders for the trust they have reposed in the Company over the years.

Chairman
Mumbai, 31st May, 2009