MANAGEMENT SPEAK

The global recovery that started in the second half of 2009-10 continued in most markets in 2010-11. However, the recovery was not uniform as the emerging markets grew faster than the developed markets, which still face headwinds due to fiscal imbalances in some geographies. The sustainability of the global recovery depends on how the developed markets manage their public debt, boost private economic activity and generate employment.

The emerging economies face the risk of very high inflationary conditions due to high commodity prices and food inflation. This is prompting the central banks to tighten monetary policies which in turn may affect growth significantly. The emerging market countries including India, need to continue their economic reforms to attract capital investments, which in turn would facilitate growth and employment.

Although India registered c.9% GDP growth in FY 11, it is now faced with high-core inflation due to rising commodity prices and food inflation. This is forcing the Reserve Bank of India to tighten its monetary policy even at the cost of slower growth.

The growth data in the EU zone reveals significant differences at the country level. Recovery in Germany and most of the Northern European countries remains well on track, whereas growth in the peripheral countries has been hampered by several factors such as export competition and weak domestic demand, exacerbated by cuts in government spending. Euro-area growth is sustained by strong investment and is largely export led, which will remain its key driver, helped by exchange rates and specialised products. The UK, in contrast, remains a fragile market and lags behind some of its European peers. The construction activity remains below pre-crisis levels in Europe. While the forward indicators point to modest growth in the coming quarters, the outlook for this sector remains sober due to weak recovery in private construction and cuts in public expenditure.

Real steel consumption in the EU zone is expected to rise by 4% but will still be below the pre-crisis levels. Steel inventories in Europe remain relatively low both in tonnage as well as months of consumption and the level of imports is currently below historic levels, as stock replenishments are done in small quantities while avoiding longer lead times.

While the global economy is certainly in a better shape than a year ago, the risk of sustaining the recovery is high and it really depends on the national governments to prudently steer the fiscal management and take policy decisions to facilitate growth and employment.

The Tata Steel Group remains focused on executing its stated strategy of allocating capital to grow in India through brownfield and greenfield projects and also increasing the capital allocation to the European and other businesses to enhance their profitability. In India, the brownfield expansion at Jamshedpur is expected to be commissioned in the financial year 2011-12 taking our flat products capacity to 6.4 million tonnes (total crude steel capacity to 9.7 million tonnes per annum). This will be accompanied by augmenting the capacity of mines to ensure that the expanded operations are fully integrated with respect to iron ore. The Odisha greenfield project is being developed in two phases of 3 million tonnes each. The project work has already commenced and we plan to commission the first phase of 3 million tonnes by the financial year 2013-14. The next phase will follow soon after. We continue to focus on downstream and value-added products, including automotive steel through cold annealed processing, packaging steel and others.

We are investing in productivity improvement projects in our UK and European operations which are essential and value accretive to the Company. The Company has already announced rebuild of a blast furnace at Port Talbot with a capital cost of £185 million. This project will not only enhance the life of the Blast Furnace in Port Talbot but also increase the hot metal capacity by 0.4 million tonnes and reduce the cost of production. The other areas where we are looking at additional capital allocation are towards energy management, across all sites, to optimise usage and cost of energy and on capital projects that enhance productivity and improve our product portfolio.

There are a few points here. Firstly, the market, though very volatile, was better compared to the previous year, especially in the first half of the year as markets recovered after falling sharply in 2009. Secondly, the improvement initiatives and the restructuring program initiated over the last 18 months (including the mothballing of the loss-making Teesside operations in early 2010) helped in improving the operating leverage of the business during the financial year. As a result of the above, our capacity utilisation in Europe was higher compared to the previous year. This obviously leads to better absorption of the fixed costs and improves the profitability. A lot of effort is currently on, across various operating areas to enhance the fundamental robustness of the business in the future.

Tata Steel in Europe is undertaking several initiatives to enhance its competitive position in a very challenging market environment.

During the year, we rebranded Corus as Tata Steel Europe to leverage the global presence of the wider Tata Group. In addition, Tata Steel Europe adopted a new ‘One Company’ operating model by setting up a single sales and marketing team, a consolidated supply chain organisation with three steelmaking hubs, speciality businesses and pan-European support functions.

The business is focusing on market differentiation with clear sector focus, technological innovation for new product development and operating excellence towards continuous improvement and reduction in conversion costs. We believe that through differentiated product strategy, customer focus and cost reduction programmes, our European operations will create sustainable value in the future.

Gaining security over raw materials has been an important element of our strategy. While we are 100% self sufficient in iron ore and around 50% in coal, we procure all our raw materials in Europe from the seaborne market. Therefore we had identified few mining projects globally and have been early-stage strategic investors towards development of the underlying reserves in those projects. Our current priorities remain on the development of the Benga Project in Mozambique, the Direct Shipping Ore (DSO) Project in Canada and the Sedibeng Project in South Africa. Tata Steel also has a 5% economic right and 20% off-take right in the Carborough Downs Venture in Australia, which produces 1.5 million tonnes of semihard coking coal. The project is currently expanding its capacity and is expected to increase production to 3 million tonnes per annum. We were recipients of our share for our Indian operations since September 2009. We are also undertaking a mineability study to assess the prospects and feasibility of developing the Margam coal mine in the UK, which can benefit our UK operations in the future.

While Tata Steel’s Indian operations continues to be amongst the most competitive operations in the global steel industry, as a Group we are focused on enhancing the value-added component of our product portfolio across all geographies in the future. Currently we do have significant portfolio of downstream products in the Group, including automotive products, packaging and special plating, electrical steels, tubular products, building solutions, structural steel, high-end wire rods, pre-cage steel and others. Our European business also supplies high integrity structural steels for aerospace programmes, high-gloss pre-painted perforated blanks for consumer goods, long rails for high speed lines, special rails for metro and tramways, and speciality pipes and plates for the energy and power sector. In Europe, we are working across technology and product platforms to continue with the product differentiation journey on further enriching our product mix. Going forward, our growth plans are oriented not only around upstream steel capacity expansion in India but also focused on adding downstream capacity and capability which will enhance the value-added mix in our product portfolio.

Since 2000, China has accounted for 90% of global steel production growth. It is likely that the pace of growth in China may decline but the overall consumption of steel will still be at very high absolute levels. China is gradually rebalancing from export-driven to domestic demand-driven economy. Removal of export rebates and consolidation of the steel industry are few of the policy indications given by the Chinese authorities which will discourage exports in the future. Given the structural shift in the urbanisation trends and investment in infrastructure in the inland provinces, steel intensity is expected to grow till 2015. While China certainly is showing signs of slowing down, the growth in steel demand should continue, albeit at a reduced pace.

During 2010, there was a structural change in terms of the contract structure of the key raw materials for the primary steelmakers. During a period of slow economic recovery globally, this move has certainly added more volatility to the steel prices and hence on the margin of the steel makers.

The movement in spot prices of raw materials in the first three quarters of the financial year reflected the seasonal demand in different geographies and the impact of monetary measures taken by the various national governments to stimulate demand. In the last quarter of the financial year 2010-11, the coking coal and iron ore contract prices were settled at a record level due to supply disruptions in Australia and some stoppages of iron ore exports from India. China’s continued production growth and upcoming new capacities are expected to culminate in a seaborne supply deficit situation and higher iron ore prices in the near future. Coking coal is a more supply constrained commodity and with rising coking coal imports into China and India it is expected that the coking coal prices will also remain at elevated levels in the near future. The above situation in iron ore and coal is likely to continue till 2014 when it is expected that global supply will be augmented with the commencement of production from the new mines that are currently being developed.