Management Discussion and Analysis

The Management’s discussions on the Steel Industry and the Company’s performance are given below:

1. Steel Business Unit

India’s apparent steel consumption grew by 11.7% to 43.8 million tonnes.

A) Global Steel Industry Overview
Global crude steel output, which closely tracks demand, grew by 8.9% to 1,244 million tonnes in 2006 as compared to 1,142 million tonnes in 2005 mainly driven by strong growth of 18% in China. In 2006, the top five steel producing countries were China (422.7 million tonnes), Japan (116.2 million tonnes), USA (98.6 million tonnes), Russia (70.8 million tonnes) and South Korea (48.5 million tonnes). The finished steel consumption grew by 8.5% at 1,113 million tonnes in 2006 as compared to 1,026 million tonnes in 2005. China accounted for 33% of global steel consumption and 50% of global demand growth. The Asian region especially China witnessed the most remarkable growth over the past ten years. In 1996, China produced 101 million tonnes of crude steel. By 2001, crude steel production increased to 151 million tonnes, at a CAGR of 8%. In 2006, China produced 422.7 million tonnes of crude steel, registering a CAGR of 23% in last five years. China’s share of world crude steel production also increased exponentially. In 1996, China became the largest steel producing country in the world for the first time, accounting for 13.5% of global crude steel production. In 2006, this share increased to around one third of the total crude steel produced in the world.

The global steel consumption increased both in developing and developed countries in 2006, with double digit growth in Europe, CIS, NAFTA and South and Central America. In Europe, the increase in demand was accompanied by a substantial increase in steel imports primarily from China, which emerged as a significant net exporter of steel in 2006. Construction was the key driver of demand across the EU in 2006, notably in Germany, which recovered very strongly.

The demand for raw materials viz. iron ore, coal, scrap, energy etc. have increased significantly due to robust growth in global crude steel production led by China. The shortages of raw materials and constraints of logistics, led to increase in prices of raw materials. Iron ore prices increased for the last five years consecutively. Iron ore fines prices increased by 19% in 2006, 71.5% in 2005, 18.6% in 2004 and 9% in 2003. There is a further increase in contracted prices of iron ore fines by 9.5% in 2007. China’s crude steel production increased by 18% or 63 million tonnes in 2006 and to support this production, iron ore imports into China increased by 19%. In order to respond to the tightening supply-demand balance, major iron ore and coal producers are investing in new mines to increase production capacity. The hard coking coal prices decreased by 7% in 2006, after a steep increase by 117% in 2005 and 24% in 2004. There is a further decline in the contracted prices of hard coking coal in 2007 due to increased supply coming on stream. The steel industry and all commodities related industries have witnessed an upward shift in their respective cost curves and hence prices for both raw materials and steel products are likely to settle at much higher levels than the average prices that prevailed in the past.

B) Domestic Steel Industry Overview
Indian Steel Industry registered a strong growth in steel consumption driven by strong growth in all steel consuming sectors viz. automotive (13.6%), capital goods (18.3%), construction (10.7%), consumer non-durables (10.5%) and consumer durables (9.1%) etc. During the fiscal year 2006-07, India’s apparent steel consumption grew by 11.7% to 43.8 million tonnes. The flat products and long products consumption grew by 11.5% and 12.3% respectively. Domestic steel production grew by 11.1% to 49.4 million tonnes. Steel exports grew by 6.1% to 4.7 million tonnes and steel imports increased by 6.4% to 4.1 million tonnes.

C) Steel Industry Outlook for 2007-08
Driven by the continued growth in developing and emerging economies, global growth is likely to remain robust. World GDP is expected to grow by 3.4% in 2007. China and India are expected to continue its march towards high growth, though controlling inflationary pressures may be a challenge for the Indian Government.

The International Iron and Steel Institute (IISI) forecasts global steel consumption to grow by 5.9% in 2007 and 6.1% in 2008, driven by strong demand from Asia, Africa and South America. The apparent steel demand is likely to increase by 65 million tonnes in 2007 and 72 million tonnes in 2008 to reach a level of 1,250 million tonnes in 2008. China is expected to remain the largest market with steel demand likely to increase by 13% (46 million tonnes) in 2007, which represents 71% of global steel consumption growth in 2007.

The Indian Steel Industry is now believed to be at an inflexion point. It is poised for a demand growth of 10% in FY 2007-08. Demand for flat products and long products is expected to grow by 12% and 9% respectively.

Rise in personal disposable incomes and easy access to funds from banks has led to new housing projects in last 3-5 years. The Automotive sector also grew at a significant rate of over 15% due to easy availability of consumer finance, excise duty reduction and higher disposal income with households. Recent increase in interest rates is likely to dampen this sentiment somewhat, but the growth rate is likely to remain robust.

The Committee on Infrastructure in India constituted under the Chairmanship of the Prime Minister in August 2004 planned for an expenditure of approximately Rs. 14,50,000 crores (USD 320 billion) in the 11th Five Year Plan (2007-2012) on Irrigation, Urban Infrastructure, Power, Roads, Railways, Ports, Airports, Telecom projects etc. This may lead to increased steel consumption in foreseeable future. India’s steel consumption is expected to increase to 65 million tonnes by FY 2009-10 and over 125 million tonnes by FY 2014-15.

D) Tata Steel’s Growth Strategy
During the 1990s, the Company re-engineered its business processes, established its cost leadership in a liberalised scenario and modernised its operations to become one of the most efficient steel producers in the world. After a period of recessionary conditions in the early part of the century, the steel industry scenario changed dramatically in 2003 led by the strong growth in China. The Company was prepared to participate in this opportunity and set out on the growth and globalisation path in the 21st century.

The Company realised the need to grow in size and regional diversity to match global players. In 2005, the Company made long term plans of becoming a 50 million tonne steel producer by 2015 having multi-locational manufacturing facilities with strong regional presence focusing mainly on auto, packaging and construction sectors across the global markets. The long term growth plans of Tata Steel are focused on the following levers:

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