Management Speak

This has been the worst global crisis in living memory. The global financial landscape has changed significantly since September 2008 and this has had a severe impact on the global economy in the last 18 months. The lack of capital had resulted in a significant decline in demand across most sectors globally and in steel too we saw demand contracting in many end-user segments in the first half of 2009-10. The Eurozone economy contracted by 2.7%, with the UK falling by 3.7% in the 12 months ended December 2009.

The collapse in private business investment and decline in consumption levels due to high unemployment rates led to low capacity utilisation in the steel industry in the first half of the year. Europe and the US were the most affected regions, being in the eye of the storm, but there were cascading effects across other geographies as well, including emerging economies like India.

The immediate impact on the steel industry was the sharp decline in volume due to the lack of credit among customers. As a consequence steel prices across the world declined significantly. In order to match the reduced demand, steel companies, especially in the US and Europe, reduced their capacity utilisation by temporarily taking capacity off stream. However in emerging economies like India, the credit shortage was not as acute as in the western world and so demand conditions continued to be relatively stable, even though prices dropped significantly in line with the global pricing scenario. The South East Asian economies too witnessed a demand contraction in 2009, partly due to domestic issues, as in Thailand, or due to lower economic activity, especially in the construction sector, resulting from risk aversion and credit concerns.

2009-10 was really a year of two halves for Tata Steel Europe (TSE). During the first half of the year the European operations were significantly affected by market conditions, which led us to temporarily shut down one Blast Furnace in each of our sites at IJmuiden, Port Talbot and Scunthorpe. This led to capacity utilisation rates falling to as low as 53% in the first quarter of the financial year. In addition the Company faced serious challenges at its Teesside facility due to the sudden and unilateral termination of a 10-year Offtake Agreement by 4 international customers of the slab produced in Teesside. The Company was consequently left exposed to the highly volatile international slab market, as Teesside slab cannot be used internally beyond the volumes agreed under the Offtake agreement. These unforeseeable developments affected the Company severely and resulted in significant losses in the first half of the year. A detailed financial analysis shows the majority of the full year EBITDA losses at TSE resulted from the action of the Offtakers.

Despite these adversities, the Company’s employees exhibited remarkable tenacity in weathering the downturn during this challenging period. The Company continued on its path towards delivering the savings identified under the ‘Weathering the Storm’ programme, which totalled almost £ 866 million during the year, as well as implementing the ‘Fit for the Future’ restructuring programme. While top-line revenues at the European operations declined by almost 35% due to lower volumes and prices, very significant measures to bring about operating cost savings were undertaken to offset some of the resulting losses. Cost reduction is a continuing activity across our businesses in Europe, as is productivity improvement and working capital management. These enormous achievements have been realised despite very serious challenges in the market.

In the second half of the financial year market conditions started to improve gradually and the Company began to bring back on stream some of capacity it had idled, although pricing pressures continued throughout virtually the whole year. The Company launched several initiatives aimed at serving the market and customers better through the ‘Customer First’ programme and also started investments to improve the supply chain process across the Company. Increased capacity utilisation rates, a better cost base and an improved pricing scenario helped the Company post a turnaround in the European operations from the December 2009 quarter onwards. However, having run the Teesside operations for almost 10 months after the Offtakers walked out of the Agreement and having incurred severe losses, the Company had regrettably to take the decision to partially mothball the iron and steel making facilities in Teesside, while continuing to seek long-term solutions for the site.

On a year-end analysis, Tata Steel Europe registered a significant turnaround in the second half of the year with an EBITDA of around £ 297 million compared to an EBITDA loss of £ 476 million in the first half of the year. The recently launched initiatives on ‘Customer First’ and supply chain management are expected to help the Company’s performance further in the future.

Operating performance in India was very good, with increased production from the new furnaces and improvements in operating parameters such as reductions in fuel and lime consumption, improvement in the mill yields and increased production at the coke ovens in Jamshedpur and Haldia. On the sales side, despite the challenging market conditions, we have produced and sold more than previous year. Downstream businesses, such as Tubes and Wires, also performed well, especially in the second half of the year. The Company’s marketshare in key customer segments like automotive also increased, largely due to increased volumes and enhanced delivery compliance during the year.

The operating performance of the South East Asian business was generally stable, though the impact of high scrap prices in the last quarter depressed margins. A great deal of effort in these operations was put into tight working capital management, with significant results. The outlook for the region, especially in Singapore, is likely to be robust in 2010 and we expect the situation in Thailand to stabilise soon.

Chinese policymakers have resorted to specific monetary tightening measures to curb speculative demand and rebalance the economy in a bid to counter potential asset bubbles and overcapacity. Gross Fixed Capital Formation, which accounts for 48% of GDP in China, is expected to slow, but real steel demand is expected to grow by 8% as end-user demand in the auto, appliance and machinery sectors continues to show strong growth momentum. The threat of increased exports from China, due to the slowdown in its construction sector, has risen but there is a view that the Chinese authorities will continue to consolidate the steel industry as 25% of the country’s producers are price sensitive and have a high cost base. The Chinese government faces the prospect of an appreciating currency amid weakening global demand and the country’s steelmakers can therefore be expected to produce steel primarily to meet domestic requirements rather than subsidise other countries by exporting steel below production cost. In this scenario, pricing of raw materials will decline, easing tightness in the seaborne supply of raw materials. Adverse steel pricing developments in China can restrict international steel prices but are not expected to lead to any sustained spurts in export volumes.

The intensity of metals consumption in India remains low, by both developed as well as emerging market standards. However, we believe that India is moving towards a period of materials-intensive growth, driven by key growth enablers like infrastructure spending, urbanisation and investment in manufacturing sectors such as automotive. India is in a unique position as a steelmaking nation, given the attractions of rising domestic demand, a rich minerals endowment and competitive production factors. On the other hand the problems that steel companies are facing to initiate greenfield capacity expansions, due to land acquisition constraints and delayed mining approvals, will lead to a widening supply deficit. In order to enhance the country’s economic competitiveness, it is essential to set up large new steelmaking capacities that will not only have supply-side benefits, but will also have very material and positive implications for economic activity in the regions where they are located. These issues need the urgent attention of the government, whose intervention is required to facilitate the setting up of new Indian steel capacity.

Near-term economic indicators for 2010 suggest strong growth in core industries, with very buoyant – indeed record – industrial production expected in the second half of the year. Discretionary spending has risen on the back of reduced unemployment prospects and higher spending power among the rural masses. This has resulted in strong growth in the auto and consumer durables sectors. India’s steel consumption growth rate is expected to rise to around 12% year-on-year in the near future.

Gross debt in the Tata Steel Group of US$ 13.3 billion in March 2009 fell to US$ 11.8 billion by the end of March 2010 (applying uniform exchange rates). The decrease came about because repayments exceeded new loans committed during the financial year and because currency rates moved in the Company’s favour. The Company repaid around US$ 2.2 billion of debt (including some pre-payments) in Tata Steel India and around US$ 844 million in TSE during the year. The Company also raised new loans amounting to US$ 2 billion in Tata Steel India to fund its long-term investments in raw material projects and the expansion of the Jamshedpur Steel Works. During the year the Company took steps to restructure its debt portfolio by exchanging US$ 493 million of its existing Convertible Bonds (CARS) with US$ 546.94 million worth of new Foreign Currency Convertible bonds, which benefit from having a lower yield to maturity, longer tenure and more equity-like features.

Net consolidated debt as at March 31 2010 stood at US$ 9.8 billion, taking into consideration liquid cash and cash equivalents on the books as at March 31 2010 of US$ 1.9 billion. This was 12.5% down from the consolidated net debt as at March 31 2009 of US$ 11.2 billion.

European (EU) steel demand declined by 24% in 2009-10 due to weak demand in steel using sectors in the last 18 months. Some sectors were supported by government stimulus packages, such as automotive (aided by scrappage schemes) and rail, which received investment in certain countries. In the second half of the year real steel demand started to stabilise and the rate of destocking started to moderate. The EU steel market opened on a relatively positive note in early 2010, with the manufacturing PMI rising sharply in March, reaching its strongest level since January 2007. This is a reflection of the combined effect of the sustained upswing on global trade, an increasingly positive outlook for EU exports and low stock levels. The rebound is expected to raise apparent consumption by 15% year-on-year, but underlying demand is still fragile and consumption levels are not expected to reach pre-crisis levels before 2012. Exports will continue to be the key driver for economic growth, as the depreciation of the Euro is likely to increase the competitiveness of EU industries. Structural headwinds in the form of a slowdown in domestic demand caused by sovereign debt issues in countries like Greece and mounting fiscal deficits in several countries remain a concern and could slow impending recovery.

Tata Steel India is one of the most competitive operations in the global steel industry. The key feature of our operations is the culture of performance improvement and of continuously looking at new means to break the barriers of performance through aspirational target setting. Right now the Company’s key priority is to execute the 3 million tonne expansion project at Jamshedpur. When completed in the third quarter of the financial year 2011-12, this project will enhance the capacity of the Indian operations to 10 mtpa. In addition, the Company is focusing on several downstream facilities that are being set up in coated and packaging products, which are consistent with the Company’s long-term strategy to increase the ratio of value-added products in its output. The Company continues to pursue its long-term strategy to build greenfield capacity in India, including in Orissa.

Over the last 18 months the Company has had a clear priority of focusing its efforts on maintaining liquidity, not only to finance the existing business but also to continue funding its new growth projects in India and its investments in raw material projects overseas. The Company consistently carried well in excess of US$ 1 billion in liquidity through the year for these purposes. It reduced its gross debt by more than US$ 1 billion in the second half of the financial year by pre-paying debt. The Company also raised equity capital of around US$ 500 million during the year through a listing of Global Depository Receipts on the London Stock Exchange.

The Company’s financial strategy is focused on optimising the cost of capital in its marginal financing, improving its credit rating and the efficient allocation of resources. This is designed to enable the Company to continue focusing on rebalancing its capital structure while funding value-accretive projects for the long-term benefit of shareholders.

The coal project in Mozambique and the iron ore project in Canada are the key projects in the strategy to enhance the Group’s raw materials integration. Significant progress has been made by the management of the Joint Venture company with Riversdale Mining in Mozambique towards the development of the Benga reserves, as is shown by the the Benga Coal and Benga Power projects receiving environmental clearance. A feasibility study into the production of 10.6 million run-of-mine tonnes in 2 phases has been completed, which envisages initial production of 5.3 mtpa by end-2011. The Benga coal reserves have been upgraded by 84% to 502 million tonnes and the measured coal resource by 126% to 710 million tonnes, firmly establishing Benga as one of the most significant coal deposits outside Australia. The Company is also one of the largest shareholders in Riversdale Mining Limited, which is listed in Australia.

New Millennium Ltd (NML), a company listed in Canada in which Tata Steel is currently a 27.4% shareholder, recently approved the findings of a feasibility study to develop its 100%-owned Direct Shipping Ore (DSO) iron ore properties in Quebec and Labrador. The Project has proven and probable mineral reserves of 64.1 million tonnes and the mine is expected to produce around 4 mtpa of sinter fines from 2011. Tata Steel has an 80% stake in the DSO project together with 100% offtake rights.