Can Tata sell its new steel in oversupplied market?
Despite an adverse market scenario,Tata Steel has two sweet spots that it will harness to sell whatever it produces
Mumbai: Tata Steel Ltd’s first new plant in more than 100 years is ready to come on stream in Odisha but is facing a situation not imagined when it was conceived 10 years ago—an oversupplied market.
Despite projections of higher economic growth this year, most experts say real demand for this infrastructure metal is still low. Steel production capacity is forecast at 114 million tonnes (mt) by 2016-17, but consumption is seen only at 103 mt, data from CARE Ratings shows.
Tata Steel would be adding a fresh 6mt of steel production capacity in phases from the Kalinganagar plant, starting possibly from around middle of this year, in addition to the 10 mt from its Jamshedpur mill.
The company has braved financial, managerial and logistical challenges to set up this greenfield plant.
Consolidated net debt of Tata Steel stands at ₹ 70,526.27 crore in 2013-14, up from ₹ 58,312.95 crore the previous year and net debt to equity ratio stands at 1.77, up compared with 1.42 in 2012-13. The company has gone way beyond the $1 billion for a 1mt plant thumb rule spending.
Lack of basic infrastructure (the company has cited electricity, water and roads), long-drawn social opposition and issues over iron ore availability and government clearances has hampered the timely setting up of the plant.
Now that the plant has come to fruition, will it face an adverse market also?
Experts say yes, but Tata Steel has two sweet spots that it will harness to sell whatever it produces.
Firstly, despite falling profit margins over the years, it is still high enough for the company to compete in the upcoming price wars. In the quarter ended December, Tata Steel’s operating profit margin was at 9.2% on a consolidated basis, Bloomberg data shows. ArcelorMittal’s was at 11.1%; JSW Steel’s at 17.8%.
Secondly, the weakness of many small and mid-sized producers may help Tata Steel and indeed the other large players to garner market share from these companies that have nearly half of the 81mt steel market.
“They will be able to sell Kalinganagar’s production but steel prices will come under pressure and some small steel mills will go out of business," says Rakesh Arora, managing director and research head at Macquarie Capital Securities (India) Pvt. Ltd.
Perhaps share prices are already reflecting this. On Tuesday, Tata Steel’s shares on the BSE traded at ₹ 349.05 (as of 3pm) , up 6% from a month ago while some of the companies with smaller capacities were down. Sunflag Iron and Steel fell 3.1%, Uttam Galva Steels declined 6.06% and Usha Martin shed 1.3%.
These sweet spots will compensate the sweat of the past 10 years.
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