Boom at home drives global moves

In­dian gi­ant Tata Steel is on the ac­qui­si­tion trail to boost pro­duc­tion and raw ma­te­ri­als sup­plies, writes Derek Parker

The Weekend Australian - Review - - Steel -

W ITH In­dia strid­ing to­wards a key role in the world’s econ­omy, its steel com­pany Tata Steel is po­si­tion­ing it­self as a ma­jor player in the global in­dus­try. The com­pany re­cently marked its cen­te­nary, and in the past few years has been on the ac­qui­si­tions trail as part of its strat­egy of di­ver­si­fi­ca­tion, ver­ti­cal in­te­gra­tion and raw ma­te­ri­als se­cu­rity.

Mumbai- based Tata Steel is part of In­dia’s huge Tata Group, a sprawl­ing en­ter­prise of 98 com­pa­nies en­com­pass­ing ac­tiv­i­ties as var­ied as ho­tels, fi­nance, clothes and tea. Of­ten seen as the flag­ship of the con­glom­er­ate, Tata Steel has a deep in­volve­ment as a sup­plier with a new Tata ven­ture, the drive to pro­duce a cheap, small car for the In­dian mar­ket. Tata Mo­tors’ Nano will hit the streets in Novem­ber 2008.

Af­ter the ac­qui­si­tion of An­glo- Dutch firm Corus last year, Tata Steel be­came the sixth­largest steel­maker in the world, with a to­tal crude steel pro­duc­tion ca­pac­ity of around 28.1 mil­lion tonnes. Some in­dus­try an­a­lysts, es­pe­cially in Europe, ex­pressed the view that the $ US12 bil­lion price paid by Tata Steel was driven more by na­tion­al­ism than hard- headed busi­ness sense, but the deal was hugely pop­u­lar in In­dia, taken as a sign that the coun­try had shaken off the last ves­tiges of its colo­nial past. In the days af­ter the deal was an­nounced, the share price of Tata Steel rose by 30 per cent on the In­dian stock ex­change.

The ac­qui­si­tion was also seen as pro­vid­ing Tata with cut­ting- edge pro­duc­tion tech­nol­ogy, as well as a pos­si­ble way to slip around the Euro­pean Union’s bar­ri­ers to for­eign steel mak­ers.

The Corus ac­qui­si­tion fol­lowed the ac­qui­si­tion of Sin­ga­pore’s NatS­teel and Thai­land’s Mil­len­nium Steel. As a Tata Steel sub­sidiary, NatS­teel has moved into the boom­ing econ­omy of Viet­nam, ac­quir­ing two steel- bar rolling plants to bol­ster its po­si­tion in the con­struc­tion sec­tor.

There are also re­ports that Tata Steel could bid for a stake in In­done­sia’s steel maker PT Krakatau Steel, a gov­ern­ment- owned en­ter­prise slated for pri­vati­sa­tion.

Tata Steel has be­gun to es­tab­lish it­self in Africa, with the de­vel­op­ment of a huge high­car­bon fer­rochrome plant in Richards Bay on the South African coast. The new plant will be able to pro­duce 135,000 tonnes of high- car­bon fer­rochrome an­nu­ally, us­ing ore im­ported from In­dia and Iran. The fer­rochrome, which is used in the man­u­fac­ture of stain­less steel, will be ex­ported to Tata Steel cus­tomers in Asia, Europe and the United States.

Aside from steel as­sets, the other side of Tata Steel’s in­ter­na­tional ac­qui­si­tion strat­egy is to buy into raw ma­te­rial sup­pli­ers, es­pe­cially coal. This is the rea­son for one of Tata Steel’s re­cent moves in Aus­tralia, the ac­qui­si­tion of a 5 per cent stake in the Car­bor­ough Downs cok­ing coal mine near Mo­ran­bah in Cen­tral Queens­land. The mine is 80 per cent owned by Vale, a Brazil­ian com­pany; Tata Steel sees its stake as a means of lock­ing in sup­ply as well as gain­ing ac­cess to min­ing ex­per­tise and tech­nol­ogy that can be ap­plied to its other min­ing op­er­a­tions around the world. The Car­bor­ough Downs mine it­self is un­der­go­ing an ex­pan­sion, and the sur­round­ing ar­eas are seen as highly prospec­tive.

Man­ag­ing Di­rec­tor B. Muthu­ra­man notes that Tata Steel aims to be­come the sec­ond­largest steel pro­ducer in the world by 2012, with to­tal pro­duc­tion ca­pac­ity of 40 mil­lion tons per an­num, com­pared to present ca­pac­ity of around 25.6 mil­lion tonnes per an­num. Ex­pan­sion work at the com­pany’s huge fa­cil­ity in Jamshed­pur will lift out­put from five mil­lion tonnes per an­num to 6.8 mil­lion tonnes per an­num, with fur­ther ex­pan­sions planned to raise ca­pac­ity to 10 mil­lion tonnes per an­num by 2010, mak­ing it the largest ca­pac­ity in a sin­gle lo­ca­tion in In­dia. The com­pany is also set­ting up three steel plants in Orissa, Ch­hat­tis­garh and Jhark­hand with a com­bined ca­pac­ity of 23 mil­lion tonnes per an­num.

Muthu­ra­man notes that the com­pany re­mains on the lookout for fur­ther ac­qui­si­tions to in­crease pro­duc­tion ca­pac­ity, as well as for raw ma­te­rial sup­pli­ers. The com­pany is cashed- up, re­port­ing a 40 per cent in­crease in net profit for the quar­ter ended March 31, against the same pe­riod the year be­fore.

On the prod­uct side, the com­pany plans fur­ther de­vel­op­ment in the ma­ture Euro­pean mar­ket and grow­ing Asian mar­ket, with a fo­cus on the con­struc­tion, au­to­mo­bile and pack­ag­ing sec­tors.

But even though its in­ter­na­tional ac­qui­si­tions grab the head­lines, Tata Steel sees its main game as be­ing at home. Strate­gi­cally, the com­pany’s fo­cus is on the bur­geon­ing do­mes­tic steel mar­ket, seen as a key to the coun­try’s con­tin­ued de­vel­op­ment.

As a con­straint on growth, Muthu­ra­man sees the key struc­tural weak­ness of Tata Steel — and the en­tire In­dian steel in­dus­try — as its lack of en­ergy se­cu­rity.

In­dia has a ma­jor po­ten­tial ad­van­tage over many other coun­tries, in­clud­ing China, in terms of rich iron ore,’’ he says. But this ad­van­tage is negated by the lim­ited avail­abil­ity as well as the poor qual­ity of cok­ing coal. Though all- out ef­forts have been made to utilise non- cok­ing coal and nat­u­ral gas for pro­duc­ing di­rect re­duced iron, avail­abil­ity of en­ergy re­mains a ques­tion mark. By in­creas­ing the use of nat­u­ral gas in the steel in­dus­try in In­dia, the en­tire out­look of this in­dus­try could be trans­formed in the years ahead.

We are liv­ing in un­prece­dented times for the global steel in­dus­try. Prices of ev­ery­thing from raw ma­te­ri­als to en­ergy in­puts to ocean freights — and con­se­quently of steel prod­ucts — have surged to un­prece­dented highs due to rapid steel de­mand growth from the de­vel­op­ing economies, cou­pled with in­ad­e­quate raw ma­te­rial avail­abil­ity.

In a sce­nario like this, the only sure way to con­tain steel prices is to ur­gently cre­ate new steel ca­pac­i­ties in In­dia, match­ing or even ex­ceed­ing the fast pace of de­mand growth un­leashed by our liberalised econ­omy.’’

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