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
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.’’