Despite the slowdown casting its shadow on the steel sector, Tata Steel has kept its borrowing costs under control and remains focussed on deleveraging, its chief financial officer & executive director Koushik Chatterjee tells Vikas Srivastava.
As far as steel prices are concerned, the sentiment was very weak in 2019. How do you see prices faring in 2020?
For steel companies, the December quarter was the worst of the last few. However, restocking has started since mid-December and prices have firmed up, with the uptrend continuing in the fourth quarter. The revival of sentiment has occurred owing to lower system inventory, which has led to restocking by companies. We believe any growth in demand would ensure that the restocking is sustained.
On prices, we expect Q4FY20 to be better than the second and third quarters of the fiscal. As for domestic steel prices catching up with international prices, I think demand triggers will play a vital role. A lot hinges on the directional and mega projects announced by the government getting off the ground quickly. The faster that happens, the greater the likelihood of domestic prices normalising vis-a-vis international steel prices.
What could the demand drivers be?
I don’t think that people had expected the Budget to be the demand driver. We believe the infrastructure spends announced by the government will drive the demand for steel. Public spending being key to a revival, facilitation of project approvals is very important. There would also be a positive impact if the government came out with an automotive scrappage policy and improved credit flows to the industry. We will also be keeping an eye on the direction of the RBI’s monetary policy.
What part of the Rs 120-trillion spend announced for infrastructure do you see materialising in 2020?
Some of the projects in the port and waterway, highway (accelerated highways programme), and airport (development of 100 airports, etc.) sectors are very important for demand generation and would have a multiplier effect on company revenues and employment. Being mega projects, these would see sizeable collateral investment.
With most of your steel consumed by the auto and construction sectors, how soon do you expect a revival in the automotive sector?
Auto recovery would require a trigger like a scrappage policy. Although the transition to BS-VI is being implemented by auto companies, we think it will take at least six months for a revival in demand to happen. You must bear in mind that demand is cyclical in nature and people have been deferring their purchases. Availability of credit has been a problem too. If the cost of credit came down, people would find it easier to buy vehicles. A stable economic climate is another factor that matters.
What’s the news on your borrowing costs? And the de-leveraging plan for FY20?
Our borrowing costs are under control. Even in a challenging market, we managed to drive costs down by almost 100 basis points while re-financing a European debt of €1.72 billion. We are focussed on deleveraging as part of our enterprise strategy. As a thumb rule, we look to reduce debt by $1 billion every year. The debt level has risen this time due to the `4,500-crore acquisition of Usha Martin at the beginning of the year. But we are targeting reducing it from a peak of Rs 1.11 trillion in September 2019. Owing to weak market conditions, our working capital needs went up in Europe. But we have lowered the working capital level in recent months, rationalised capex and taken steps to cut costs. So, the $1-billion target will be back on our agenda; in fact, we are looking to reduce debt in Q4FY20 .
Where do you see raw material prices headed?
Coal prices were very high at the beginning of the year, though they have softened slightly since then. As you would know, coal prices have a fundamental impact on both our India and Europe operations. We are also keeping watch on Australia since it witnesses cyclones and rains in the ongoing season. As for iron prices, though they have been high, the fact that we do not buy much iron ore in India has helped. In Europe where we do buy iron ore, our spreads fell sharply in the December quarter as the raw material basket had grown and steel realisations went down.