Stumbling along in Europe, Tata Steel reaches a crossroads

Last Updated: Tue, Dec 25, 2012 06:23 hrs

B Muthuraman and T Mukherjee (senior general managers then), "Would you let the bluest of blue chip companies have a red bottom line?" The context of that question was a miserable first quarter result in the backdrop of competition from imports, signalling a transition to a buyer's market.

The question helped Tata, who was then new to his role of Tata Steel chairman, extract a promise from the two gentlemen. Before the end of the financial year, the company would reduce cost by Rs 500 a tonne, which translated to 7.5 per cent of the cost at that point in time. Till then, every year, cost had actually gone up.

By December, at a meeting that lasted till two in the morning, Tata was told by a group of very satisfied executives that they had managed a cost reduction of Rs 350 a tonne.

But Tata's response was a clear expression of disappointment: "Your promise is with me, you don't have to make another promise. What is at stake is your prestige and reputation."

The message was, therefore, loud and clear: By March, costs were brought down by Rs 500 a tonne even though there was an increase on almost every other count, including railway freight. Target-led innovation had made it possible.

It was an achievement indeed, but towards the late 1990s, profitability started suffering once again, prompting Tata Steel to appoint three consultants-Booze Allen Hamilton, McKinsey and Arthur D' Little. The report card: a grade C'.

Tata Steel was told in clear terms that it was flabby and no good compared to global peers. McKinsey had even cautioned that the steel business was subject to commodity cycles and Tata Steel should diversify.

It came as a rude jolt, but the management took the cue. From 1995 to 2001, Tata Steel reduced workforce from 78,300 to 47,300 by implementing a voluntary retirement scheme (VRS), and an early separation scheme (ESS). At the executive level, Tata Steel introduced the performance ethic programme. Had the VRS not been introduced in 1995, all its profits, especially in 2001-02, would have gone towards payment of salaries. In short, Tata Steel would have been in the red.

But the company bounced back. In 2001, it topped the World Steel Dynamics (WSD) chart of world class steel makers against several parameters that included operating cost, technology, product quality, position in the domestic market. Small acquisitions - NatSteel and Millennium Steel - followed and till 2006, that's before Tata Steel acquired Corus, the company featured among the top four steel makers in the world. But following two financial crises that reverberated through the world, Tata Steel has slid down the charts. A lot of it is linked to its European operations.

Five years after the high profile buyout of Corus - the biggest foreign acquisition made by an Indian company at $12 billion in those times - Tata Steel is at a crossroads. At 608 pence a share, the price was a 34 per cent premium to Tata Steel's original offer. Though the deal catapulted Tata Steel to the fifth largest steel maker, in hindsight, it looks like a costly deal.

The Tata Steel group's fortunes have seesawed with steel prices, primarily because the European operations that account for 60 per cent of revenues don't have captive raw material resources, unlike its Indian operations. Together, coking coal and iron ore, account for about 65 per cent of the total cost of steel production.

Unsurprisingly, profitability has slipped down the years. From a high of Rs 12,322 crore at the end of March 2008, Tata Steel's consolidated profit after tax stood at Rs 4,49 crore in 2009 and 2010 ended with a loss of Rs 2,121 crore. 2011 was better at Rs 8,856 crore, but in 2012, it almost halved to Rs 4,949 crore.

Raw materials, however, are still a part of the bigger problem. According to some, Corus buys the Rolls-Royce of raw materials, but with that it is possible to achieve records in technical parameters, not profits. It's a combination of factors that's affecting Tata Steel Europe, raw material apart, such as under-investment in plants by erstwhile promoters, and high employee cost, though Tata Steel has downsized significantly, and slowdown in Europe.

There are issues with the integration process as well. Ratan Tata had recently said the earlier British managers of Corus were not ready to go the extra mile. Whether that has affected the $450 million savings from synergies expected to be achieved over three years is not known

Of course, some captive raw material will flow in from Riversdale. Tata Steel is expected to receive its first shipment of 850,000 tonnes of coking coal and 200,000 tonnes of thermal coal from these mines in Mozambique shortly. But for its European operations that have a capacity of about 18 million tonnes yearly, it could just be a peck in the ocean.

The demand scenario for Corus doesn't look quite bright either, at least in the near term. According to Tata Steel's forecast, the European economy was expected to contract in 2012, with only marginal growth predicted in 2013. That's not good news for a company which now depends on Europe for 66 per cent of its total production capacity,

So, the focus obviously would be to correct the imbalance and focus on India to achieve business growth. The Indian operations are on a steady course, which is poised to better once the steel plant at Kaliganagar is commissioned in 2014, though the project is delayed by about five years and Tata Steel is almost sure to miss its target of achieving a capacity of 50 million tonnes by 2015.

Recently, Ratan Tata said in his interview to the group's in-house journal that his involvement in Tata Steel's growth and evolution has been significant. It looks like his successor will have a lot to straighten in the group flagship.

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