tata steel: Tata Steel MD Narendran on bear market in steel sector

What is happening in China is because of the lockdowns. Steel consumption in China was also slightly higher. Production was actually pretty strong and so in May you saw 7 million tons of exports, which is above their normal monthly export of 5 million tons,

TV Narendran
said in an interview with ET Now. Edited excerpts:

Your view was that steel prices will remain bullish. But with a lot of volatility, is that picture still intact?

Yes, even if you look at today’s steel prices, international prices are in the $730-$740 range, which is higher than the long-term average. So what I said was it’s going to fluctuate at a higher level than the decade average that we’ve seen and so far it’s still there. It is still higher than the long-term average of the past 10 years.

The view shared by some opponents is that steel prices are currently well above average production costs. Historically, if one looks at the decimal mean, is this kind of spread unlikely to continue?

There are reasons why I disagree. If you look at the last 10 years, spreads were more determined by exports from China and Chinese exports were not really profitable exports. If you look at the financial results of the Chinese companies over the past 10 years, you will see what I am saying because they had an EBITDA margin of 5% under normal market conditions. A private sector company cannot survive on a 5% EBITDA margin and continue to grow but they had several reasons why they could survive on that 5% EBITDA margin. That is no longer the case. The Chinese companies are no longer aggressive exporters. Yes, exports in May were on the higher side, but that is more temporary.

China wants to reduce its steel exports because it wants to reduce the carbon footprint of the steel industry in China. So I see a much better balance in world trade in this decade than we have seen in the past decade and if China is not an aggressive exporter. And now Russia and Ukraine, which together would export about 40 million tons, are no longer on the market. Then you only have Japan and Korea, which are not cheap exporters from that point of view. I see more stability in steel prices and better spreads.

Second, if you look at Europe, everyone is investing and switching to greener steel, so that’s going to take a lot of capital and that will also increase costs. Opex is also going up in Europe due to the fact that you are paying a carbon price, so for all these reasons I expect spreads to be higher than they have been in the last 10 years.

Right now, looking at where coal prices are and what your underlying selling prices are, are you running a profitable business or are your spreads negative?
We have a profitable business.

The concern across the entire commodities market is that China is not producing and we understand that the Covid restrictions will likely only be extended. What happens in such a scenario?

What is happening in China is because of the lockdowns. Steel consumption in China was also slightly higher. Production was actually quite strong and that’s why in May you saw seven million tons of exports, which is above their normal monthly export of five million tons. As a result, steel prices in South East Asia have also fallen somewhat in recent weeks, but in the medium to long term, I think the Chinese government will take steps to get the economy back on track.

Yes, it will no longer grow at 8% and 9%, but it is a USD 13-14 trillion economy, even if it grows at 3%, that’s pretty strong because it’s the second largest economy in the world, so you can’t expect it to grow by 8% and 3% on 12 trillion is a lot of GDP growth.

So I expect that measures will be taken in China to stabilize the economy in a way, we will not see the kind of growth that we have seen in the past I do not expect exports to take place like in the past, but yes, China is having a big impact on global sentiment in multiple ways, so that’s how I see it. It’s a country to watch, they account for 55% of steel consumption and over half of steel production, so we’ll be watching closely.

Are you afraid that the accumulated stock has already started?

Not so much in Europe. In India yes, because exporting is not an option. In Europe, export is always an option.

For those who fear a bear market has begun in the steel sector, how would you confirm that fear is not true?

Of course, we will also reflect the general sentiment in the market when interest rates rise, stock prices fall in a sense, or most indices fall. As the dollar strengthens, money flows out of emerging markets such as India. So to that extent we’re all victims of that, but if you look at the fundamentals of Tata Steel, if you look at our balance sheet, if you look at the multiple we’re trading against, I think there needs to be more confidence in the stock.

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