Tata Steel To Invest 400 Million Pounds To Improve European Operation

Tata Steel, one of the largest steel producing companies in India, has announced its plans to invest 400 million pounds in its European unit during the current financial year. The plans for the investment have come at a time when the European economy is going through a downturn. The company has said that the investment will be done to improve the performance of its operations in Europe and in areas which can provide quick returns. The European operation of the company has been facing severe pressure due to a fall in demand and a decline in the steel prices in the last one year. There was a situation when the company had to sell the inventory at losses due to a weak demand scenario.

Post this scenario the company took various initiatives, including closing down one of the plants to reduce the overall costs. A few other measures were taken to improve the overall operating efficiency.  During the last few quarters the major initiatives taken were to improve the product mix and focus on higher margin business. And now that raw material cost has come down from its high, the focus will be on further trying to improve the margins with tight cost control and emphasis on increased product differentiation. We believe that the investment of 400 million pounds is one of the major steps to improve the operating performance of the company, especially in a downturn period where the margins have got squeezed.

“We plan to invest to improve performance of the operations in Europe and in areas which can provide quick returns,” Tata Steel’s Managing Director H M Nerurkar told reporters on the sidelines of a CII conference. Further, the management has stated that the investment will be funded through internal accruals. However, it also added that the plan for funding is not yet finalized.

In the June 2012 quarter the company had reported weak numbers, especially for the European operations. On a consolidated basis, the net sales of the company grew by a mere 2 per cent on a YoY basis to Rs 33,547.73 crore. The net profit has taken a huge beating and was down by 90 per cent on a YoY basis to Rs 517 crore. Then fall in the net profit was attributed to the fall in the global steel volumes which declined by 7 per cent on a YoY basis to 5.7 million tonnes, hit by the economic slowdown in the European division.

However, in the last three months there has been positive news coming from the European region. The European leaders are taking several steps to bring the economy out of the crisis. This may prove positive in terms of revival in the steel demand in the coming months. For the September quarter we expect the company to report subdued numbers mainly of the back of the monsoon in India and the continuous fall in demand in the European operation. However, the good thing is that most of the raw material prices have seen a significant decline in the last two quarters with iron ore prices falling by 20 per cent in the last three months while coking coal prices have fallen by USD 200 per tonne levels down by 10 per sequentially. Falling raw material prices are good for Tata Steel’s European business margins, but with a lag.