Tata Steel is looking to bring profit margins to Corus, its European operation, closer to those enjoyed by its Indian operations, notably Jamshedpur, near Calcutta in Eastern India. Tata’s four European Corus plants, at Scunthorpe, Port Talbot and Teesside (ex British Steel plants) in the UK and Ijmuiden in the Netherlands average some 7% EBITDA (earnings before interest, tax, depreciation and amortization), the typical measurement for company to company valuations. Jamshedpur, on the other hand, achieves a figure closer to 36%, according to Tata’s CEO B Muthuraman due to better operating procedures and access to local, company owned, iron ore reserves. Interestingly the firm quotes these figures on the basis of steel coil at $500/ton, which suggests the cost of production at their European works is a little over $465/metric ton, close to the figure we estimated a week back using the MetalMiner steel cost build up model. Some may argue that the market in India is rigged in the producers favor with taxes on the export of iron ore and a domestic market protected by import tariffs, which may partly explian the much higher profitability there.
Nevertheless Tata’s commitment to develop their $13b European acquisition such that they will achieve profit levels of more like 30% by 2013 is welcome news to the workforce who were probably expecting redundancies in light of the current state of the steel market. Indeed in the short term, production has been cut back by 30% to try to bring supply closer to much lower demand from construction, engineering and automotive, but Tata appear committed, for the time being, to build their European operations for the long term and, in line with many other mills, are looking to add captive iron ore sources to their European operations notably from Canada, South Africa and the Ivory Coast. We hope they succeed, the more viable producers there are the better for consumers. More consolidation in the hands of the majors we don’t need. Tata is already the 5th largest producer in the world by some measures but with Arcelor Mittal dwarfing the rest we hope Tata can bring down Corus’ costs to maintain them as a viable alternative in Europe.