Behind the Story: Why Tata Steel Ltd is Still Succeeding

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The initial thaw in the European market has Indian steel companies smiling. In fact, the country’s largest private steel company Tata Steel Ltd.  recently posted better than expected first quarter results, attributed to a “phase of solid economic growth in Europe supporting the recovery in steel demand in its main market.”

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The world’s biggest steelmaker ArcelorMittal had posted Q1 results last week and said that prospects for Europe and North America were encouraging.

For Tata, the strong showing in Europe comes as a relief. Staring in the face of a global downturn for years, the company had somehow managed to remain in the black in the last four quarters with intensified measures such as cost cutting and pushing high-end product.

Incidentally, Tata Steel’s European sojourn started in 2007-08 through its $13 billion acquisition of Britain’s Corus in 2007. Today, more than half of its earnings comes from outside India. Reuters reported the steel major as declaring a net income of approximately  $173 million (Rs 10.36 billion) for the quarter, helped by higher sales volumes and better business in Europe and India.

Analysts, on average, had expected a profit of about US $150 million. The company had posted a net loss of approximately $1 billion in the same period last year, but that was largely due to impairment charges. Tata sold 7.6 million tons of steel in the fourth quarter, up from 6.56 million tons from a year earlier. For the full year, sales stood at 26.56 million tons from 24.13 million tons previously.

Now, with the European market picking up, Tata Steel Europe looks like it’s finally stabilizing. The global financial crisis had forced a $1.6 billion write-down in 2013. Just two days ago, a news report had spoken of how Tata Steel, riding on the back of a cyclical upturn in European demand, was planning to raise US $1.24 billion overseas through the sale of bonds by one of its Singapore entities.

This step, claimed The Economic Times story, was part of a mega $7 billion debt refinancing initiative for Tata Steel Europe. This is one of the the largest debt sales ever by an Indian company.

In his reaction to the fourth quarter results, Karl-Ulrich Köhler, chief executive of Tata Steel in Europe, told the media here that Europe appears to be entering a phase of solid economic growth, supporting a recovery in steel demand. But EU steel use, he felt, would remain at low levels historically because of continuing global overcapacity.

What has also helped Tata Steel post a better than expected fourth-quarter profit was the more than 30 product launches in Europe this year.

Founded in 1907, Tata Steel is part of the Tata group that also owns British luxury car maker Jaguar/Land Rover. Of late, a clampdown on illegal iron ore mining had forced Tata Steel and many other Indian steel companies to look to foreign shores to pump up their revenues. With most of the mining ban now gone, domestic operations of these companies are expected to improve.

Sohrab Darabshaw contributes an Indian perspective on industrial metals markets to MetalMiner.

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