CEOs & MDs
said in an interview with ET Now. Edited quote:
Your view is that steel prices will remain with an upward bias. But with so much volatility, is that view still intact?
Yes, even if you look at current steel prices, international prices are in the $730-$740 range which is higher than the long term average. So what I’m saying is that it’s going to fluctuate at a higher rate than the decade average that we’ve looked at and it still is so far. This figure is still higher than the long-term average for the last 10 years.
The view shared by some opponents is that currently the price of steel is trading well above the average cost of production. Historically, when one looks at the decadel average, is this kind of spread unlikely to continue?
There’s a reason why I’m different from that one. If you look at the last 10 years the spread was mostly determined by exports out of China and Chinese exports were not really profitable exports. If you look at the financial results of Chinese companies over the last 10 years, you will see what I said because they have 5% EBITDA margins under normal market conditions, private sector companies cannot survive with 5% EBITDA margins and continue to grow. but they have different reasons why they can survive with that 5% EBITDA margin. That’s no longer the case. Chinese companies are no longer aggressive exporters. Yes, May exports were on the higher side, but that is more temporary.
China wants to reduce its steel exports because it wants to reduce the steel industry’s carbon footprint in China. So, I see a much better balance in global trade over this decade than we have seen in the last decade and if China is not an aggressive exporter. And now, Russia and Ukraine, which together export about 40 million tonnes, are no longer on the market. Then you just have Japan and Korea which are not low cost exporters, so from that point of view. I see more stability in steel prices and better spreads.
The second thing is if you look at Europe, everybody’s investing and converting it into greener steel so there’s a lot of capital spending on that and that’s also going to add to the cost. Opex is also up in Europe due to the fact that there is a carbon price you pay so for all these reasons I would expect the spread to be higher than it was in the last 10 years.
Right now, looking at where the price of coal is and what your base selling price is, are you running a profitable business or are your spreads negative?
We run a profitable business.
The concern across commodity markets is that China is not producing and we understand that Covid restrictions will likely be extended. What happens in such a scenario?
What happened in China is because of the lockdown. Steel consumption in China also increased slightly. Production actually was quite strong and so you saw seven million tonnes of exports in May which was higher than their normal monthly exports of five million tonnes. So that’s why steel prices in Southeast Asia have also fallen a bit over the last few weeks but in the medium to long term I believe the Chinese government will take steps to ensure the economy gets back on track.
Yeah it’s not going to be growing at 8% and 9% anymore but it’s a $13-14 trillion economy, even if it’s growing at 3% it’s pretty strong because it’s the second largest economy in the world so you can’t expect it to grow. at 8% and 3% at 12 trillion is a lot of GDP growth.
So I would expect action to be taken in China to stabilize the economy, we’re not going to see the kind of growth that we’ve seen in the past I wouldn’t expect exports to happen the way they have in the past but yes, China is having a big impact on sentiment globally in a number of ways , so I think so. This is a country we need to watch, they account for 55% of steel consumption and over half of steel production so we will be watching them closely.
Are you afraid that the built inventory has already started?
Not so much in Europe. In India yes, because export is not an option. In Europe, export is always an option.
For those who fear a bear market has started in the steel sector, how do you validate that those fears are not valid?
Obviously, we will also reflect the overall sentiment in the market when interest rates rise, stock prices fall in some sense or large indices fall. As the dollar gets stronger, money flows out of emerging markets like India. So we’re all victims to that extent but if you look at Tata Steel’s fundamentals, if you look at our balance sheet, if you look at the multiples that we’re trading, I think there should be a lot more confidence in the stock.