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Tata Steel sees high energy prices in Europe as key risk

Tata Steel Ltd posted a record quarterly profit of ₹12,548 crore in the September quarter, boosted by an improved performance at its European operations. But higher energy prices in Europe are a risk, said Koushik Chatterjee, executive director and chief financial officer at India’s largest steel producer by capacity. Edited excerpts from an interview:

Energy commodity prices have been going up. How is the company addressing that?

There has been an inflationary trend across the world. So I think, from that perspective, it is left to the internal actions on cost takeouts, reduction of overheads, which, for us has been a journey for many years and therefore there is no relenting on that front. Energy prices are more in Europe, and we see that as a risk. But I think that’s getting addressed. In some ways, it’s going to be a winter where we have to be very alert, and there too we are taking steps to ensure our exposure to energy prices is reduced, both from a consumption perspective as well as (in) taking positions, which we have already taken on some energy exposures on hedges and so on. So I think that’s how we are essentially looking to contain the inflationary impact of these prices on profitability.

Your peers are looking at introducing an energy surcharge to deal with the increasing costs.

In Europe, we have a carbon surcharge of €12 per tonne, and it is increasing. When the price levels are strong, then howsoever you transfer that cost increase to customers and by whatever name you call (it), it works. But we have to ensure we keep our internal actions to improve our efficiencies. And we should always be looking at raising prices when price allowances are high. So I think that surcharge is logical from a passthrough point of view. And that’s how our peers are looking at it. We’ve done the same in Europe.

How much of an impact of the Chinese policies do you see on the steel sector?

China has been strategically moving away from exports and is focused on its own capacity nationalization. It has been cutting down production. So the impact of the potentially lower real estate property construction in China is being countered by lower production by China. Also, China has become a lot more focused on its carbon emissions. So importing raw materials, producing steel, booking the carbon in the country’s name, and then exporting it out is not the best of the equations any country or industry would play for a long period of time. So it’s important to understand that the China impact is slowly receding from the seaborne trade market. And as we see it, it will have less and less of an impact on the domestic markets

Steel is becoming a lot more localized than globalized as we have seen in the last decade. So local factors are playing a lot more determinants than international factors, though it is always an import parity-based product. While China is still 50-55% of the global steel capacity, they’re working on a certain determined path on consolidation, on reducing carbon footprint and focusing on better technology and, essentially, reducing Chinese steel for Chinese demand. And if we keep seeing that, then it will be more domestic factors that will impact.

How do you see the strict emission standards impacting steel supply?

The carbon issue is a global issue. So, emission standards are important. For example, in Europe, they’re proposing to launch the carbon border adjustment tax. So laws within Europe are becoming a lot more stringent and ensuring that the carbon emissions of the steel industry are contained and reduced. They wouldn’t allow imported steel coming in from anywhere in the world with a higher carbon element in the steel. So that is why we are seeing supply shortages in the steel industry. And that’s actually one of the structural reasons why the prices are high because there is a limited supply. And the latent capacities in Europe are not coming back because they will have to buy carbon credits, which are also increasing significantly. So if you look at all of this equation, it has to be domestic supply for domestic requirements. Or else you will have to ensure that the border adjustment takes care of that, and there is a penalty for that. So that may make steel imports into regions like Europe costly, so the consumers have to pay for higher carbon steel that is being imported.

India, of course, will continue to grow. And is, of course, one of the countries where both growth is happening, and brownfield capacities are coming in. We need steel for growth as the GDP increases, and the Indian economy becomes bigger, and infrastructure spending becomes bigger, and the transition to a decarbonization starts because India has announced its target of 2070 to be net-zero. You will find that requirement for infrastructure is increasing on a yearly basis.

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