Investors in Tata Steel’s shares do not seem to be buying into its medium-term profitability outlook. For the March quarter (Q4FY24), consolidated Ebitda at ₹6,600 crore was better than expected, albeit lower year-on-year (y-o-y) by 8.6%, mainly due to the partial shutdown of its Netherlands facilities. Notably, losses from European operations declined sequentially. Still, the shares have been down 4% over the past two trading sessions since the results. Investors could be concerned about the developments related to the UK operations. In FY24, the Netherlands and UK facilities contributed 38% of revenue, but incurred an Ebitda loss of over ₹7,000 crore. Thus, consolidated FY24 Ebitda stood at ₹22,300 crore, down 31% y-o-y.
The UK operations are undergoing a structural shift in the steel-making process and may take time to return to profitability. However, the Netherlands is expected to be Ebitda positive in Q1FY25 with the resumption of normal plant operations. Over the medium term, these units can add to the company’s profits meaningfully thanks to the evolving dynamics of the European steel market.
Carbon tax on steel
The market is changing because of the imposition of carbon tax on industries such as steel and the initiation of the Carbon Border Adjustment Mechanism (CBAM). CBAM, legislated in 2023, imposes a carbon tariff on imports from carbon-intensive industries to the EU and becomes effective from 2026. “Tata Steel is paying carbon tax of nearly $25-30 per tonne of steel produced which is projected to go up to more than $200 per tonne by 2033. With the switch to green steel, a company can potentially generate savings of more than $100 per tonne on its 10 mtpa EU steelmaking capacity,” said Satyadeep Jain, research analyst at Ambit Capital. Mtpa is a million tonnes per annum.
Tata Steel has initiated the exercise to transition from high-emission steel making process through blast furnace (BF) to greener and more fuel-efficient electric arc furnace (EAF) route. The company would be shutting down both BFs at the UK facility by September and run the existing downstream facilities by importing semi-finished steel from the Netherlands and India. The EAF facility would require an investment of £1.25 billion (about ₹13,000 crore) and is expected to be ready in three years after equipment orders are placed”. The production through BF also entailed higher operating cost and management projects cost of production to drop by about ₹12,500 per tonne after EAF commissioning.
As assistance for green transition, the UK government would provide £500 million or 40% of the project cost. While the grant funding agreement (GFA) has not been signed yet, the management hopes to do so in the next few weeks. It has also begun the discussion with the Netherlands government for a similar replacement of its facilities in the country and hopes for a similar grant from the Netherlands government.
Expansion in India
While the European business is transitioning to green steel, Indian operations continue to cash in on the country’s rapidly rising steel consumption and is also undertaking significant expansion. The biggest expansion project of 5 mtpa capacity at an investment of about ₹27,000 crore is coming up at their existing facility in Kalinganagar, Odisha, and a small 1.0 mtpa EAF-based plant using scrap steel as raw material in Ludhiana. The management has indicated its inclination to build more such smaller plants to add to the circular economy if the project is successful.
So far, so good. To be sure, the GFA in the UK faces uncertainty from the announced elections. The company may have to go through another gruelling process of negotiations in case the GFA is not signed before the elections and in case of a change of government, especially because the BF closure would lead to significant job redundancies. Signing of the agreement could just be the trigger investors may be waiting for.
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