CFO Leaders: Tata Steel’s Koushik Chatterjee, Preparing For A Super-Cycle?
Koushik Chatterjee, chief financial officer of Tata Steel Ltd. (Photographer: Dhiraj Singh/Bloomberg)

CFO Leaders: Tata Steel’s Koushik Chatterjee, Preparing For A Super-Cycle?

I raise doubts about adequate steel consumption growth in India. Koushik Chatterjee says the challenge is supply.

This is not about a near-term problem. That picture is one of reasonable recovery, so far. Effective production management, even during the lockdown, and subsequent pent-up demand have helped Tata Steel Ltd., where Chatterjee has been CFO for two decades, play catch up. In the nine months of the financial year to date, the company has produced 19.09 million tonnes versus 21.1 in the same period last year. It has sold 19 million tonnes versus 19.84 last year.

No. This debate we are having on the CFO Leaders show is over a 10-year view of the industry. The union government has set a policy target of 300 million tonnes per annum domestic production capacity by 2030. India is at 140 MTPA right now. It consumed 100 in the last fiscal. Each time in the last three decades India’s steel industry has made a big capacity push it has ended with high levels of debt, unviable projects, loan restructuring and most recently insolvencies.

I argue that at an average steel consumption growth of 5%, as witnessed in the last five years, the local demand impetus is too weak to support such an ambitious capacity target sans a large policy boost. At just over 74 kilograms per capita, versus a global average of 229 kg and with China at over 663 kg, India’s steel intensity is among the lowest in the world.

Chatterjee says the Atmanirbhar Bharat program, Make in India effort, domestic defence production policy, national oil and gas grid, the many city metros under construction... are all triggers to boost demand in India, even if not to the targeted level. At a purchasing power parity of $2,000 per capita steel intensity shoots off and the spike happens like a S-curve, Chatterjee says, pointing to China, Korea, Japan.

According to him, the bigger challenge will be meeting that demand — on account of two C’s. Capital and carbon.

Reproduced from a Ministry of Steel statement.
Reproduced from a Ministry of Steel statement.

Even a 100 MTPA in new capacity will cost roughly $100 billion and new technology, to ensure it meets new standards set by the Paris Agreement. Chatterjee emphasises efficient capital (read low cost) and capital efficiency. And future tech. Which may also impact costs.

“Setting up a greenfield steel plant is unlikely to be viable the way we have done it in the past,” Chatterjee says.

The demand may become 200 or 300 MTPA but whether the supply from within the country will be the same or not is a discourse that one has to have, both from a capex point of view as well as from a carbon intensity point of view. Unless those two are addressed it will not be viable.
Koushik Chatterjee, Executive Director and CFO, Tata Steel

Cartelisation? Super-Cycle?

Returning to the present — to cyclical peaks in profitability, Nitin Gadkari and Goldman Sachs.

In the quarter ended September 2020, Tata Steel’s domestic operations clocked an Ebitda per tonne, a key measure of profitability, of over Rs 13,000. Estimates are for it to cross Rs 18,000 in the December quarter, close to 15-year cyclical peaks. Improved steel demand, higher iron ore prices and cheaper coal prices will contribute to the record margin. Domestic steel prices (hot rolled coils) were up 37% in December 2020 over the previous year and global steel prices hit an eight-year high in December, says a Crisil report. Prices in India are still 6-8% below global landed prices (import prices) indicating “there is room to raise domestic prices further given they move in sync with the world trend,” says Crisil.

CFO Leaders: Tata Steel’s Koushik Chatterjee, Preparing For A Super-Cycle?

Chatterjee refuses to get drawn into a conversation on how high prices may rise and for how long... but he does answer two other connected and critical questions.

1. Cartelisation?

Road Transport and Highways Minister Nitin Gadkari has expressed concern over rising cement and steel prices and alleged cartelisation among manufacturers.

Chatterjee responds by saying it’s a global industry with global pricing.

When asked whether access to captive iron ore and record margins offers an opportunity to lower prices, he makes the argument for free markets and tolerance for both down-cycles and upcycles.

China prices today are at about plus $700 (per tonne). So, if you look at it globally, there is a supply constraint of steel which is also part of it, not the only factor. There is a raw material price issue, there is input cost issues and all of that is part of the cycle. I don’t think anybody questions us when we are at $350 a tonne of HRC prices. So, I think we have to bear it up and down.
Reproduced from a Crisil Research note. The spider chart depicts monthly price trend for China HRC f.o.b. from January 2010 to December 2020.
Reproduced from a Crisil Research note. The spider chart depicts monthly price trend for China HRC f.o.b. from January 2010 to December 2020.

2. Super-Cycle?

In December, global investment bank, Goldman Sachs forecast the beginning of a commodity super-cycle on the back of rising global liquidity, weaker dollar, a decarbonisation push that could boost industrial capital expenditure, and sovereign fiscal efforts to boost employment, wages and reduce inequality.

A kind of super super-cycle, as it were, with industrial capital expenditure running at 2000 levels and social rebuilding generating a 1970s style consumer boom — is how news agency Reuters describes it.

Agreeing with Goldman’s rationale, Chatterjee says:

Liquidity being provided through the monetary system is the classical commodity cycle trigger if you look back pre-2006, 2007.

Even in advanced countries consumption is being promoted by the government through post-Covid fiscal moves. That will boost commodity demand.

Certainly the decarbonisation agenda across the world has become a very important fact.

That involves capex of a different nature that will impact the material used for mitigation, including steel or various other metals.

The investment horizon is of at least half a decade to a decade affecting companies from all industries.

That’s just to curb scope one emissions, after which will follow scope two and scope three emissions, eventually covering changes to the entire supply chain.

“So, I certainly think that those (Goldman’s) arguments are absolutely correct. The timing and the duration is what I can’t predict.”

The last time Tata Steel missed calling a cycle it was stuck with an expensive European bauble. A decade and billions of dollars in write-downs later it’s about to sell it, in parts. Just as the cycle may turn in its favour. Time for a rethink, Mr. Chatterjee?

More on that in the next story.

To access all CFO Leaders conversations and stories click here.

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