Tata Steel’s $1.6bn writedown

Tata Steel has announced a $1.6bn writedown on its struggling European division. Its European operations has been hit by the 30% fall in steel demand in the Eurozone since the emergence of the global financial crisis in 2007. The company’s 2012 turnover was $26.13 billion, so the write-down is a pretty big deal.

Europe’s steel industry woes are pretty well documented and its main steel trade association had urged a 25% cut in capacity to remain relevant. However, closing steel plants are a challenge as the sector is seen as strategically and symbolically important by politicians.

In December last year, ArcelorMittal wrote down the goodwill in its European businesses by about $4.3 billion and ThyssenKrupp wrote down $4.7 billion of its Americas unit.

Tata Steel is expected to announce its financial results on May 23rd. Is some “spring cleaning” in store as the new Chairman takes over? (ET, FT)



Falling Demand Impacts Profitability of Indian Steel Industry

The Indian steel industry is on a slow growth curve. Domestic demand for steel has fallen because of inflation and high interest rates. Low availability of raw materials, high cost, upheaval in the mining sector, state bans, and environmentalist pressures are creating more problems for steel producers. The Editorial March 2013 reveals that the growth rate of the Indian iron and steel industry fell from 11% in 2010 to 4.3% in 2011.

finished steel - india

India is the fourth largest producer of crude steel in the world today. It is also an importer of steel since 2007. It is projected that if the 12th Five Year Plan proposals are implemented as per schedule, India could grab second place by 2015-16. However, as the 12th Plan Period (2012-17) commences, the prospect does not look bright for domestic demand of steel though per capita consumption in India has increased from 36.6kg in 2005 to 51.7kg in 2010.

Challenges facing the Indian steel industry

There are many problems that are hurting the growth of the Indian steel industry:

  • Non-availability of iron ore: Iron ore is available in plenty in India but unregulated mining and large scale exports have raised concerns on the long-term availability of raw materials to address domestic demand. For the sake of sustainability, the Ministry is restricting exports and making efforts to preserve the non-renewable iron ore fields.
  • Non-availability of coking coal: Coking coal is largely imported as domestic availability of the resource is limited. Raw material security and price volatility are challenges. Non-coking coal used for sponge iron production is growing scarce; imports will create heavy cost burdens on the steel sector.
  • Inadequate infrastructure: Inadequate sintering and pelletisation facilities for steel as well as domestic technology to process low grade iron ore are significant challenges. Existing road, railway, port and power facilities are not good enough to support the 12th Plan working group’s optimistic projection of steel production doubling in the next 5 years.
  • Outdated technology and R&D: The performance of Indian steel plants is lagging because of low quality inputs, obsolete technology in treating resources, and insufficient R&D on alternate technologies to reduce wastes and cost, and address environmental concerns.
  • Cheap steel imports: Indian steel industry players are concerned about the cheap steel dumped into India by Japan and Korea, following the Free Trade Agreement and lower import duties. “India has spent over $5.5 billion of precious foreign exchange Iast year in importing steel which Indian steel mills are capable of producing,” says Dilip Oommen, CEO & MD, Essar Steel India Limited.

 Steel industry prospects

As per the 12th Five Year Plan, infrastructure will receive an investment of $1 million. If that happens, domestic demand, infrastructure and the economy will receive a boost. The Steel Ministry proposes to increase steel production to 60 million tonnes in the next 5 years with an investment of ₹2.5 crore. Therefore, the Ministry plans to review steel-related sectoral caps by banks and consider relaxation of norms on External Commercial Borrowings (ECBs).

The Steel Ministry also expects domestic steel demand to rise by 10.3% annually by the final year of the 12th Plan. World Steel Association, a leading global steel body, predicts steel consumption will increase by 5% in India in 2013.

steel demand - india

As of now, the steel industry is experiencing immense pressure on profit margins. Rising input costs have increased steel production outlay. At the same time, low demand has created over-capacity. JSW Steel reported ₹669 crore in losses (analysis) in the second quarter of this fiscal. Tata Steel also saw profits going down by 89% (analysis). Steel companies may have to look at export options to maintain profits but the global scenario is hardly more encouraging. To be sure, it’s a tough time for steel manufacturers.


[stockquote]JSWSTEEL[/stockquote] [stockquote]TATASTEEL[/stockquote]


We last took a look at TATASTEEL [stockquote]TATASTEEL[/stockquote] in October last year. We were waiting for a decisive breakout above the (down) trend-line before getting bullish on the stock. It made a 52 week low of Rs. 320 last Friday.

Technical chart of TATASTEEL

As you can see from the chart, the stock has tested the Rs. 320 levels twice before since 2009 and has bounced back each time. From a valuation point of view, it is trading at a PE of ~8 which is on par with its global peers like US Steel and Arcelor Mittal. Plus, the Tatas have been giving a Rs. 12 per share dividend since 2011. However, the global outlook for the metal is bearish, with European steel demand being down by 30%, and the industry remains highly fragmented.

So the question is will TATASTEEL be a good  buy at today’s levels? The RSI indicator is at neutral and MACD is bearish. So from a technical point of view, it is a short-term sell. From a long-term perspective, it is trading at valuations that might be a good entry point for investors who can stomach volatility. If the stock closes above Rs. 320 levels today, it is a long-term buy from our point of view.


Today’s pick is [stockquote]TATASTEEL[/stockquote]. The last year saw the stock trading in a 350 to 500 range and is currently trading around the same price.

The stock has been in a down-trend since February this year, with a support near the 350 levels and resistance around 470.


Oscillators RSI and CMO are at currently at 41 and -35 and are hovering close to the oversold territory.

MACD line and signal line are at a distance; the histogram levels are stagnant suggesting a short term consolidation.

The GMMA chart is not suggesting any directional move. The short-term lines and long-term lines are too close to each other.


TATASTEEL’s average correlation of 0.73 with the Nifty is positive and quite strong. The stock tends to replicate the movements of Nifty quite closely. [stockquote]NIFTYBEES[/stockquote]


TATASTEEL has a historical volatility in the range of 0.3 to 0.8. The scrip’s volatility is currently in the middle range and hence should not be a concern to the traders.

Looking at these technicals a short-term hold is suggested. For the long-term outlook of the scrip a decisive breakout above the trend-line will suggest a change in the current down-trend.

After coming out with a positive result in Q3, U.S. Steel expects a global slowdown in the metal demand for the Q4. Will it be the same scenario for the TATASTEEL for the coming quarter as well?

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Tata Steel to pump Rs8,000 crore in Jamshedpur in FY12

Sharing details of the Gopalpur SEZ project, Tata Steel said it would invest Rs800 crore as anchor investor in the 50,000-tonne ferrochrome and 0.5-MT rolling mill.
We are investing Rs8,000 crore in the current fiscal, which will be in the Jamshedpur plant, Tata Steel managing director H. M. Nerurkar said on Friday.
Tata Steel global debt equity is 1.5:1 but in all future projects the company would aim to keep it at 1:1.

Tata Steel to pump Rs8,000 crore in Jamshedpur in FY12 – livemint.com.