Tata Steel pledged to accelerate a cost-cutting drive after deterioration in European markets and softer demand in India led to an unexpected loss in the second quarter, sending shares down.
The Mumbai-based group, which took its current form when India’s Tata conglomerate bought Anglo-Dutch steel producer Corus for $13.1bn in 2008, posted an after-tax quarterly loss of $69m, compared with profits of $40m in the same period last year.
Europe’s second-largest and India’s largest private sector steelmaker by output said the eurozone’s return to recession had hit it harder than expected, while lower steel prices present challenges to future profitability.
“We are seeing no major improvement in the situation for consumption in Europe... and we think that it will be a slow improvement,” says Dr Karl-Ulrich Köhler, managing director of Tata Steel’s struggling continental operations.
Reversing this flagging performance is now among the most pressing tasks awaiting incoming Tata group head Cyrus Mistry, who took over as deputy chairman of Tata Steel on Friday, and will replace Ratan Tata at the helm of the wider group at the end of the year.
Any recovery will be complicated, however, by a further projected slowdown in global steel demand over the next two years, with the eurozone debt crisis and weaker Chinese and Indian growth hitting major producers like Tata.
The company believes a renewed push on cost reductions combined with investment delays and a shift to more complicated, higher-value steel products will improve its bottom line in coming quarters.
“We are speeding everything up that we can in our lists of cost improvements... but saving alone will not make us stronger, which is why we are putting a lot of effort into improving our positioning, to make us less vulnerable to market fluctuations,” Dr Köhler says.
Analysts said attempts to blame the surprise loss only on weak European demand disguised other worrying underlying issues, including losses in other divisions and rising net debt, which stood at $10.4bn at the end of September.
“The numbers are very poor, and the Indian operations are in surprisingly bad shape too, with a sharp rise in raw material prices,” says Ritesh Shah, a Mumbai-base steel analyst at Espirito Santo, a brokerage.
“And it’s just not the old Corus bits. Other subsidiaries in South Africa, along with their shipping and raw materials divisions, are losing money too. Are these losses sustainable? We don’t know.”
Koushik Chatterjee, group chief financial officer of Tata Steel, admitted that the company’s typically robust growth in India, which has in recent years compensated for poor performance in Europe, was also under pressure.
“If you look at the standalone number, our profit after tax in India is actually the same level as the previous quarter,” he says. “But if steel demand in the entire world has melted, India has certainly softened, and we had seen a slightly slower market.”
Tata Steel posted revenues of $6.5bn in the second quarter, up 4 per cent from the year before, while the group’s share price ended down 3.25 per cent at Rs390.55