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We visited Tata Steel's IJmuiden facility in Netherlands and met with management. Following are
the highlights of the meeting.
Company's largest facility
The IJmuiden facility is Tata Steel's largest facility with a capacity of 7.7mt and accounted for
about 25% of its FY10 total production. It is currently operating at an annualised production
capacity of 7.2mt. Operating out of 750 hectares, it employs 9,200 employees and 2,500
contractors. IJmuiden is the main site for strip products in mainland Europe and sells 75% of
its volumes in the spot market, which includes quarterly contracts.
Downstream capacity mainly of flat products
The facility includes a) two-blast furnaces; b) two coke oven batteries of 2mt capacity each; c)
sinter plant of 8mt capacity; d) converters; e) two continuous slab casters and rolling facilities,
including one 5.4mt hot strip mill, two cold strip mills of total 2.1mt capacity, and three hotdipped
galvanised lines of total 1.5mt capacity; f) 350MW power plant. The facility also
includes specialty lines for packaging, colouring, etc, apart from support functions like R&D
and IT.
Carries 1-1.5 months of raw material inventory
The facility consumes 10.5mt of iron ore, 1.5mt of scrap and 4.5mt of coal and PCI annually.
While iron ore is sourced from Brazil and Australia, coal is sourced mostly from North
America. The facility carries about 1-1.5 months of raw material inventory at any given time.
Aligning sales on a sector specific basis
Europe is seeing varying demand growth across different sectors especially with demand
from the construction sector still weak. As part of the "One Company" operating model, the
company is now aligning marketing, sales and distribution teams directly with major
industries/sectors. Management believes the sector-specific targeting will help it serve its
customers better.
Move from "volume perspective" to "value perspective"
The European operations are also focusing on moving from a "volume perspective" to a
"value perspective". Currently, only 40% of volumes are sector aligned and management
plans to increase it to 65% in the coming years. The higher product differentiation is key to
improve margins, especially with lack of raw material integration and the volatility of raw
material prices. Construction and automotive remain key sectors and with purchasing power
in a few hands, management highlighted that to be the supplier of choice was a priority. We
note that European management has earlier highlighted they plan to increase proportion of
volumes to auto sector to 25% from the current 18%.
Cost-saving measures to continue
On the cost side, the company continues to implement strategic cost-saving measures to
improve the long-term competitiveness of its business. The "Weathering the storm" initiative
during the recession saw the company idling surplus capacity to align production with demand
as well as other cost saving initiatives. This saw the company saving £712m and £866m in
FY09 and FY10 respectively. The "Fit for the future" initiative has seen the company rightsizing
the manpower as well as other restructuring initiatives. The financial benefit was £107m
in FY10 and the company expects steady-state benefits of £250m from FY12. Optimisation of
energy costs remain a key focus. We note that last week, Tata Steel Europe has signed an
agreement with nPower which will see it provide 5 terawatt hours of energy to 22 of Tata
Steel's plants across the UK.
Targeting EBITDA of US$100 per tonne for the European operations
IJmuiden is currently in the top quintile of the European steel cost curve and management
plans to save costs further and increase ebitda to $100 per tonne over the next few years.
IJmuiden is the cost leader in Tata Steel's European operations due to market closeness.
Overall target for all European operations is $100/t though IJmuiden has a 4-5% cost
advantage over Port Talbot operations. Even historically, margins at Corus were always lower
compared to its competitors by about 5%, which is what management is looking to address.
This will see the company increasing its investment in Europe and hence capex is likely to
exceed depreciation over the next few years.
Carbon tax could hurt
Currently, the EU has 93% free allocation of carbon credits to the top decile of steel
producers from 2013-2020 taking 2005-2008 as the base year for calculation. However, the
shortfall of credits for the average producer is ~20% which will have to be met through market
purchases. Currently with the European operations operating at less than 80% capacity, it has
been able to earn carbon credits over the last few quarters. When production increases
beyond ~80%, the company will have to buy credits. The UK government is also now
considering a minimum carbon floor price for electricity generation. The proposal calls for a
floor price for CO2 permits to be £16 ($25.67) a metric ton in 2013 rising progressively to
£30/t in 2020. Tata Steel's UK steel capacity is 10.7mt and assuming 80% free allocation of
credits, carbon credits would need to be purchased for the emissions from the remaining 2mt
capacity. Assuming 1mt of carbon emissions per tonne of steel, we estimate 2mt of carbon
credits will have to be purchased per year leading to carbon tax of £32mn from 2013 rising to
£60mn by 2020. We note that industry has been strongly opposing the move as it would
render UK companies uncompetitive vis-à-vis global competitors.
We have a Buy rating on Tata Steel with target price of Rs716.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We visited Tata Steel's IJmuiden facility in Netherlands and met with management. Following are
the highlights of the meeting.
Company's largest facility
The IJmuiden facility is Tata Steel's largest facility with a capacity of 7.7mt and accounted for
about 25% of its FY10 total production. It is currently operating at an annualised production
capacity of 7.2mt. Operating out of 750 hectares, it employs 9,200 employees and 2,500
contractors. IJmuiden is the main site for strip products in mainland Europe and sells 75% of
its volumes in the spot market, which includes quarterly contracts.
Downstream capacity mainly of flat products
The facility includes a) two-blast furnaces; b) two coke oven batteries of 2mt capacity each; c)
sinter plant of 8mt capacity; d) converters; e) two continuous slab casters and rolling facilities,
including one 5.4mt hot strip mill, two cold strip mills of total 2.1mt capacity, and three hotdipped
galvanised lines of total 1.5mt capacity; f) 350MW power plant. The facility also
includes specialty lines for packaging, colouring, etc, apart from support functions like R&D
and IT.
Carries 1-1.5 months of raw material inventory
The facility consumes 10.5mt of iron ore, 1.5mt of scrap and 4.5mt of coal and PCI annually.
While iron ore is sourced from Brazil and Australia, coal is sourced mostly from North
America. The facility carries about 1-1.5 months of raw material inventory at any given time.
Aligning sales on a sector specific basis
Europe is seeing varying demand growth across different sectors especially with demand
from the construction sector still weak. As part of the "One Company" operating model, the
company is now aligning marketing, sales and distribution teams directly with major
industries/sectors. Management believes the sector-specific targeting will help it serve its
customers better.
The European operations are also focusing on moving from a "volume perspective" to a
"value perspective". Currently, only 40% of volumes are sector aligned and management
plans to increase it to 65% in the coming years. The higher product differentiation is key to
improve margins, especially with lack of raw material integration and the volatility of raw
material prices. Construction and automotive remain key sectors and with purchasing power
in a few hands, management highlighted that to be the supplier of choice was a priority. We
note that European management has earlier highlighted they plan to increase proportion of
volumes to auto sector to 25% from the current 18%.
Cost-saving measures to continue
On the cost side, the company continues to implement strategic cost-saving measures to
improve the long-term competitiveness of its business. The "Weathering the storm" initiative
during the recession saw the company idling surplus capacity to align production with demand
as well as other cost saving initiatives. This saw the company saving £712m and £866m in
FY09 and FY10 respectively. The "Fit for the future" initiative has seen the company rightsizing
the manpower as well as other restructuring initiatives. The financial benefit was £107m
in FY10 and the company expects steady-state benefits of £250m from FY12. Optimisation of
energy costs remain a key focus. We note that last week, Tata Steel Europe has signed an
agreement with nPower which will see it provide 5 terawatt hours of energy to 22 of Tata
Steel's plants across the UK.
Targeting EBITDA of US$100 per tonne for the European operations
IJmuiden is currently in the top quintile of the European steel cost curve and management
plans to save costs further and increase ebitda to $100 per tonne over the next few years.
IJmuiden is the cost leader in Tata Steel's European operations due to market closeness.
Overall target for all European operations is $100/t though IJmuiden has a 4-5% cost
advantage over Port Talbot operations. Even historically, margins at Corus were always lower
compared to its competitors by about 5%, which is what management is looking to address.
This will see the company increasing its investment in Europe and hence capex is likely to
exceed depreciation over the next few years.
Carbon tax could hurt
Currently, the EU has 93% free allocation of carbon credits to the top decile of steel
producers from 2013-2020 taking 2005-2008 as the base year for calculation. However, the
shortfall of credits for the average producer is ~20% which will have to be met through market
purchases. Currently with the European operations operating at less than 80% capacity, it has
been able to earn carbon credits over the last few quarters. When production increases
beyond ~80%, the company will have to buy credits. The UK government is also now
considering a minimum carbon floor price for electricity generation. The proposal calls for a
floor price for CO2 permits to be £16 ($25.67) a metric ton in 2013 rising progressively to
£30/t in 2020. Tata Steel's UK steel capacity is 10.7mt and assuming 80% free allocation of
credits, carbon credits would need to be purchased for the emissions from the remaining 2mt
capacity. Assuming 1mt of carbon emissions per tonne of steel, we estimate 2mt of carbon
credits will have to be purchased per year leading to carbon tax of £32mn from 2013 rising to
£60mn by 2020. We note that industry has been strongly opposing the move as it would
render UK companies uncompetitive vis-à-vis global competitors.
We have a Buy rating on Tata Steel with target price of Rs716.
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