Davos WEF 2022: Tata Steel’s TV Narendran Says Commodity Prices To Stay Higher Than In The Past Decade
A major concern that steelmakers have is that coking coal prices are still over $500 a tonne, TV Narendran said.
Commodity prices will be higher than in the last 10 years as multiple factors prop them every time they settle down, according to TV Narendran of Tata Steel Ltd.
The prices will fluctuate at a higher level as demand for some commodities is increasing at a faster rate than supply, Narendran, managing director at Tata Steel, told BQ Prime’s Menaka Doshi on the sidelines of the World Economic Forum in Davos.
The commodity prices had peaked soon after the pandemic when China recovered fast, and the world, including India, announced investments in infrastructure, Narendran said. But as it started settling, the Russia-Ukraine war happened, he said.
Geopolitical issues have influenced volatility much more than in the past, according to him. But the bigger concern that steelmakers have is that coking coal prices are still over $500 a tonne. “It doesn't show any sign of coming down in a hurry and that's a concern, because that's a huge input cost for us.”
Apart from inputs and other costs, the focus on ESG is also contributing to this volatility.
“ESG transition is requiring more minerals and ESG itself is making sure mining minerals becomes difficult,” he said. “There are a lot of these complexities that can come on over the next few years.”
India has imposed an export duty on steel as part of its efforts to cool inflation. Narendran said he fully understands and appreciates the compulsions of the government but hopes that the levy is a short-term measure.
“[In the] medium to long term, India has a 100-150 MT opportunity to be a big exporter of steel, which shouldn’t be missed.”
Watch the full conversation below:
Edited excerpts from the interview:
It does seem as if most people continue to believe that we are in the midst of a commodity supercycle, and that from here on prices will continue to rise. We haven't yet seen the peaks. Is that a correct assessment?
TV Narendran: As I have always been saying, you will see commodity prices higher than what we have been used to for the last 10 years. So, it will fluctuate at a higher level, because what's happening is the demand for a lot of commodities are increasing faster than the supply. I was at a conversation earlier where they said that the ESG transition is requiring more minerals, and ESG itself is making sure mining minerals becomes difficult. So, there are a lot of these complexities which will come to the fore over the next few years.
Do you expect that the rise in prices will be as rapid as we have seen happen over the last few years, or that at some point–maybe 6, 12 or 14 months down the line–it will start to slow down?
TV Narendran: I think it peaked soon after the pandemic when China recovered fast and the world announced investments in infrastructure, including India. Then, it started settling when the Ukraine-Russia war happened. So, there have been geopolitical events which have influenced the volatility much more than in the past. It was again settling in but the bigger concern that we have–the steel makers–is that coking coal prices are still over $500. It doesn't show any sign of coming down in a hurry and that's a concern because that's a huge input cost for us.
We just heard from the government with regards to the levy of an export duty. They have also, on the other hand, reduced some customs duties. But the big impact will be the levy of export duty. Could you talk us through the implications of that?
TV Narendran: I think we fully understand the compulsions–the pressure on inflation, RBI has had to act, and the government has had to act. So, to that extent, we appreciate the compulsions. It hurts us but we appreciate the compulsions.
Secondly, it creates a situation where obviously domestic prices will mirror international prices closer than it did in the past. Now, the key question is how long will this be there–this export duty–because in the medium to long term India has a great opportunity to be a big exporter of steel.
The countries who have traditionally been big exporters are China, Japan, and (South) Korea. They are all moving away from export markets, and rightly so. India has the raw materials. Russia and Ukraine, which have the raw materials like India, are also out of the export markets. So, it's a 100-150 million tonnes opportunity for India as a potential steel exporter, which we should not miss because steel is produced in some of the poorest states in the country using minerals which are available in those states.
I'm okay in the short term to deal with inflationary concerns. But, in the medium to long term, I think exports should be a very important part of a steel production strategy.
When announcements of this nature come in, it becomes difficult for any industry to plan things like capacity, because you don't know what the life of something like this will be–when it will be taken off, will it get perpetuated? What immediate impact would it have for, let's say, capacity planning for companies like yours? For instance, I know you were hopeful of doubling capacity from the current 20 million tonnes, and almost 10-15% of that was supposed to be for the export market. Are you rethinking that strategy?
TV Narendran: Obviously, what we are planning just now–the capex which is ongoing–will continue because we are completing projects like the Kalinga Nagar expansion. So, I think that doesn't get affected.
The longer-term planning will obviously depend on the longer-term approach to exports because even when you look at 40 million tonnes of capacity, we assume 10-15% will be exported. So, that's about 4-5 million tonnes.
Now, if you're closing out export markets, the question is you will pace your expansion as fast as the domestic demand grows. So, if domestic demand grows very strongly, good for us. If it doesn't, then we'll have to plan capacity expansion accordingly. But I hope that this export tax is more a short-term measure to deal with inflation and not a longer-term strategic call.
In the near term if you move some of this export material to the domestic market, what is the hit that you would take in terms of pricing? What were you expecting in the international markets because again this depends on whether you're selling spot, contract–so I'm not clear on what the specific hit would be?
TV Narendran: I think just now there's a lot of panic in the market–it's not just the steel companies, but the people in the value chain. Customers are not sure should they buy now or wait for steel prices to drop further. So, there's a little bit of a brain freeze going on.
There's not much transaction happening just now. The price is trying to find its own level. It had anyway softened from the beginning of the month because honestly, when we started this quarter, we had expected coking coal prices to be over $600. It's at $510-515 which is still too high, but lower than what we had thought.
Steel prices were also settling to reflect lower coking coal prices than we had thought in March. Finding that balance has got a bit disturbed because of this export tax. We are still waiting to find that level at which transactions will happen in India. I think it's already maybe Rs 7,000-Rs 8,000 lower than what it was last month this time.
So, just within the span of a few days?
TV Narendran: I mean in the last few days, it's probably Rs 2,000-3,000 lower. But if I look at the last two to three weeks because it's also reflecting international prices, coal prices, etc., export tax only accelerated that journey.
But at some point in time, we will find the balance because honestly, the exports are only about 10% or 15% of the volume.
For most steel companies anyway, June volumes are not being exported much. So, if there's an impact in May exports, where many steel companies are having to pay this 15% to customers overseas to honour contracts, but some of that volume from June onwards will come back into the domestic market. So, I think Rs 7,000-8,000 is what I'm seeing just now from what it was.
But if the real volume comes into the domestic market only in June, that's when we start seeing an even sharper hit to domestic prices?
TV Narendran: Well, the flip side is demand may come back because the feedback we had was demand was getting delayed because of high commodity prices. So, if people have been postponing purchases saying commodity prices are high, hopefully, they will come back when commodity prices are low.
So, how do you tell your investors what all of this is going to mean for the quarter?
TV Narendran: We'll wait till the end of the quarter when we talk to the investors. But yes, investors get worried when they see this kind of fluctuation, and which is reflected in the share prices of all steel companies.
Any immediate capacity expansion that you are likely to shelve on account of this?
TV Narendran: No.
So, what we are looking at as a worse case scenario, let's say for companies like yours–I am sure you won't give me numbers–is this sort of a bottom-line gate for this particular quarter, and then we will see if the export tax continues into the subsequent quarters?
TV Narendran: I think the way I would put it is, yes, it's a speed breaker on a journey. But there's also sometimes a feeling that ‘Oh, the sector is now going into a bad cycle’. I don't think we are anywhere near that.
And the bottom line here can't be more than 10-15%, because that is the quantum of your exports?
TV Narendran: I wish it was that simple. But the issue is while this is impacting directly 10-15%, it's impacting indirectly the balance 85% in terms of domestic prices.
So, that’s where the impact is. But it will fluctuate a bit and then find its own level. Like I said, demand has got postponed. It will come back because fundamentals are still very strong. So, if they are saying that infrastructure projects were put on hold because of high commodity prices, hopefully they will come back now.
Is demand everything that everyone had hoped for, because if it were that then steel companies would not be so worried about putting most of the supply back into the domestic market? On the one hand, we keep hearing that capex is picking up, more companies are putting up greenfield facilities, not just brownfield or de-bottlenecking, and infrastructure is picking up. Then there's this concern that if we pump so much steel into the market, and it's only 10-15% in terms of quantum, prices will dramatically fall, so I can't square the two.
TV Narendran: I think the real issue is in the steel industry. You add capacity in 3 million tonne units. When you do an expansion, it is 3 to 5 million. So, when you say demand grows at 7% a year on a 100 million base, that's seven million a year.
But if each of us–JSW, JSPL, ArcelorMittal–all of us are adding capacity, we are going to add 3 million tonnes at least, each one of us. So, the supply side is always ahead, not necessarily keeping pace with demand. That's why exports are important. You will export because you have to run your capacities full to utilise the plants. So, you will typically use exports as a buffer.
For instance, soon after the pandemic, when demand in India was close to zero, we all exported 30-35% into China, and that's what kept the steel industry going. So, exports is always a buffer that helps us manage the balance between demand and supply in the domestic market. I think that balance should not get disturbed for longer than required.
In fact, you mentioned ArcelorMittal, and they have said to us in an interview that they're going to reconsider their planned capital expenditure of Rs 1 lakh crore over 10 years because they, too, are unsure. I guess the signaling is what's worrying most people, not that the tax is being levied for a few months. But the fact that the government is using these tools makes somebody worry about putting this capacity together.
TV Narendran: The question for the steel industry is: Should you plan your capacity expansion based on domestic demand or your ability to sell the product competitively to the rest of the world and in India.
Can domestic demand support these fairly aggressive capacity expansions? We're seeing it not just at your company, but at JSW and ArcelorMittal Nippon and the entire next group of companies?
TV Narendran: My point is India should be a big exporter of steel, and we should allow for exports. I can understand the short-term pressures on inflation. But I don't think an export tax should be there permanently, because then we will miss an opportunity to build more capacity in India for exports. And if you're only servicing the domestic market, it's a missed opportunity.
But you continue to have confidence in the demand scenario right now. You are not seeing any slowing down, either on account of very high raw material prices across the board or higher rates, interest rates? You are not seeing projects going under a rethink?
TV Narendran: No, because I look at it this way, we were reasonably bullish about demand even before. Now, because of these actions. prices are coming down. If there has been a delay in projects because of high prices, then hopefully they will come back and demand should look better. That's the way I look at it.
Can you tell us about the challenge of decarbonisation in the steel industry? Where is Tata Steel in that process? Where is the Indian steel industry in that process?
TV Narendran: It's an extremely important journey for the steel industry going ahead and also for Tata Steel. We have already announced plans in Europe, because Europe as a geography is ahead of the rest of the world in planning for it–planning the infrastructure, planning the policies, etc. So, each country has set its own goals.
We have said that we will move into, from a coal base to gas base to hydrogen-based steel making in The Netherlands, for instance. In U.K., the opportunities are about leveraging the scrap that is available to make steel, which has a lower carbon footprint.
In India, it's going to be even more complex because firstly, if you have to move from coal to gas to hydrogen, you need to have gas available in eastern India. Today, there is no gas available in eastern India, and we need to work with the government to see how soon can gas be available.
Otherwise, steel companies and most of the capacities being added in the east because iron ore is there, will keep investing in blast furnaces. And if you invest in a blast furnace, you’re going to run it for 20 years or 40 years. So, that's a call we need to take. It's a very important journey, but the cost and complexity should not be underestimated. I think Europe is realising that.
In Europe, we are already seeing this play out.
TV Narendran: Absolutely, because Europe had assumed that they will transition easily from coal to gas. But now with the problems with Russia, many countries in Europe were dependent on Russia for gas, so they don't have the LNG network to import gas from other parts of the world.
Norway, which is a gas producer, is trying to maximise the gas production but cannot substitute for Russia. So, I think these are big plays.
Because over the last 100 years, we built the infrastructure for fossil fuels. Coal can move easily. If you don't get coal in Russia, you will buy from Australia or from North America, wherever. But the gas infrastructure, LNG network, gas pipelines, and we have not even started talking about hydrogen, all this needs to be built for the world and for the steel industry to transition to green.
So, I think it's a great challenge, great opportunity. Also, a lot of innovation will need to come in because it's not a silver bullet which will solve the problem. There will be a bouquet of solutions which will have to be used.
European businesses already started working on plans to become, let's say, next generation ready in that sense?
TV Narendran: Absolutely. So, in Europe, we had already announced that we will be net zero by 2050. But now, as a group, we have taken a call that Tata Steel is going to chase net zero by 2045. So, that's something that we have done.
Does that require large capital investment?
TV Narendran: More than capital investment, it will require scaling up of technologies that are available today. So, we are already doing a lot of work both in Europe and in India. For instance, we have set up India's first carbon capture and usage plant in a steel company in Jamshedpur. And we are setting up a biomass-based hydrogen production unit in Kalinga Nagar; (these are) pilot plants, but all that needs to get scaled up in a very big way.
In Europe, we had already done work on Hisarna which emits a kind of carbon which is easier to capture and store. We have made plans to transition from blast furnace route to a gas-based DRI route to a hydrogen route. But we are talking to the Dutch government to see when can gas and hydrogen be available and at what price. So, once we have clarity on that, we can move ahead with our clients.
Is there any immediate impact on your operations, as a result of the energy crisis that some parts of Europe are facing, either directly or indirectly through your customers?
TV Narendran: Well, directly, we were quite well-hedged on gas prices when gas prices shot up. I think gas prices are settling down now. To that extent, I think the worst is behind us. Our customers, particularly auto customers, have been impacted by the neon gas issues from Ukraine. So, the auto pick-up has been a bit slower than what we had anticipated.
But other sectors have been reasonably strong. So far, what has been impacted on the demand side has been offset by supply constraints because Ukraine and Russia are out of the EU market, and India is also out of the EU market. So, that creates a situation where the spreads in Europe can continue to be reasonably healthy for us.
Do you feel confident about growth in Europe lower than growth in India but still steady?
TV Narendran: If not growth, at least not the kind of... Europe is a mature market.
“If not growth…” you are saying, so not even the 2-3% growth that you were initially planning?
TV Narendran: Just now we stand by that, but I think there are forecasts that if the war continues for a very long time, Europe may go into a recession. Just now, it's fine.
You had said somewhere that you don't intend to do any more inorganic acquisitions. Is that correct?
TV Narendran: We always reserve the right to exercise that option. We don't want our competitors to have it easy. But the point you're making is after Neelachal, we now have three sites in India, which can help us to grow to 45-50 million tonnes with existing sites, we don't need any new sites to more than double our capacity in India. So, we will look at it if we need to participate in it. But we are not under any compulsion or pressure.
You were never under any compulsion. There was one moment I think when you were playing catch up though for having taken your eye off India and focused on Europe a little bit more.
TV Narendran: I think what we were missing was long products in our portfolio. With Neelachal, that has got addressed.
So, you don't have any gaps to fill with regards to acquisitions?
TV Narendran: We had already said earlier that we were not going to participate in any flat products inorganic opportunities because we have enough, and long products was a gap which has also got plugged.