Chairman Mistry Forecasts Challenging 2 Years for Tata Steel

Tata Steel Ltd., India’s biggest producer, forecast the next two years will be “challenging” because of a slowing local economy and a global supply glut. The shares fell to their lowest in more than four years.

“The overhang of the economic crisis and significant overcapacity in regions like Europe and China continues to stress global capacity utilization and the demand supply balance,” Chairman Cyrus Mistry said in the company’s annual report published today. “The Indian economy has slowed down in the last 12 months and some of the sectors including the automotive and capital goods have been faced with a demand slowdown that is unlikely to turn around quickly.”

Tata Steel, whose European unit accounts for two-thirds of its total output, and other European steelmakers such as ArcelorMittal and ThyssenKrupp AG reported a quarterly loss in three months ended March 31 as Europe’s economic crisis sapped demand and slower Chinese growth weighed on commodity prices. Tata Steel wrote down $1.6 billion of mostly overseas asset values, including $1.35 billion for Europe, in the period.

Europe has about 210 million metric tons of annual steelmaking capacity, while demand in a “normal market” is 150 million to 160 million tons, according to industry lobby group Eurofer. Steel use in the European Union fell 9.3 percent in 2012 and is expected to contract a further 0.5 percent this year, Tata Steel said in the report. Demand may increase 3.3 percent in 2014 to 144.1 million tons, it said.

Tata Steel shares fell 3.3 percent to 243.20 rupees in Mumbai, the lowest since April 29, 2009. The benchmark Sensitive Index climbed 0.5 percent.

Falling Demand

Steel demand is 30 percent lower than the pre-2008 financial crisis levels and the outlook for the euro area continues to be depressed, Mistry said. Hot-rolled steel coil, a benchmark product used in automobiles and buildings, declined 11 percent to an average price of 477 euros ($627) a ton this year from the previous 12 months, according to Bloomberg calculations based on data from Metal Bulletin.

“Tata Steel Europe’s margins could decline sequentially over the next few quarters as a sharp fall in European steel prices could impact realizations with a lag,” Bank of America Merrill Lynch analyst Bhaskar Basu said today in a report. “A weaker Indian rupee would amplify Tata Steel Europe’s losses and also increase consolidated debt.”

Rising Debt

Net debt at Tata Steel, which has 62 percent of its borrowings in foreign currency, may increase to 632 billion rupees ($11 billion) in the year ending March 31 from 554 billion rupees the previous year, according to the Bank of America Merrill Lynch report. A weaker rupee may increase debt by 21.8 billion rupees, it said.

The rupee, which fell to a record 61.2125 against the dollar on July 8, has declined 8.5 percent since April 1.

European car sales slumped to a two-decade low in June, while a report yesterday showed investor confidence in Germany, Europe’s largest economy, unexpectedly declined in July, adding to signs the region is struggling to emerge from recession.

In the last fiscal year, Tata Steel added 2.9 million tons of capacity to its main plant in India, enhancing its total capacity by almost a third to 9.7 million tons. The company is in the process of building a 6 million ton-factory in the eastern state of Odisha, with half the capacity planned for the first phase.

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