The European business of Tata Steel is set to report one of its most profitable years since its acquisition in 2007.

Powered by a strong commodity cycle, resulting from a demand burst after the relaxation of coronavirus restrictions and a fall in Chinese exports, the European business has recorded £768 million EBITDA (earning before interest, depreciation, taxation and amortisation) at the close of nine months ended December 31, 2021.

Analysts expect the trend to continue in the present quarter — that will make the profitability for this fiscal on a par with the best days the European business has seen under its Indian owners.

T. V. Narendran, managing director and CEO of Tata Steel Group, concurred with the views of the analysts.

“It has been a good year. Quarter-on-quarter, there have been improvements and you will see more improvements simply because we had annual contracts which have all got renegotiated from January 1,” Narendran said in Calcutta on Saturday.

Long considered the Achilles heel of Tata Steel Group, the European business is primarily split into two geographies: the UK and the Netherlands.

In 2007-8, the first year under the Indian ownership, it reported EBITDA of £1,063 million. EBITDA dropped to £893 million in the following year in the wake of the subprime financial crisis that was precipitated by the fall of the Lehman Brothers.

The European business could never see that level of EBITDA thereafter as it continued to struggle with a high cost base.

The remarkable performance comes in the backdrop of shrunken volumes.

TSE has recorded 6.63 million tonne (mt) steel deliveries in nine months compared with 22.8mt in 2007-8 and 18.8mt in 2008-9, indicating stronger EBITDA margin in this fiscal.

The sharp decline in volumes is mainly due to the fact that TSE had to periodically selloff units to remain afloat.

The war impact

The market is very volatile after the Russia-Ukraine conflict. Raw material and freight costs have gone up significantly — but so have prices.

“Overall prices have shot up in Europe because everyone’s costs have gone up. Spot prices in Europe have crossed €1000 a tonne,” Narendran said at the sidelines of CII’s annual eastern regional council meeting.

The Tata Steel chief predicted that margins may expand for a couple of months before cost pressures catch up with the business. Coking coal prices have reached $650 a tonne, while iron ore has crossed $150 a tonne.

“In the immediate future you will see margins improve simply because the price increases are ahead of the cost increases. But in the next couple of months, cost increases will start hitting everyone. To the extent that you have inventory in the system, you have an advantage for a couple of months.”

“But it will catch up. If this prolongs for longer, you will start feeling the pressure, one is cost pressures and two, is the working capital pressures because everyone is holding high value material,” Narendran said.

While costs have gone up, the conflict has taken out Russian and Ukrainian steel exports to an extent.

The two countries exported 45mt annually and a large part of it went to Europe.

This was has now created an export opportunity for Indian steelmakers, especially to Turkey and Europe.

However, Tata Steel typically exports to southern Europe and Turkey to avoid competition with the European business which caters to the markets in the north.

Narendran said the export from India would continue to be 10-15 per cent of output as the focus remains on meeting domestic demand.

In terms of prices, the impact is more on long products — used in construction and infrastructure — than the flat products, used in automobile and consumer durables.

The war hit the production of long products as Russia and Ukraine were big exporters of billet, a long-product intermediary.

With rising prices of billets, scrap prices have shot up.

“In India, the secondary producers are seeing scrap prices going up, coal prices going up and hence the price increases have been pushed first by secondary producers,” Narendran explained.

He said flat steel prices were relatively stable as there were no secondary producers.

EBITDA poised for a surge in 2021-22

The Tata Steel Europe story: It is set to enjoy one of its most profitable year since the Tatas took over the business in 2007

What are the numbers: Current fiscal EBITDA till December £768mn. With three months to go the performance likely to be on par with 2007-08 (£1063m) and 2008-09 (£893m)

What to watch out for: High EBITDA on very low volumes. Deliveries till December 6.63mt against 22.8mt in 2007-08 and 18.8mt in 2008-09

How will the situation unfold with the Ukraine war: Margins to expand for a couple of months as spot prices have shot up. But ultimately costs will catch up

Any advantage in terms of new markets: Ukraine and Russian steel are off the market. Situation needs to be assessed as Tata Steel India a likely beneficiary. But priority remains the domestic market

What has been the price impact: Long product prices have gone up as supply of billets, an intermediatory, has fallen. Flat steel prices have been stable