June 02, 2004 | The Asian Age

Tisco to improve production

Tata Iron and Steel Company Lt is an integrated player in the steel industry. The company, one of the lowest cost producers of steel, has initiated steps to improve its steel production by upgrading and modernising its plants. The recent joint venture with a Thai company, and future plans to enter into similar alliances for procurement of raw material, is likely to help the company gain much better competitive advantage in the near future. This focus of the company to be a backward integrated player has helped the company reduce its operating cost over the years.

Even the improving labour productivity has helped the company improve its production per man year. The company has increased its focus on improving its product mix by concentrating on high margin and branded products. The company is also planning to enter into new businesses like titanium and ferro chrome, which could drive further profitability and revenue growth. Going forward, additional volume growth is expected to be from expansions, acquisition of new plants and de-bottlenecking of existing plants.

Also, the company has almost 85 per cent of its production booked for the current year, which would help it maintain its profitability and hence, we expect the company to be a good long term investment.

Industry scenario
The global steel industry had a fantastic year of 2003-04 with the steel prices rising at a steady rate. This increase in steel prices was mainly fuelled by the increasing Chinese demand for steel products. However, the declaration of the Chinese government to slow down its pace of growth has impacted steel prices of hot rolled coils, which declined from approximately $545.9 a tonne in Q4 FY04 to $480-$ 490 tonne during the last 45 days. However, the steel prices in US and European countries are firm at around $525 per tonne, owing to the strong demand.

Developments and impact
Tisco is planning an expansion of 1 MT. It has also proposed an expansion of 2.4 MT with an estimated investment of over Rs5000 crores by 2007. In a parallel development, the company is planning to set up a sponge iron plant with a capacity of around three lakh tonnes. With this increase in capacity, the volumes of the company would improve, thereby adding to its top line growth. The increase in cost of input material is a key concern for all steel producers.

In order to sustain production levels and to overcome increasing input cost, Tisco has entered into a 49:51 joint venture with Thailand's Sila Eastern to source limestone. This joint venture is expected to reduce the outgo on limestone by $2 per tonne.

The risks related to the future growth of Tisco can be mainly due to the following reasons:

  • The fall in the Chinese demand for steel products could impact the international prices which have been rising steadily, thereby affecting the margins of the company to a considerable extent.

  • The increase in cost of input materials like freight rates, cooking coal and coke and sponge iron could lead to an increase in operating expenditure.

  • Shutdown of G Blast furnace on account of implementing expansion plans for 100 days during October-January 2005. In addition to this, other plants are also likely to be shutdown during the same period.

The growth in the coming years for Tisco is expected to come mainly due to the following reasons:

  • The shortage of iron ore has forced western European plants to reduce production thereby filling the demand-supply gap created by softening of the Chinese demand to drive growth.

  • The upgradation and the modernisation of G Blast furnace and other plants would help improve productivity of the company thereby improving its profitability.

  • The joint venture entered with a Thai company would help supplies of limestone to be maintained at competitive prices, which would help maintain the input cost.

  • Tisco plans to acquire steel plants in India and abroad to increase its production capacity during 2004-05. The company also plans to expand its existing production capacity.