Not many people know that Tata Steel has a larger business share in the global chrome industry than in its core carbon steel business. B Muthuraman, managing director, puts this fact in perspective. "By global comparison, our chrome business is actually larger than our steel business. In fact, it is the only business in the steel portfolio, which has a positive EVA of Rs500 crore." Why then, isTata Steel looking at changing its business model altogether?

It’s a steel
Ferro chrome is an essential ingredient in the manufacture of stainless steel. Right now the global stainless steel market, which stands at 20 million tonnes per annum, is growing at +4 per cent per annum. Out of the current annual production of approximately 4.5 million tonnes of ferro chrome, stainless steel consumes more than 4 million tonnes. The balance is consumed by specialty steel.

"Unlike steel, which is a value-destroying business globally, the chrome business is a value-creating one," says Mr Muthuraman. As stainless steel consumption is linked to lifestyle development across geographical regions, consumption potential is on the rise in developing countries.

In China, the world’s largest developing market, consumption is expected to go up to 3.2 million tonnes by 2004. That is a nearly 60 per cent jump from the 2002 level of consumption of just under 2 million tonnes. With the availability of stainless steel scrap limited in the short and medium term, and with increasing stainless steel production, the consumption of ferro chrome is expected to go up by a significant extent.

Rich vein
Tata Steel has been the pioneer in the chrome business in India. A geological team from Tata Steel discovered chromite in India in 1949. The ore produced in India is rich in chrome content and is definitely one of the best in the world. But India's advantage gets largely nullified when value addition is considered. "Ferro chrome (FeCr) is an energy intensive business where power accounts for over 46 per cent of the total production cost. In India the power cost works out to US cents 5 per KWh, as compared to US cents 1.5-2.0 per KWh in South Africa. Given this kind of cost differential and current prices, it is difficult to foresee how Tata Steel can maintain a positive EVA in the chrome business if it sticks to India," says the man behind the initiative, Somdeb Banerjee, chief, Overseas Project.

Tata Steel had no option but to rethink its business model. While power tariffs were making its ferro chrome export uncompetitive, it was not possible to restrict its business to chrome ore/concentrate. This was so because of the limited domestic market and declining prices. To stay afloat, Tata Steel had to find a new business model.

Stainless credentials
Tata Steel was the first Asian company to receive a ‘Main Producer Status’ for the supply of ferro chrome to quality-conscious customers in Europe and Japan. It also became a long-term supplier to South Korea. Its credentials are impeccable: it is the first company in the world to become a fully integrated ferro chrome manufacturer with ISO 9001 and ISO 14001 certification.

Tata Steel had strong links with customers and did not want to lose this valuable asset. Also, exiting the business would have had a negative fallout in Orissa, where the mines are situated. This, in turn, would have dealt a blow to Tata Steel’s reputation for social responsibility.

While Tata Steel was debating its business model, the global stainless steel market was undergoing a significant change through mergers, realignments and acquisitions. Consolidation in the industry was limiting the avenue of chrome ore sales. Tata Steel’s mining operations in Sukinda are globally competitive; the high quality reserves and the optimised production cost needed to be channelised properly, so as to maximise the positive factors.

SIP of success
This dilemma led to the birth of a complex business model that was a global first in chrome. Tata Steel analysed and identified the factors for success in the chrome business, evaluating 24 countries on the basis of this matrix. A final evaluation of six countries led to a race between Australia and South Africa. The latter won because of its technological base, long history of ferro chrome production (South Africa currently accounts for more than half the global production), and its promise of the lowest capital/operating cost.

Australia scored higher on inbound logistics, because of the possibility of back loading vessels bringing coal to India for Tata Steel. Since the transport cost to the customer destination is lowest from South Africa, it emerged the winner in overall logistics cost. Tata Africa Holdings convinced the South African government to offer special considerations. Another benefit was the securing of income tax exemption for the project under the Strategic Industrial Project (SIP) scheme, enabled largely by Tata Africa.

"We were the first company to bag income tax concessions in South Africa under SIP," says Mr Banerjee. "Given the power costs in India and depressed global prices, we would have had a limited chance of survival if we had stuck to India, with our basic business model, leave alone being EVA positive. So we looked at the practices in aluminium industries and our own work on 'tolling’ in China, as well as conversion models in the domestic industry, and adopted the same for developing this business model," he says. With this project, Tata Steel will become the first player in the global ferro chrome industry to have multiple locations, adding value to its customer service capabilities.

Steeling a march
The business model is based on the margin maximisation approach. This works by leveraging India’s advantage of high grade ore with South Africa’s advantage of low cost power, and creating a transnational value chain which is further supplemented by a logistics solution model to maximise returns on delivery to the customer. Power cost was the key: the proposed site at Richards Bay is in an advantageous zone, when compared to Kazakhstan and Finland, where power cost ranges between US cents 2 and 3 per KWh, and which are logistically disadvantaged. Richards Bay is the largest and the most efficient port in the African continent, and also industrially the most developed city in South Africa. It is the largest port for ferro chrome export globally, accounting for more than 45 per cent of the world’s trade.

Richards Bay welcomed the new potential foreign investor. The mayor of Richards Bay even visited Jamshedpur to discuss the speedy completion of the project. "We have received tremendous support and currently the Environment Impact Assessment Study is progressing smoothly. We have the possibility of tying up with a state-owned enterprise called IDC in South Africa as our joint venture partner. If all goes well, we expect to commence cold and hot trials in the second quarter of 2005," says Mr Banerjee.

Chrome bright future
What does it mean to Tata Steel and its stakeholders? Through its innovative approach, Tata Steel has created value out of a business which was on the verge of being written off. In the process, Tata Steel’s ferro chrome is being turned into a globally competitive business that offers better options to customers. While the proposed project will create new job opportunities in South Africa, and result in earnings of foreign exchange through the export of ferro chrome, it will also keep the chrome ore mines at Sukinda, Orissa, viable.

The project has the potential to become the nucleus of a much larger operation of the Tata Group in Africa. This may be only the beginning. The challenge ahead is to create a global mindset among the employees. For a company that has redrawn the global competitiveness roadmap, that should not be difficult.