(column by Devdeep Singh, Karan Mehrishi)

Charge of the "Steal" Brigade?

The early 90s tested Tata Steel in real terms. From plant shut-outs to its grand acquisitions, from Russi Modi to Muthuraman, and from a meek entity to one of the world's most efficient steel producers - the rise of Tata Steel has been implausible. But against the might of Mittal Steel & Posco, Tata Steel might find all its achievements standing to nothing; or would it?

Every time the bird Phoenix rose from its ashes, it signified its immortal character. Likewise, Tata Steel has always defied the odds, be it the steel downturn of the 90s, or Russi Modi, the then CEO of Tata Steel, leaving the company in the years of turbulence, or the vagaries of the cyclical steel industry. Yes, Tata Steel has borne it all; and much successfully. But the new decade brings new smelted winds, some of them molten enough to vaporise even the most prescient of all corporations; and those are the winds of global steel manufacturers - like Mittal Steel & Posco - trudging batallion-like into India; manufacturers in front of whom Tata Steel seems lesser than even half a match; firms, for whom, bludgeoning Tata Steel could be easier done than said; companies, for whom acquiring Tata Steel could be done over dinner, or just to satisfy egos. Would Tata Steel be able to take on the financial where with all of these behemoths? Would B. Muthuraman, Managing Director, Tata Steel be able to fight their might? In reality, will Tata Steel even survive?

Back to the mines...

Tata Steel did not follow the old school paternalism and refrained from antiquated management practices to survive the post "license raj" scenario. The utmost challenges were to hold people together and to streamline business processes. Ratan Tata did captain the company from the years of shuffle to the glorious present when Tata Steel, under Muthuraman, was named the Best Steel Company by World Steel Dynamics in 2006 for the third time. Adding to its unquestionable credit is the fact that it is amongst the lowest cost producers of steel in the world; down to a point, where typical Indian steel industry competitors like SAIL & Essar Steel are considered almost passe.

Ore refining time cometh?

The answer is probably yes as the global entrants are no minnows. Mittal Steel, which rules the global steel industry in low end steel production, has already announced plans to set up a 12 million tonne (mt) steel plant in Jharkhand, investing $9 billion. In comparison, Tata Steel produced a mere 3.29 mt during the period April-December 2005. The total steel production of Tata Steel is only around a measly 8% of Mittal Steel. But worse for Tata Steel is yet to come, as the largest investment in the Indian steel sector came from Posco in June 2005.

The world's fifth largest steel company is set to pump in $12 billion into its steel plant in Orissa. Posco's chief representative, Lee Min Su said that the company wants to expand in three key areas - steel and allied business; mining activity; and technology or management know-how exchange. Tata Steel's ostensible nonchalance stood refuted as Muthuraman assertively cautioned in October 2005 that it was "a dangerous trend" to allow exports of iron ore. It is not only the competition that is haunting Tata Steel in its dream run, but also the threat posed by the global steel industry. As per an OECD study 'Capacity Expansion in the Global Steel Industry' in January 2005, the world steel production is expected to rise at 3.7% per year, reaching 1.09 billion tonnes in 2008.

The world steel consumption, during the same period, is likely to rise by 3% only. In such a scenario, the global steel capacity will far exceed the demand. Thus, the expected overcapacity, apart from factors like new capacity expansion plans and crippled conditions of the raw material markets would further aggravate the injuries of the global steel sector. Another factor that would add to the problem is the dominance of China. Muthuraman is famous with his thunderous media comment, "China has no business making steel; we can beat the hell out of the Chinese." Great words, but without basis. With a steel production of 39.1 metric million tonnes (mmt) per year, India lags far behind China (just 11.22% of China's steel production in 2005). Clearly, overcapacity of steel would lead prices to fall to bare minimal levels. Where almost all major Chinese companies have the Chinese government as majority stockholders (see Scrutiny B&E issue dated March 24, 2006) - thus allowing them the financial where with all to survive price pressures - the majority of Indian private steel companies, including Tata Steel, would just capitulate.

Selling 'value' or 'steel'?

For starters, Muthuraman seems to be gambling on both the low cost and value proposition. Of course, despite the low cost positioning, Tata Steel did register a whopping turnover of Rs.158.77 million in fiscal 2005, a rise of a mind-boggling 99%! Profi ts too rose by a smashing 33%! But even in terms of capacity, Muthuraman doesn't wish to be left behind, envisioning, "We plan to be a 25 mn-30 mn (tonne) player by 2015 through our projects and acquisitions." And for this, he commits, "We are focusing at disintegrated manufacturing strategy. Produce steel at locations where it makes sense." But April-Dec 2005 results clearly reveal that production has risen by a meager 4.9% to 3.29 mt. But then again, Tata Steel has planned to invest $23 billion for expansion over the next 15 years. Its recent acquisitions in diversifi ed markets - Natsteel in Singapore, Millennium Steel in Thailand, KwaZulu Natal region in South Africa, a JV with BlueScope of Australia and a JV with Iran - implies its focus at decreasing the risk factor. In September 2005, Tata Steel invested $118.8 million with government of Jharkhand to set up a steel plant of 17 mt capacity.

The iron'ic end game

By introducing brands like Tata Steelium (the world's fi rst branded cold rolled steel), Tata Shaktee and Tata Tiscon and opening up India's fi rst steel retail shop - Steel Junction - in Kolkata, Tata Steel has tried to redefine the way steel is sold in the Indian market. Unfortunately, as is clear globally, steel sells on quality (and price) parameters, rather than on the brand name; and this might just prove to be a very costly brand positioning exercise. Tata Steel should clearly follow two killing strategies. Firstly, without an ore of a doubt, is that of providing value through finished moulded products to its customers, rather than just providing rolled steel. Ingraining itself into the factory processes of clients is the only way Tata Steel can ensure that switching costs of its consumers is extremely high, and they don't switch to competitors, whether domestic or foreign, in the short term. The second strategy is of securing long term sources of raw materials like coke and iron ore that would give Tata Steel the largest sustainable competitive advantage in times of raw material shortages and skyrocketing prices. Surely, Tata Steel has the might to lead the steel brigade; what is required is an attitude that is tougher than even steel itself!

Steal'ing production from the west

When the European steel industry saw the recent 2005 production statistics from International Iron and Steel Institute (IISI), it was shaken out of the colonial hangover. The world's erstwhile steel producing monolith - Western Europe (with Africa) - produced only 8.8 mmt of crude steel in 2005, down by 6.4%. This pessimism inspiring performance has its roots firmly attached to the existing demand. Crude steel does not find itself on the western economies' wish list and as Muthuraman says, "The growth of steel production is shifting towards countries like China, India and Turkey," where the production is fuelled by huge insatiable demands stemming from high growth in these regions. Though Muthuraman projects an annual global growth of at least 4% over the next 25 years, Chinese steel production grew by an astounding 34%; while India had a more liberal statistical fi gure of 11%. These countries and regions are not only meeting their own 'never ending demand', but with their low cost high quality steel, are also satisfying demands in eastern European countries. Apparently, now the steel production & price fixing ball is in the Asian region's court. Part of the new paradigm shift we would say!

(End of Devdeep Singh, Karan Mehrishi column)