EIC ANALYSIS OF TATA STEEL
* The Financial market in the last 12 months has been volatile triggered by the subprime mortgage crisis in the US. This has adversely affected the liquidity and the risk perception of the international capital markets. Inflation has increased around the World boosted by mainly increase in food and energy prices. The real effective exchange rate for the US dollar has declined since mid-2007 as foreign investment in US bonds and equities has been dampened by reduced confidence in both the liquidity of and the returns on such assets, weakening of US growth prospects and interest rate cuts. The main counterpart to the decline of the dollar has been appreciation of the euro, the yen, and other floating currencies such as the Canadian dollar and some emerging economy currencies. Corus acquisition is being financed by a substantial amount of debt. This puts pressure on Tata Steel’s bottom line, and should the business environment deteriorate, the necessity to service this debt could restrain Tata Steel in its future investment and capacity expansion plans. In addition it could also limit the Company’s inorganic growth options.
* Due To Subprime Crisis in USA an subsequent tremor all along the world, especially in developed market in Western Europe make the vulnerable position of Corus even more riskier.UK, Germany, Netherlands the main market for Corus products are facing the fear for recession on negative growth.
* The steel industry is highly cyclical, receptive to general economic conditions and reliant on the condition of a number of other industries, including the automotive, appliance, construction and energy industries. If these industries experience a downturn, Tata Steel too would too take a hit, thus negatively impacting its rating.
* Corus follows the policy of entering into long term supply contracts with raw materials vendors.Thus there can be a huge time gap between variation in prices under purchase contracts and the time when Corus can make a corresponding price change under its sales contacts with its consumers. Moreover, Corus may not be able to pass on the increased raw materials costs to its customers. Such developments would lead to a downside in our rating.
* Steel production processes are energy dependent and price movements in the energy market would accordingly affect Tata Steel’s bottom line.
* Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus, but the cost of the integration goes much more beyond the financial aspect. There are other factors which will add to overall integration costs such as * Cross Cultural Integration
* Employer-Employee Relationship
1. Government Policy on Steel Industry
* New Industrial Policy, July 1991 - Iron and Steel industry, removed from the public sector and exempted from the provisions of compulsory licensing. * From 24.5.92, Iron and Steel industry has been included in the list of `high priority'industries for automatic approval for foreign equity investment upto 51%. This limit has been recently increased to 74%.
2. International conditions
The steel industry is subject to cyclical swings arising from factors such as excess capacity, regional demand & supply imbalances and volatile swings in market demand and prices, more recently exacerbated by quarterly pricing for iron ore and metallurgical coal.Global demand surpassed the pre-crisis peak in the financial year 2010-11, driven by strong demand in the developing economies, notably China. Prices for iron ore and metallurgical coal spiked, exacerbated by supply disruptions due to flooding in Queensland, Australia. The Indian operations benefitted from strong domestic demand and achieved record output at 6.855 million tonnes. The South East Asian plants also...