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Corus buy will impact Chinese steel market
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January 31, 2007

At last, the deal has finalised after nine rounds of bidding for Anglo Dutch steel maker, Corus between Indian steel producer, Tata Steel and CSN, Brazil's steel company.

Winning the Corus deal makes Tata Steel the world's fifth largest steel company. After nine rounds of bidding at 608 pence per share, Indian steel maker, Tata Steel won Corus in an all-cash deal. This deal will put combined capacities at 22 mtpa.

In accordance with this, analysts from Steel Biz Briefing say that this deal will help Tata catapult itself into the global industry.

They also say that the Chinese steel industry will continue to grow, and that China, not being a low cost producer, will not flood market with cheap steel. They believe that steel prices will be positive in 2007.

Excerpts from CNBC-TV18's exclusive interview with Patrick Flockhart:

A lot of people have been saying the good things about the deal and raising a few question marks about the price - what is your own feeling about these two, the strategic moves and the price at which it has come?

Let us look at the price first of all. As a very rough rule of thumb, Mittal paid about $720 per tonne of production for Arcelor. Another way of looking at this deal is that actually Tata has paid about $620 a tonne for Corus, so yes, they had paid more as the multiple of EBITDA, but actually paid less per tonne of production that Corus is actually doing.

So in one sense, that is a good deal. I think that the price is possibly at the top end of some of our estimates, but it is still not an unreasonable price.

So I think that this is pretty good deal for Tata Steel. I am also hearing that there is a very good cultural fit between the management of Corus and the management of Tata. So I think that they are going to work well together, which is going to be important in terms of making sure that this huge steel giant is also very profitable steel giant.

In terms of your question of strategy, Tata has pretty professional operations and it has already got a well-fledged strategy for further developments in India and also significant presence in South-East Asia in places like Thailand with National Steel and also it has got some plans in Iran.

So I think that there will be further moves from Tata pretty soon after it has got Corus bedded down. With Corus of course, Tata gets a wonderful international distribution network. This distribution network has always been hungry for Corus in terms of a producer to actually develop internationally. And so now with Tata actually acquiring Corus that is going to be possible. So I think there will be a very positive future.

Speaking earlier about the steel prices and the strength that has come in to them, you are not in the camp that believes it might be peaking out by the end of this year and then the Tata-Corus management might head into a sticky spot in terms of prices?

One of the reviews at the moment is that the average steel price for 2007 will be below the average steel price for 2006, maybe or maybe not. Even if it is the case that the steel prices in 2006 have been pretty good and the steel prices in 2007 are going to be pretty good, as we are looking at the market at the moment, we have actually been seeing quite steady rises in Europe over recent weeks.

The north American market has been proving a little bit stubborn in terms of its pricing but actually that has turned also in recent weeks and the prices in North America are rising. Most interestingly, in Asia, there is a very steep rise in the prices in the Far East at the moment. Largely as a result of China, non-exporting is much as it should be as people have expected, but the general picture though is that steel prices are looking quite positive in the world at the moment.

So I would be in the camp where steel prices will be above the average of 2006 in 2007. So I think that the management of Tata Steel would be in good shape at the end of this year.

If you were a stock market investor this morning, what would you do, would you buy the Tata Steel stock or would you sell it?

I have not seen actually what the price was this morning, but I would put it this way - I noticed yesterday that Tata Steel has actually increased its profit even though its cost had actually gone up. So on that basis, I think that one should be pretty confident about investing in Tata Steel because investing in that you are actually investing in a very professional and well managed steel business. So I think it would be pretty safe. 

I believe you have been speaking to a lot of Corus employees as well, do you expect or do you foresee any other problems for Tata Steel as they synergize and consolidate with Corus?

No, certainly in my initial discussions with people, they were quite positive about Tata; they were actually a bit negative about CSN. To be fair to CSN, they really did not know the great deal about CSN at that stage. But a lot of sentiment that I am hearing from people in Corus is pretty positive. Obviously, people are concerned about their jobs, but I do not think that as a result of this in the short-term there necessarily will be any major redundancy in Corus.

So I think that the employees will welcome this and I think they will be pretty pleased that they are going to be a part of the international group that can really grow somewhere. Corus has been a bit stuck over recent years because its balance sheet has not been strong. So with Tata buying it, I think all the employees will say okay, we are now in the business that can really go somewhere.

So no major problems are seen with employees, except possibly there might be some minor difficulties if Tata does decide to sell off one or two parts of the business and I am sure that Tata will decide to do that because there must be some parts of the Corus business that Tata wouldn't want, specifically the engineering business, which I think could make sense for part of the sell now. Sure some employees there might not be too happy, but I don't think that as a major obstruction at all. So I actually foresee a pretty smooth transition here. 

First Mittal-Arcelor and now this one - do you think the fact that this market is now congealing into larger pieces, does it really have positive ramifications on steel prices or do you think that is overstating the case?

Yes, I do think that is overstating the case. Worldwide, steel production is about 1.3 billion tonnes a year now. Mittal is only about 10 per cent of that, this new business which I think should be called 'Tatorus' is going to be about 20 per cent of that. So the overall sectors will be very fragmented and so there might be a little bit more price control from these large producers.

But it's not going to be majorly significant. They are not really going to control world prices too seriously, world prices are really controlled by consumer stock levels and upto a large extent what is happening in China, now, China has been the largest producer in consumer steel worldwide and the Chinese market is very fragmented, the largest steel company in China, is actually smaller than the new Tata Steel business. So the price volatility in the steel prices will remain.

But the outlook is quite positive because there is a reasonable balance between the supply and demand for steel and overall there is a continuing growth in the requirement for steel, particularly in the developing world. So it is an ongoing volatility, but overall, the prices will be reasonably good.  

We have been looking at the financials of Corus, it is a high cost producer, the margins we believe are as low as 10%, if you have to rate this because it will now be rated globally, where would a Tata-Corus compare with an Arcelor-Mittal, a Posco and Nippon?

Only some parts of Corus are high cost, actually their Dutch plant is probably the lowest cost producer in Europe and it is actually potentially one of the lowest-cost-high quality plants in the world. So Tata is getting a little pearl of an operation there.

The higher cost operations in Corus are actually in the UK, particularly South Wales, which perhaps cant make as much steel as we would like, to be cost efficient. We were speaking to Dr Mukherjee from Tata a few months ago and he certainly has some ideas about how he could increase the efficiency in South Wales. The other main UK plant is a Scunthorpe, which actually is relatively efficient and has a great deal of flexibility. So it is not true that the all of Corus is high cost.      

A large part of whether this will work out well or not probably hinges on how the steel market will play out for the next 4-8 quarters. What is your sense of how Chinese exports are panning out and what kind of a range would you peg steel at next 4-8 quarters as far as you can see?

I think that the first thing is that China is going to continue to grow over this year but it is not going to consolidate, it is still going to be a fragmented industry within China. So therefore it is going to make it quite hard to control. But China is not a low cost producer, it has to import virtually all of this iron ore and has to import a certain element of it coal though it does actually produce coke, but the point it that it is not a low cost producer. So even if it is producing more than it requires, it is not necessarily going to flood the market with low cost steel.

On top of that even if I say that it is a difficult market to control, difficult industry to control in China because that is so fragmented. The Government in China is pretty concerned that it is not causing international disruption with a flood of steel exports and consequently it has been reducing tax rebates and such like that had previously gone towards exports particularly for long products.

So I think that we will see some more restrain from China this year, I think that steel prices will be pretty positive throughout 2007, in 2008, they might peak a little bit more but they probably dip down a little bit more towards the end of 2008. General outlook is positive though particularly with the Beijing Olympics taking place in 2008, so there is going to be a lot more use of steel in a hurry in places like China.

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