India's Tata Steel, the world's No 7 steelmaker, posted a June quarter profit that lagged estimates, and warned that banking concerns and government fiscal cuts in Europe presented risks to the industry's outlook. Tata Steel bought Anglo-Dutch steelamker Corus, Europe's second-largest steelmaker, in 2007 for $13 billion in the largest overseas acquisition made by an Indian company so far.
The deal vaulted Tata Steel to the world's No 5 steelmaker at the time. In April, the World Steel Association said the global steel industry was recovering faster than expected, but demand has slowed since then, held back by overall a gloomier economic outlook and destocking in China. Tata Steel said on Thursday it expects industry fundamentals to remain cautious in the second half the 2011 financial year.
"Global economic recovery is continuing, but European recovery in general is weak," Kirby Adams, Tata Steel's head of European operations, said. "A worrying sign is fiscal stimulus cuts likely in Europe and the US," he said. Tata Steel's European operations account for two-thirds of its global capacity of about 30 million tonnes, while the Indian operations contribute a quarter. It also has units in Thailand and Singapore.
Leading global steelmakers ArcelorMittal and Nippon Steel Corp in July warned that slowing growth in China, higher raw material costs and a slowdown in Europe would push down third-quarter earnings. Tata Steel said it expects a double-digit decrease in raw material costs in the next quarter. It also expects a modest recovery in steel prices by the end of 2010.
"We have new orders from the engineering and auto sectors but the construction market remains very subdued," Adams said. "Raw materials now account for more than 50 percent of total costs, with iron ore being the most volatile," he said. The Indian firm reported a net profit after minority interest and share of profit of associates of 18.25 billion rupees ($389.1 million) for its fiscal first quarter ended June, compared with a consolidated net loss of 22.1 billion rupees a year ago.
Net sales were 271.95 billion rupees compared with 232.9 billion a year earlier A Reuters survey of six brokerages had forecast a net profit of 20 billion rupees for the quarter, on net sales of 278.1 billion. Last month, Tata Steel reported flat sales from its otherwise booming Indian operations, hurt by weak market sentiment in the products segment and excessive imports from China.
Tata Steel is raising $340 million by preferentially issuing shares and warrants to founders to fund its expansion in eastern India, where it is raising capacity by 3 million tonnes. Earlier this year, Tata Steel's finance head said it is looking at options to raise equity and was seeking long-term funds for steel projects.
The company raised $350 million in debt for working capital amid rising raw material costs, Chief Financal Officer Koushik Chatterjee said on Thursday. The firm said it is continuing to talk to a handful of companies for the sale of its mothballed Teesside plant in northern England. Corus has hired Citi to sell the plant, one of the largest employers in the area.
Tata Steel said net debt was at 457.1 billion rupees at the end of June 2010. Shares in Tata Steel, valued by the market at $10.6 billion, have declined about 13 percent so far in 2010, compared with a 4 percent rise in India's benchmark index. The shares closed down 0.1 percent at 519.80 rupees in Mumbai ahead of the results.