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EU steel market’s demand recovery to boost Tata Steel Europe’s earnings in H2 of FY21

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Mumbai: For Asia’s oldest maker of the primary infrastructure alloy, Tata Steel, Europe has suddenly become very crucial, as the old continent shows distinct signs of stirring back to life despite isolated lockdowns.

Top steelmakers in Europe have raised prices of carbon steel – something that would have a material impact on their performances. So much so that Tata Steel Europe may post positive earnings in Q3 and Q4, say analysts.

“Europe is witnessing price hikes in carbon steel…which if it sustains for longer will lead to earnings upgrades for companies including Tata Steel,” said global brokerage firm, Morgan Stanley in its recent report.

ArcelorMittal has raised its EU HRC spot prices by euro 600 per tonne from around euro 540 per tonne. If accepted, this would take the European spreads to a record level of around $400 per tonne vs the historical average of $244 per tonne, other steelmakers will follow suit.

“Most of the European peers like ArcelorMittal, SSAB and Voestalpine have indicated a probable pick up in demand in the Dec 2020 quarter on a sequential basis with potential for better spreads,” said Morgan Stanley’s report

Tata Steel did not comment.

Along with a strong demand revival, a structural shortage of steel and lower solid fuel prices are also helping boost profit performance.

“While capacities idled in Q1FY21 are gradually restarting, we expect supply constraints to sustain in Q3FY21…lending support to prices,” said Amit Dixit, research analyst, Edelweiss Institutional Equities.

Tata Steel Europe could surprise the street in Q3 and Q4. Spreads have been increasing, and they have been booking contracts since June, and these price increases will boost their Ebitda, added Dixit.

Morgan Stanley has said that a sustained period of wider spreads would benefit European operations and limit cash losses.

Tata Steel reported a consolidated net profit after three quarters at Rs 1,665.07 crore for the September quarter, and Tata Steel Europe reported a loss of Rs 462.07 crore during the same quarter.

“We expect the company’s European operations to post a positive Ebitda in Q3,” said Amit Murarka, research analyst, Motilal Oswal Financial Services.

Tata Steel recently announced holding talks with Sweden-based steelmaker, SSAB, for the potential sale of Tata Steel’s Netherlands business, including the Ijmuiden Steelworks. While the deal is still at an early stage, analysts believe that with positive demand revival in Europe, the company will get a good deal on the sale.

“The recovery in demand in the EU might result in the company getting a good price on the deal, but the deal is still at a very early stage of completing the due diligence process,” added Murarka.

The recovery will come in as a breather for Tata Steel’s struggling operations at Port Talbot in the UK. While the company has planned to sell its profit-making Netherlands business, it is looking for some support from the UK government for its Port Talbot plant.

“This is positive for Tata Steel India too. With Europe seeing recovery and prices moving up which will be sustained until the end of Q4, there won’t be any debt from the parent to the UK operations for FY 21 at least,” said an analyst tracking the company, requesting anonymity.

Given China’s faster-than-expected recovery in demand and prices, EU prices will likely sustain until the end of FY21, said the person cited above.

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