Tata Steel Limited (TATLY) Q3 2023 Earnings Call Transcript

Tata Steel Limited (OTC:TATLY) Q3 2023 Earnings Conference Call February 7, 2023 3:30 AM ET

Company Participants

Samita Shah – Vice President, Corporate Finance, Treasury and Risk Management

T.V. Narendran – Chief Executive Officer and Managing Director

Koushik Chatterjee – Executive Director and Chief Financial Officer

Conference Call Participants

Pinakin Parekh – JP Morgan

Amit Dixit – ICICI Securities

Indrajit Agarwal – CLSA

Satyadeep Jain – AMBIT Capital

Ritesh Shah – Investec

Kirtan Mehta – BOB Capital

Tarang Agarwal – Old Bridge Capital

Sumangal Nevatia – Kotak Securities

Anupam Gupta – IIFL

Prashant Kutty – Emkay Global

Operator

Ladies and gentlemen, good day, and welcome to the Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions]

And now would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma’am.

Samita Shah

Good afternoon, good morning and good evening to all of you joining us today. Welcome to this call and thank you for dialing-in.

We have with us our CEO and MD, Mr. T.V. Narendran; and we have with us our ED and CFO, Mr. Chatterjee, who will discuss the results and walk you through any questions you may have. Our presentation, which describes the results, has been uploaded on our website. Do go through it if you haven’t already, and we will take questions in audio mode as well as chat mode.

Before I hand it over to them, I would just like to draw your attention to the clause on page two of the presentation, which the safe harbor clause, which essentially will cover the entire discussion today. Thank you. And over to you, Naren.

T.V. Narendran

Thanks Samita. Good day everyone. A bit of a narrative on the way we see the situation. The global operating environment has continued to be volatile during the quarter, amidst inflationary pressures, tightening financial conditions and the COVID overhang and among the key economies, the U.S. and EU witnessed a quarter-on-quarter decline in industrial output, while the Chinese GDP grew at its lowest pace since 1976.

Given this backdrop, global steel prices continued to remain under pressure for most of the quarter and resulted in subdued steel spreads. In the EU, the steel spot spread, including energy and emission related cost went close $200. And in India, the economic activity remained resilient. However, depressed international prices weigh in on the sentiment.

Moving to our performance. Tata Steel India deliver — deliveries stood at 4.74 million tons and were up 7% year-on-year, primarily driven by the 11% growth in domestic deliveries. Our domestic deliveries grew at a faster pace than the Indian steel apparent consumption, which are about 8% year-on-year, and it reflects a strong market presence across segments and agile business model. Some of the highlights are value added segments like the oil and gas, infrastructure, solar and retail housing grew by about 17% on a year-on-year basis, in part due to the expanding product range and innovative solutions.

Tata Tiscon, which is largely sold to retail customers, registered a best of our quarterly sales and we continue to expand our physical reach via new dealers and a virtual reach through Tata Steel Aashiyana, our eCommerce platform for individual home builders, and sales through Tata Steel Aashiyana have consistently grown over 50% in the last two years.

Our sales to the MSME sector has grown 25% to 30% year-on-year in the last two quarters. We have moved from fracking six segments to 80 micro segments, we just help us understand customers better and enhance the ability to move material across micro segments based on demand.

Looking ahead, we expect Indian steel prices to move higher based on improved expectations about the Chinese demand and the sustained government spending on infrastructure in India. The raw material costs are likely to remain range ground, and fourth quarter was also seasonally a stronger quarter in terms of deliveries, and we’re looking to leverage the momentum.

We continue to progress on expanding our capacity across multiple sites in India as we look to grow to 40 million tons in India. And view in terms of deliveries FY 2024 should fully reflect the 1 million tons per annum in large volumes while subsequent years, FY 2025 and FY 2026, will reflect the 5 million ton expansion in Kalinganagar Phase II and a 0.75 million ton setting up of the electric a furnace mill in Ludhiana. We are parallelly expanding our downstream operations at tinplate, wires and tubes. The ongoing expansion in tinplate is from 0.38 million tons per annum to 0.68 million tons per annum. The wire capacity is being expanded from 0.47 to 0.55 million tons per annum and the tubes capacity from 1.2 million tons per annum to 1.5 million tons per.

Separately, phase commissioning of the 6 million ton pellet plant at Kalinganagar has begun and we should stop buying pellets from the second quarter of FY 2024, which will help reduce our costs. We are also looking to commission the PLTCM, which is a pickling line and tandem cold mill, which is part of the 2.2 million ton per annum CRM complex during this quarter.

On slide 19, we have provided some domestic — details of domestic deliveries across sectors. And over the years, while we have sold the volumes in automotive with share has also moved to around 15% of our total sales, and this is set to rise to the commissioning of the CRM complex and incremental capacity at Kalinganagar. Similarly, the growth in long products will drive an increase in the high margin retail housing business for us.

Moving to Europe. The steel deliveries stood around 2 million tons in the third quarter, though the volumes were higher by 6% quarter-on-quarter basis, the sharp drop in realizations on subdued demand and elevated costs, including energy, have weighed on the steel spreads. Looking ahead, uncertainty purposes about supply demand fundamentals, despite the recent pickup in the EU prices driven by the hopes of a milder and shorter down cycle. Our steel realizations will remain subdued in fourth quarter, given the lag effects of some of the contracts.

We continue to make progress on our sustainability journey to achieve net zero by 2045 via multiple pathways. We already started initiatives such as charging most scrap into our furnaces. Our products like TiscoBuild Green construction blocks and Dhurvi gold have had flagged as one of the input centers achieved solid-based utilization as well as the best customer needs for eco friendly solutions.

Before I hand over to Koushik, I’m also happy to share that Tata Steel is only company in India to be recognized by the World Economic Forum as a global diversity, equity and inclusion lighthouse. And we’ve also been awarded a Great Place to Work Certification for the six time.

Over to you Koushik.

Koushik Chatterjee

Thank you, Naren. Good morning, good afternoon, and good evening to all those who have joined in. Let me give you a deeper sense of the financial performance.

Our consolidated revenues for the quarter stood at about INR 57,084 crores, while EBITDA stood at INR 4154 crores which translated to a margin of about 7%. The standalone EBITDA margin was higher at about 18%. Overall, the profitability was affected by a sharp drop in the realizations and spreads in Europe during the quarter.

So first is standalone at Tata Steel standalone India, the EBITDA stood at INR 5,334 crores, which translates to an EBITDA per ton of about INR 11,623, excluding the ForEx impact, the EBITDA stood at about INR 4,763 crores and was up by about 15% quarter-on-quarter.

India steel prices remain subdued for most part of the quarter. The fall in long prices, long product prices were higher than in the flat products due to extended monsoon and the stoppage of construction in Delhi, in the NCR region as per the ruling of the National Green Tribunal. However, the raw material prices were also lower as coking coal prices declined by around $82 per ton on a consumption basis. The royalties also declined by about 14% quarter-on-quarter to INR 775 crores. Overall, the drop in costs more than offset the greater-than-expected decline in net realization, and that’s led to the margin expense.

At Tata Steel Europe, the EBITDA loss stood at about 166 million tons. As Naren mentioned, deliveries were up 6% quarter-on-quarter, but there was a sharp drop in realization within the quarter with revenue per ton being down by about GBP159 per ton. The sharp drop in realizations would have part due to the higher spot sales and subdued demand given the macro conditions in Europe and high stock of inventories with the customers.

Costs were higher by about GBP31 per ton, while the coking coal consumption costs were down by about $95 per ton. Quarter-on-quarter there was an NRV markdown loss of about $55 million on the slab stocks being carried due to the forthcoming relining in Tata Steel Netherlands.

Energy costs remain broadly stable on a quarter-on-quarter basis. The currency markets have also been very volatile, and there has been sharp movement between the USD/INR and the euro/INR to name a few. This has led to an FX impact on the intercompany loans provided over time and the result — and this resulted in a ForEx gain of INR 1,427 crores at the consolidated level.

Taxes for the quarter stood at about INR 2,905 crores and are fundamentally made of two parts, A recurrent tax in line with the profitability in India largely. And B, the non-cash deferred tax charge primarily due to the reduction in the surplus in the British Steel Pension Scheme as a part of the derisking, and I’m coming to that point soon.

We made further progress during the quarter on derisking the British Steel Pension Scheme and expanded the insurance coverage from 30% to 60% now. This buy-in transaction and the actual movement during the quarter have led to the reduction of the surplus, but it still continues to be material in surplus.

As mentioned in the previous quarter, the surplus reduction results in a reduction in the deferred tax liabilities in the OCI. But given the large amount of accumulated losses and the deferred tax assets in Tata Steel U.K., we have to limit the movement by recording and offsetting deferred tax expense in the profit and loss account, which is why you see a non-tax deferred charge in the profit and loss.

Depending on market conditions, the residual insurance of about 40% liabilities will be completed in the first half of the calendar year 2023, and will be commensurate non-cash deferred tax expenses depending on the size of the scheme that we do.

Moving to cash flow. The operating cash flow for the quarter stood at about INR 5,000 crores versus INR 1,700 crores in the previous quarter and primarily was driven by favorable working capital movement. The working capital release was due to reduction in inventory at Tata Steel U.K. and Tata Steel India on account of low commodity prices or lower inventory levels, but this was partly offset by increase in the slab stocks in Tata Steel Netherlands, as I mentioned earlier. As slab stock gets consumed over the next two quarters, we expect working capital release at Tata Steel Netherlands also over the relining period, which will be starting in April.

We continue to invest in growth in Kalinganagar and in NINL, taking our capital expenditures to about INR 3,632 crores for the quarter. The nine months CapEx has been about INR 9,746 crores, and we will be targeting to spend around INR 3,000 crores in quarter 4 to ensure that we accelerate the completion of Tata Steel Kalinganagar expansion project.

Our net debt has remained broadly stable at about INR 71,706 crores, and the liquidity remained strong at over INR 15,000 crores. We are not able to deleverage in this particular year due to very high volatility in the earnings and working capital. Our focus on completing the Tata Steel Kalinganagar project, acquisition of Neelachal, which was about INR 10,000 crores this year and the best ever dividends that we paid over INR 6,000 crores. Even after this, our net debt to EBITDA is within the long-term target levels of about 2%.

Our long-term target for deleveraging continues to be the same. We will continue to restart the deleveraging in financial year 2023/24. And we continue to ensure that our target of 1 billion is fulfilled and met during the next — past year and going forward.

Looking ahead, the next few quarters are likely to be weaker for Tata Steel in Europe as markets continue to be subdued. And the realization for the fourth quarter are forecast to be weaker and drop will be higher than the drop expected in the coal and iron ore prices. Furthermore, Tata Steel Netherlands is undertaking the blast furnace relining in quarter 4 of FY 2024. We are working on minimizing the impact on all of these aspects, including the working capital and margins. Moreover, there are a few specific asset challenges, which we are investing. Some of the heavy in assets in Tata Steel U. K. are reaching the end of their useful life. Any long-term solution in the U.K. also is to address the rising cost of carbon and the local emission reduction goals.

The U.K. government has provided us a framework of support for the proposed transition of Tata Steel U.K. to a low carbon configuration. This framework consists of potential partial capital expenditure grant policy on electricity pricing and regulatory intent to ensure a level playing field for being steel manufacturers. We are currently evaluating this offer of support. We’re developing the options, investment options, which will be — which has to be capital-efficient, economically viable, bankable and value accretive, which will be reviewed internally over the next couple of months and determine the way forward. In the interim, we will continue to run Tata Steel U.K. optimally for cash with minimal support from Tata Steel in India.

With that, I conclude my comments, and we open the floor for questions and answers. Thank you.

Question-and-Answer Session

Operator

We will now begin a question-and-answer session. We will be taking questions on audio and chat. [Operator Instructions]

The first question is from Pinakin Parekh of JP Morgan. Please go ahead.

Pinakin Parekh

The company had effectively guided to a certain set of numbers for India operations and for the Europe operations. Clearly, the earnings are far weaker than that. But it seems that the profitability is lower than peers as well. Can you walk us through as to what happened in the India business, in particular, if the cost reduction is lower than what we have seen in peers? And how this will trend over the coming quarters?

T.V. Narendran

So, Pinakin, in terms of cost reduction, I don’t know if you can be more specific. But generally, one area where we had a slightly different issue in India as we were ramping up Neelachal. So if you look at it on a consolidated basis, you had the Neelachal business, which was incurring costs but not yet earning much revenue that we will get settle during this quarter because the production is coming up to peak and we selling that’s certainly one area. But otherwise, I don’t know of any specific area where our costs have trended differently. I don’t know if it can be more specified maybe I can try and answer.

Pinakin Parekh

Sure. I mean, we — just given that the December quarter, the coking coal cost benefit that was supposed to be there, the margin expansion was probably — markets thought that it could be higher than what we have seen. So, just trying to understand was there any particular realization of contract sales volume issue or where other than coking costs, some of the other expenditure did end up being higher than what was earlier thought in November.

T.V. Narendran

No. When we had met in November, I think the guidance on the realizations were not as pessimistic as it turned out to be, right? I mean, if you really look at we went into that quarter, we thought the prices will have reached its bottom and will start moving up or if not moving up, it will stay stable. But the realization Q3 in India has been about INR 2,000 less than Q2, right? Certainly. So, the margin expansion in Q3 was largely supposed to come from the drop in coal cost — consumption cost, the coal consumption cost $90 a ton, which is what we have guided in November. We had said $90, I think we ended up close to that. But in terms of [technical difficulty], we had expected — we didn’t expect the prices to drop as much as it did, right?

Pinakin Parekh

Sure.

T.V. Narendran

And by that it was already towards the end of December. And secondly, we were also hoping to get the relief on export duty earlier than when it came. It came only in the middle of November, whereas we have been hoping that it would have come earlier because the steel prices in the domestic markets were still quite low.

Pinakin Parekh

Sure. Sure.

T.V. Narendran

We actually had a pretty good quarter as far as production is concerned. And I think at least in India, we haven’t have issues.

Pinakin Parekh

Sure. Fair enough. My second question is just going back to Neelachal and you said that it was — it has been ramping up during this quarter. Now if you look at the medium term ROIC target of 15% on a INR 12,000 crore investment, it effectively implies a steady state through-cycle EBITDA of INR 2,000 crores from that acquisition. So, when can we see that kind of earnings come through from Neelachal, because clearly, at this point of time, it is a material drag on consolidated earnings?

T.V. Narendran

Yeah. So, Pinakin, basically in Neelachal we were EBITDA negative in the last quarter and that change obviously because one is we are today producing at least 50,000, 60,000 tons a month and we hope to take it to 80,000 tons a month of steel. I’m not talking of hot metal, hot metal, the blast furnace is already at 80,000, 90,000 tons a month, okay? So, we think go up, the billet production is there and they’re selling the product at Tata Tiscon. So, next year, for instance, you will see 1 million tons of products in out of Neelachal, right?

So, if the return on investment on Neelachal was also based on the expansion of Neelachal beyond the 1 million ton, we said the INR 12,000 crore valuation was not for a 1 million ton capacity, but both for the opportunity for us to increase the size, because if you look at 1 million capacity, we would have been closer to what we paid for Usha Martin or something like that, right, because the INR 5,000 crores. What we paid extra was for the iron ore, which is coming at premium, and we’ve paid for the land, which is 2,500 acres of land. That’s what we’ve paid the premium for. So that — to monetize that, we obviously need to expand Neelachal about 4 million to 5 million at least, which we will do. We’ll go to our Board [technical difficulty] to 1 million tons. We were waiting for 1 million ton operating rate to be reached before we go and more capital to expand in Neelachal.

Pinakin Parekh

Understood. This is very helpful. Thank you very much.

Operator

The next question is from Amit Dixit of ICICI Securities. Please go ahead.

Amit Dixit

Good afternoon everyone, and thanks for the opportunity. I have two questions. The first one is essentially on non-cash deferred tax of payment event or provision in the consolidated numbers. So, is it possible that theoretically if there is profit in Tata Steel Europe, then this can be offset at a later date? So theoretically, we can get a lower tax rate? Or is it that the profits have to be in Tata Steel U.K. for the offset sales to take this.

Koushik Chatterjee

Yeah. Amit, the offset has to be in the entity, which is carrying this, which is Tata Steel U.K.

Amit Dixit

Okay. The second question relates to the spreads in TSE. Now while in the prepared remarks you have mentioned that the drop in realization would be higher than the benefits of coking coal and/iron ore escalation whatever is there. Now will there be any NRV provisions in this quarter as well given that prices have moved up in Europe, 55 million was reported in last quarter, will there be something in this quarter also. And will we have EBITDA — more EBITDA compression or will we end up with a number lower than what we have in this quarter on per ton basis.

Koushik Chatterjee

So, I think to answer that question, first is, we’ve kind of taken all the NRVs that we could estimate. As you know, the NRV is 0.2 point, it is at the end of the quarter. So, we had stopped up labs in mountain in Netherlands in anticipation of the blast furnace relining. And as the blast furnace relining will take about 120 days, you have to have enough stock to the business and service the customers. So this stock, which has been accumulated over the last six months almost, was on account of the fact that at that point of time, the coal prices were about 450 — north of 450 iron ore prices were also high, which is why this NRV testing happened, and that’s write-down of the NRV mark-to-market is what we have taken in this quarter.

If the prices don’t fall very sharply or significantly from here, I don’t see any material NRVs. I can’t rule out small changes in NRVs, but nothing material in that nature. And we are just now actually — the other thing is, as I mentioned in my remarks, both in U.K. and Netherlands, we going to go run flat out for cash. And therefore, if that is the case, then we are also targeting significant stock level reductions from — as far as practical to run the business. And therefore, end March inventory number should also look much lower, hence the risk of the NRV comes down.

Amit Dixit

Great. Now, one as seated question that the annual contracts that are going to be negotiated maybe from FY 2023. The expectation is that they would be negotiated at a significantly lower level, given that what we in FY 2022. And the quarterly contract that possibly you will enter with in March and would again be at a significantly lower level because at that time Russia/Ukraine war was there, [indiscernible] over the moon. So, do you expect that contracts, monthly contracts or quarterly contracts will be negotiated lower and therefore, we can have the overhang of lower realization extending right into the first six months, let’s say in FY 2024.

T.V. Narendran

So Amit, let me put it this way. The annual contracts that we had for last year, most of them were in excess of EUR 1,000 per ton. Okay? So this year, while the annual contracts are at a lower level, depending on which sector, which industry from maybe 100 to 150 or maximum of 200, but they’re still higher than the spot prices. That’s one point I wanted to make.

Secondly, the spot prices are about as going up now, if you’ve seen it in Europe also it’s gone up by about EUR50 a ton. We — if you look at last quarter and there is an extension of Koushik’s answer, the cost of Q3 is higher than the cost of Q2 because of these NRV provisions. So despite the coal being $90 per ton cheaper and iron ore being $20 per ton cheaper, our cost was GBP31 per ton higher in Q3 compared to Q2 only because of this NRV provision.

So, when you look at Q4, we expect that the realizations in Europe will be about GBP70 per ton lower than Q3, but we expect cost to be at least GBP100 per ton lower on Q3 to Q4 basis. So, we see a margin expansion per ton this quarter. Of course, we are still looking at gas prices and many other moving parts just now, but at least from a margin per ton or EBITDA per ton point of view, hopefully, the worst is behind us as far as Q3 is concerned.

Now going forward, the stocks that Koushik said, basically, we had to build about 700,000 tons of stock. That will start getting converted into cash. While the blast furnace will be down, the sales will not be down to the extent of what production is down, and that’s what these slab stocks are going to do. So — and since that NRV projection — as the NRV correction has been done for the slab stocks, if the spot prices and the steel prices keep going up, we shouldn’t have a problem.

Operator

[Operator Instructions]

The next question is from Indrajit Agarwal of CLSA. Please go ahead.

Indrajit Agarwal

Hi. Can you hear me?

T.V. Narendran

Yeah.

Koushik Chatterjee

Yes. Yes.

Indrajit Agarwal

Okay. Hi. Thank you. I have two questions. First, if you can give us some indication as to what would be the relining CapEx and how long is the shutdown be? And in view of that, what is our cash fixed cost per ton in Europe, so at what EBITDA levels will not need support from India? That’s my first question.

T.V. Narendran

So, I think, the blast furnace shutdown is planned at about 120 days. And the cash part of it is already — it’s not the new cash also come in, but it’s a question of also ordering has also been done over the last one year. So, some part of the cash has already gone up, and there will be some spend obviously as the relining happens because that’s the period and it is in the ballpark of about EUR250 million to EUR75 million, and that is — of which — some of it has already been spent and some will be spent.

And I think if I can put it the reverse way, the Tata Steel Netherlands actually sitting on EUR600 million of cash, so they don’t require any money from India.

Indrajit Agarwal

And U.K. is the name that cash efficiency.

T.V. Narendran

So that’s why I said that in my comments that we would look at running it on — for cash. And we will minimize as much as we can. We’re looking at driving it. And including in this quarter, there is almost about INR 1,000 crores of working capital release. So, we will continue to push that very high.

Indrajit Agarwal

Sure. Thank you. My second question on coking coal. While we understand your fourth quarter guidance, but given the news flows around the Australia/China trade opening up, how do you see coking coal prices trending on a more like six, nine-month basis from here.

T.V. Narendran

So, I think coking coal is obviously not as liquid a market as one would like it to be and hence is very vulnerable to be fluctuations. But generally, we do see unless this what do you call it, an odd event like the Russia/Ukraine situation. We see coking coal prices between $250 and $350. It will fluctuate in that range. There would be some weather event in Australia for which it may spike up or something else. But we are not seeing coking coal prices drop much below $250 in the short term or medium term because, honestly, there are not so many investments being made in coking coal because generally coal has seen a bad basket to invest in. So, this is where the challenge is, but I think this is the range that we can see coking coal prices. Today, it’s gone up close to $350.

Your question on China buying coking coal, well, I think one thing which China has done well as they managed for the last few years without buying Australian coking coal. So, they managed to be the quality they want it out of the facilities that they have. They’ve also been buying out of Russia. So, I’m not sure it will make such a material difference as we could have done three, four years back because they have developed ultimate sources over the last few years.

Indrajit Agarwal

Sure. Thank you.

Operator

The next question is from Satyadeep Jain of AMBIT Capital. Please go ahead.

Satyadeep Jain

Thank you. A couple of questions on Europe. First on the profitability, I believe a couple of years ago, the company was embarking about transformation program and that time we thoughtful is that these spreads of about EUR240, but then the company was looking at in cash breakeven. Given the current spreads area also about EUR200, but — or 2,000 bps. At these levels, the company should have been possibly be at least EBITDA breakeven. Is there something maybe on the U.K. plants reaching end of life or is there anything else going on that is leading to the deviation from the targeted transformation plant saving. That’s the first question.

T.V. Narendran

Yeah. So Satyadeep, I think two things. One is, of course, our traditional view of spreads now needs to get corrected for energy costs and gas costs. Because traditionally, energy and gas was hardly — and carbon together was less than 10% of the raw material costs, whereas it went up last year to almost 40%, right? So, it played a very material gold. Now it is coming back to around 10% to 20%. So, it’s at a more reasonable level. So that is one thing that’s why what we have traditionally seen is EUR225 and EUR250 spreads. We’re assuming that gas and energy prices would be as high as it is today. So that’s one change.

Second point is, if you really split the U.K. and Netherlands, the Netherlands business has traditionally been EBITDA positive, cash positive, for sure, every year and pretty much all quarters. So, it’s only — last quarter is one of those quarters where it was EBITDA negative, but largely because of the NRV provisions that we had to make on the slab stock, which is itself was unusual situation as a build up to the last summer shutdown.

U.K. is where we have a challenge because energy costs have always been higher and has become even higher. We have some challenges on end of life. So what happens in the end of life situation is the production levels are also not as stable as we would like it to be, and that leads to unplanned outage. So that’s something that we are dealing with. So a lot of the underperformance has been in U.K. for the last quarter. Netherlands also has not had as good a quarter as they would normally have. So we expect in Netherlands, at least, obviously, operationally, this quarter was fine, but next quarter, we had this blast furnace relining after that things should come back to a stable state in Netherlands.

The U.K. situation is slightly different. Cost situation is improving in both these places because industry prices have come back close to pre Ukraine levels. So that’s the way we see it. I think Netherlands should continue to be cash positive and EBITDA positive, and should not need support from India. U.K. is what Koushik said, we will take a call going forward, what best to.

Sorry to come back to that. Yes, it has — it has given us the numbers that we were chasing. You should also keep in mind that Europe is today in a high inflation environment. So, the inflation is much higher than what we had thought two, three years back, and that also has an impact on cost. So, even if we have taken out a lot of costs, some of the costs because the inflationary pressures have gone up more than we had planned three years back.

Satyadeep Jain

Understood. The second question is on CapEx. The $250 million to $275 million for relining, I think I was under impression that this is going to be partial relining given the eventual transition to DRI sometime in the future. It’s just taking to partial declining seems somewhat high. And secondly, on the media reports indicate possibly a $1 billion last requirement for conversion for the U.K. If I understand it correctly, the idea is to convert to standalone year, given the scrap supplier there. The CapEx required for us should be I believe much lower than those media headlines, is there a thought behind maybe not just looking at standalone year for possibly exploring other options there, that’s the question of CapEx.

T.V. Narendran

Yeah. So on the relining, it depends on — if you’re comparing to a relining cost in India, something obviously, $275 million looks high. But if you compare to what relining cost in Europe is comparable. Having said that, this blast furnace is expected to run at least till 2035, even in our transition plan. So that’s why this is being relined for that kind of a life. The blast furnace, which will go down first will be the blast furnace, which is coming up for relining in 2026 or 2027. So we have two blast furnaces in Netherlands. So this is being planned to be run until 2035, even in a transition plan, Okay? That’s one part.

As far as U.K. is concerned, the media reports on the numbers are speculative. So I don’t want to comment on that. But having said that, the proposal to the government was not just about an ES, but it was also about the hotspot mill, which is also coming to end of life and some of the other assets, which were important to keep the site sustainable. So that’s why the amount of more than what we would spend typically on a year. But given what we’ve got from the government, we are looking at what then would be the next testing. What is the best that we can do with that kind of money that may be available to us and the policy support that we will get from the government. So, I think this is what we are working out based on the recent inputs that we had from the government.

Satyadeep Jain

Thank you.

Operator

The next question is from Ashish Jain of Macquarie. Please go ahead. Ashish, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat question section. We will now move on to the next question.

The next question is from Ritesh Shah of Investec. Please go ahead.

Ritesh Shah

Yes. Hi. A couple of questions. Sir, first is, can you broadly give us some color on the assets that we have in Europe. I think in the prior question, you indicated that there are two furnaces in the Netherlands. One, what is due for relining it will be till 2035, are the other blast furnace, it has a relining due by 2026. Is that right?

T.V. Narendran

Yeah. That’s right. 2026, 2027 around that time.

Ritesh Shah

Correct. Sir, how should we understand the same aspect for the U.K. operations, whether in you indicate there are many assets reaching end of useful life. And if you could please put in perspective what you indicated that the framework that you are engaging with the U.K. government on practical grant level playing field. I don’t know whether it refers to CBAM or something else. If you could marry both those verticals together, it would be great, sir.

T.V. Narendran

Sure. So in U.K., if you look at — so one of the blast furnaces in the U.K. got relined about five, six years back, okay, or maybe 10 years back 2012, I think it was. So, typically, a blast furnace one is relined will run for anything from 15 years to 20 years. So, there is one blast furnace, which can go on for slightly longer. The other is due sooner. But more than the blast furnaces in U.K. So coke ovens, it’s a steel mill. There are many parts in the U.K. business, which — where the assets are a bit old and need support. And that’s where our proposal to the government was to say that infra-spending capital on assets, which anyway don’t have a very long-term future, why don’t we use that opportunity to transition into a greener process food, particularly given that the U.K. has a lot of scrap, which is it is exporting. But the challenge there was the energy cost in the U.K. even before Ukraine was twice the energy costs in Europe.

So, our ask of the government was 50% — at least 50% of the CapEx that we need to spend to be supported and there should be policy support on energy cost so that we are not disadvantaged compared to Europe. And thirdly, of course, the policy support that the European steel companies are getting in terms of Carbon Border Adjustment Mechanism, et cetera. The ask in general in Europe by steel companies of government is typically on these principles that at least 50% of the CapEx that is required to be supported as grants because the industry through its cash flows cannot justify spending out the CapEx that it needs for this transition.

And secondly, OpEx support because when you transition from coal to gas and hydrogen, your input costs are less dependent on steel prices. When you’re looking at metallurgical coal, there’s a correlation between the metallurgical coal price and the steel price. But when you’re starting to use gas and hydrogen, the correlation is not there because gas and hydrogen are used for other applications as well. So, the ask of the government is to also say that how do you protect the industry, if it’s changing from one consumable to another, which is move vulnerable to other industries.

The third point, of course, in Europe is about Carbon Border Adjustment Mechanism. So the last point is that we are also saying that there should be a level playing field, not only in terms of Carbon Border Adjustment Mechanism. But if there are some countries in Europe supporting their steel industry with let’s say 50% of CapEx, then the other countries also need to consider that because otherwise, at the end of the transition, some of the steel companies in Europe will be disadvantaged compared to somebody else who’s got more support from the government. So that has also been asked on the principle of support, and this is what has actually been discussed by us and our peers to the multiple governments that we — in the countries that we operate.

Ritesh Shah

Right. Sir, thanks for the details. Sir, if I had to conclude on that point, what is the aspirational ROI. In the presentation we indicated 15%. So for standalone, whatever we do for U.K. operations, even factoring 50% hypothetically the government does contribute to the CapEx. What is the ROI that we are looking at a corresponding cost of capital? Just trying to make sense on the incremental ROC.

Koushik Chatterjee

So on that Ritesh, it’s more linked to the cost of capital. So what works for — in India, for example, our WAC hurdles are more 12%. But in Europe, it will be around 10% — 9%, 10%. That’s the IRR hurdle for approval of CapEx. But the ROIC that we are looking for is always at about 15%.

Ritesh Shah

Sure. That’s very useful. And I had a couple of questions for India operations. First is, do we see leeway to increase local steel prices are more referring to — from an import parity mark standpoint. Second is volume guidance, if it’s possible on FY 2025 basis given I think the Street will start to look at the company on 25 basis. And third is basically iron ore merchant sales, is there an opportunity that the company has over here, if at all, if you could detail any plans on this particular aspect. Thank you so much.

T.V. Narendran

So, I think steel prices is — in India is also reflecting the trends in international prices. If you look at prices in Southeast Asia, they got up $100 in the last four weeks, and steel prices in India, we expect it to go up by that amount over January, February and certainly by March. So that’s something which is mirroring what’s happening in the international markets. The demand in India has been strong. There was in between a few shipments of imports which came from Russia, et cetera, but I don’t see import as a big threat just yet. In between Japan, we’re exporting a lot because the yen has gone to 145, the yen has also strengthened.

So, I think we are in a much better situation today as far as import prices concern then we were two, three months back. And I also think, in any case, the steel prices in India, we need to find a better balance than we’ve seen in the last three, four months. I think that’s reflected in the financials of the steel companies over the last two quarters. right? And particularly, if the industry needs to invest for growth, we need better cash flow than we’ve got in the last two quarters. So that’s as far as steel prices are concerned. Sorry, what was the…

Samita Shah

So, I think there was a question on volumes. So, as you know, we don’t give any volumes in the — at this time. We will do that once we finalize our annual plan. But maybe you can just walk in through the broad sense what we expect.

T.V. Narendran

So, in terms of volumes next year you will see Neelachal at 1 million. We’ve not seen much of Neelachal this year because we started the plant within three months of acquiring it, but pretty much the steelmaking started in November. And we have today — in fact, yesterday was the highest ever production that Neelachal is ever had. We produce 3,200 tons of steel yesterday in Neelachal. So that means the going rate is already at the capacity, right? So that is the incremental volume, which really come next year.

We will also get some incremental volume out of the Kalinganagar. We have a new caster coming in that should be up. And Kalinganagar also today is actually producing at over 300,000 tons a month, which is like 3.6 million rate. So we’ll get some additional volumes from the caster. We’ll give guidance when you do the annual results. These are — and through some debottlenecking will get some volumes out. But how much more, we will guide you in the next call. In two years, we will have the Ludhiana plant also up, which is 0.75 million. And by which time the Kalinganagar blast should have also started.

Operator

The next question is from Kirtan Mehta of BOB Capital. Please go ahead.

Kirtan Mehta

Just continue on the previous question, you’ve given some color on FY 2024 numbers to get more an FY 2025, which is likely to be the valuation base for the Street. Could you walk us through the ramp-up sequence of Kalinganagar expansion — post expansion? How long would it take to ramp up to a full capacity?

T.V. Narendran

So next year, what you will see is, firstly, the pellet plant would have ramped up by the end of the first quarter, which means we don’t need to buy pellets, which means that the cost savings for Tata Steel. Secondly, the cold rolling mill, not the galvanizing line, but the cold rolling mill will be ready. So, we will have what we call full hot CR, which can be sold. So basically, the hot-rolled coil gets converted into cold roll. So there’s no incremental volume, but there’s incremental value which comes from that. Like I said, if we have the new caster in by the middle of next year, we will get some additional volumes from steel make because today we make more hot metal than the steel mill shops can consume. So, these are the areas where you will see the ramp-up.

The blast furnace of Kalinganagar should come up only in FY 2025, and that’s where you will see the ramp up. Typically blast furnaces ramp up fast unless you have a problem. The hot strip mill and the steel mill shops would also be ready. And once you have the steel — once you have the blast furnace making hot metal, ramping up the steel mill shop and the hot strip mill is not an issue. If you remember the Kalinganagar Phase 1 ramp-up was one of the fastest for any greenfield site. I think we did it in about 16 months, the full ramp-up. So that’s typically what it would take. We should keep in mind that it’s going to be one of the biggest blast furnaces in India. So, we will obviously ramp up keeping the complexity of large furnaces in line.

Kirtan Mehta

Thanks for this details. One more question from my side. If you look at the Tata Steel and its subsidiaries, there is spread which is opened up to around 12% to 15%, if we take the conversion ratios in account. So, in fact, if it will be back look at from this perspective, it would be market is pricing sometimes one to 1.5 years for a merger to continue it from this angle. Do you think that, that’s a fair estimate by the market? Or do you see the merger progressing a bit faster than that?

Koushik Chatterjee

So Kirtan, I think we are at a stage where we have done the filing for — to the SEBI and the regulators, and we will be looking at getting their clearances. And since some of them are listed companies, I think a year is the honorary course of business of the NCLT, we should be able to do that. I don’t see 1.5 years. In Bhushan, we got delayed because of multiple reasons, but these are subsidiaries which being in our full follow. So, we are hoping that we can close it before one year.

Operator

We would now like hand over the conference to Ms. Samita Shah for the chat question. Over to you ma’am.

Samita Shah

Thank you, Vinshi [ph]. I’ll start with the questions on India. We have a question on auto. We had said that auto sector is 15% of our volumes. What would be the growth trajectory going forward for the company as an average? And what is our targeted mix from the auto sector for FY 2024?

T.V. Narendran

So, obviously, our growth in auto will depend largely on the pace at which auto growth because we already have a 50% market share and normally auto companies like to buy from at least two suppliers, if not more. So, we are not looking at a much higher market share than we have today. So, our growth in volumes will largely depend on the growth of market sector.

Having said that, once the cold rolling mill with its galvanizing line and the annealing line comes in full, what is coming up just now is the — what we call the PSPCL, which is basically the cold rolling mill. But the annealing and galvanizing facilities will be commissioned over the next 12 to 14 months. Once that comes in, then you will have a lot more to add to the product mix. So, while we have a very high market share, let’s say, in hot roll coils, which is over 55%, 60% in some cases, in auto — in cold rolled and galvanize we have in the 30% to 40% range. So, there is a room for us to increase our market share in the galvanized — high end galvanized and cold roll anneal products, which we will do over the next three, four years. But overall, if you look at it, auto will always account for 15% to 20% of our overall volume.

The other sector, which is quality conscious accrual base which we are pursuing in a big way is oil and gas. And I think the Kalinganagar plant is ideally suited for the oil and gas segment, and we are making a lot of headway there. So, we expect that also to account for a big chunk of our value-added sales going forward.

Samita Shah

There are two questions on the volume guidance, but I think we answered earlier, so I’ll go to that. There is a question on iron ore marking sale. Why do we not do have — why do we not do some merchant sales as an optionality is available.

T.V. Narendran

Yeah. That optionality is available with the requisite permissions that we need to take, which we’ve taken. We are doing some iron ore sales, but largely our iron ore is meant for captive use because what we are producing, we are consuming. Once the pellet plant is starting, we will be using more iron ore for the pellets because we don’t have then by pellet. But having said that, whenever there is an opportunity to auction iron ore that we can’t use because of the grades or because of the — whether it’s fines or whatever, then we do that. And we — I think one of the challenges today is not so much about auctioning it, but about the logistics of it. And I think we have done quite a few rakes of iron ore in the last two, three months. Not yet so material, but yes, it has started.

Samita Shah

There is then a question on RINL investment. Given our deleveraging target for year 2024 and ahead. Can we confirm that we are not going to bid for these assets?

T.V. Narendran

So I think what we’ve always said is our existing sites allow us the run rate grew to 40 million tons, right? So, I think our growth ambitions can be fulfilled from our existing sites. But it will be premature for us to emphatically say yes or no, because there’s a competitive environment and why should we announce what we want to do or going to ahead of when you need to do it.

Samita Shah

And there’s another question on India, which says can you assume 16,000 EBITDA per ton for Q4. So, as you all know, we don’t give a quarterly guidance. So we will not comment on that. Just moving to Europe, there’s a question that do we expect steel prices in Europe to benefit if CBAM proposal are implemented.

T.V. Narendran

Yes, certainly, because we should keep in mind that in Europe today we pay EUR80 per ton for CO2. I mean, obviously, we get three allowances. So even — despite that, I think we paid something like EUR100 million a year. So the — because the three allowances we get are not — doesn’t cover our needs fully, right? So that’s a cost. We are paying and everyone else in Europe is paying today. And as those elements — those three allowances go down, you will pay more. So that’s why there is a CBAM because if somebody can make steel, which is more carbon inefficient and ship to Europe without the cost, that’s very unfair on the European steel industry. If you look at Tata Steel in Netherlands, it is the second most carbon-efficient blast furnace in the world. It emits about 1.8 tons of carbon per ton of steel. So for blast furnace emitting that kind of carbon to pay EUR80 per ton, carbon cost and somebody who is, let’s say, 2.5%, not paying that cost is certainly unfair. So we expect that CBAM will come in. We expect that steel prices in Europe will reflect the cost in Europe because some of those costs are unique to Europe and the industry will need that support.

Samita Shah

And there is a question around the energy costs, so given that the spreads have been — our margins have been affected by coal costs and gas costs. Could the company please report that line separately under expenses for both Europe and India? Koushik to comment, but I would just say all of you know that we give a lot more information than any other steel company in the world actually any company in terms of the profit and loss details.

Koushik Chatterjee

It will get covered in the MD&A when you look at the annual numbers.

Samita Shah

The next question is comment I think, are we regretting not considering divesting our international business when the situation was favorable? Will we revisit this in the next up cycle?

Koushik Chatterjee

Hypothetically, yes.

Samita Shah

More of a comment. I think there is a question around debt reduction, do you expect the debt reduction in Q4 FY 2023.

Koushik Chatterjee

So we’ve — actually, in this third quarter itself, we paid about INR 1300 crores, but it got offset by the currency valuation. So, my principle that I can articulate as a company is, we will look for all opportunities to reduce our debt. As I said in my comments that completion of Kalinganagar is a priority, but deleveraging is also a very important priority. And therefore, whenever we get opportunity, we’ll do so. We do have some scheduled repayments ahead in 2024 coming up. So there will be a natural deleveraging itself. And then whatever we get from a surplus cash generation, we would look to prepay our leverage.

Samita Shah

There is a question of profitability of Europe for 4Q, says your commentary suggested that EBITDA per ton will further weakened over third quarter, can you please clarify?

T.V. Narendran

No, I think we said it will not — it will improve compared to third quarter because while the — I mean, our current estimate is the realizations on an average for Europe will be GBP70 per ton lower in Q4 compared to Q3, but the cost will be about GBP102 per ton lower, but we are watching all the costs very closely, including gas prices, energy costs which has dropped significantly over the last few weeks.

Samita Shah

The next question on Europe is on U.K. What is the going forward on U.K. given the package is inadequate? When can we see some concrete steps that you will take?

Koushik Chatterjee

So I think we are — as I mentioned in my comments that we are looking at an optimal model, which is investable, bankable and fix the need of the company. This is not a excel model analysis, it’s an engineering analysis and it’s a technical analysis, which is under it. We’ve been doing it in the past when we look at as what Naren mentioned, as the broader configuration given the current offer of the development, we are going to look at it. We’ve already started looking at it, and we will come back to our Board and take guidance on that. So it will take a little bit of time, but not indefinitely.

Samita Shah

What is the kind of annual contract negotiation in Europe, can you give us a sense of how different it is.

T.V. Narendran

Compared to year?

Samita Shah

Yeah.

T.V. Narendran

Yeah. So, like I said, it’s depending on the industry it’s, I think, in the range of 50 to — 150 to 200 in that range, lower than last year’s annual contract prices. But most of last year’s annual contract prices were higher than EUR1,000 per ton. So I think it’s in the EUR850 to EUR1,000 range is what we see most of the contracts for this year, which is lower than last year, but higher than today’s spot prices.

Samita Shah

The next question is on Europe in terms of the investigations around the environmental issues, can you please give us an update?

T.V. Narendran

Yeah. So, I think largely, it is to do with our operations in Netherlands. Obviously, we’re responding to the various notices that we get, et cetera. There are issues related to the coke plant there and the emissions out of the coke plant and a few other instances of the past. What we have done over the last few years is one is, of course, we have a roadmap to continue to improve the situation. Having said that, I must also say, like I said before, that our Dutch plant is certainly one of the cleaner steel plants in the world, but we are conscious about the feedback from the community and from the regulators and constantly trying to improve the facilities that we have there. So that work goes on.

There are obviously investigations going on. There are questions being asked, which we are responding to. We are cooperating with authorities and doing the best that we can. But having said that, I think we are a responsible corporate, and we will do whatever is the right thing to do.

Samita Shah

And one question before we go back to audio is on the products being this quarter. It’s quite a large amount, can you please explain this and provide some details.

Koushik Chatterjee

So this is something which happens every quarter. Actually, there are gains and there are losses. So there is a Tata Steel investment in Tata Steel Holding, which is the holding company in Singapore for and it is done through a debt mechanism. So whenever there is an FX movement every quarter, it is adjusted. Sometimes it is negative, sometimes it’s positive. And this quarter, as I mentioned, euro/dollar and euro/INR movements have been quite volatile, resulted in an FX gain, and that’s been accounted for in the others.

Samita Shah

Thank you. We will go back. I have we have a few analysts for the audio questions, so we’ll go back to you in the future. Thank you.

Operator

Okay, ma’am. Moving back to the audio questions. The next question is from Sumangal Nevatia of Kotak Securities. Please go ahead. Sumangal, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat questions section.

We move on to our next question. The next question is from Tarang Agarwal of Old Bridge Capital. Please go ahead.

Tarang Agarwal

Hello. Am I audible?

T.V. Narendran

Yes.

Samita Shah

Yes.

Tarang Agarwal

Hi. Three questions from me. Two on Europe and one on India. On Europe, given that your current contracts have been priced at anywhere between south of EUR1,000 per ton. But if I look at the total cost, even if I eliminate the NRV of EUR55 million, the total cost at least for the last four, five quarters has been trending north of EUR1,000 per ton. So, is there something that I’m missing here or from the point of view of how it’s going to play out on a per ton basis?

T.V. Narendran

I think we will have to get…

Samita Shah

Yeah. Maybe we can connect because I think the question is not actually very clear. The numbers we are not able to…

T.V. Narendran

I don’t see the cost in Europe more than EUR1,000.

Tarang Agarwal

Okay. I’ll take it offline. The second question is how fungible…

T.V. Narendran

Sorry, the only thing I can think of is we have a lot of downstream assets in Europe. So, I don’t know if there’s any conclusion on those costs versus those realizations, anyway we can do that. But maybe Samita can clarify more specific.

Tarang Agarwal

I will. I will. Second, how fungible is the cash between Netherlands and U.K.

Koushik Chatterjee

So in the past, we — when we used to run the Tata Steel Europe, we used to use it in a very fungible manner, given the fact that Tata Steel Netherlands has a decarbonization project ahead of them, we are kind of escrowing and ensuring that we have that capital because that will be a very material investment that has to be done in TSN. But otherwise, cash moves freely across all entities.

Tarang Agarwal

Okay. And my third question that’s on the India business. Between BPR downstream, ITP and automotive, if you could give us a flavor in terms of how the realizations are different.

T.V. Narendran

So, in terms of realizations, automotive contracts, the tenures are different of these contracts, right? So, if you look at it, the automotive contracts are typically three months to six months depending on the customers. Now — so if you have a rising market, the auto contracts look less attractive because the spot prices have gone up above the auto contracts. In a falling market, the auto prices will look better. So that always happens, particularly when there’s a lot of volatility. But fundamentally, the reason why we pursue auto customers is that they are not price buyers. They look for buying from suppliers who are approved, right? So that means your competition is limited to whoever has the approval for supplies. And that’s why segments like automotive, oil and gas are attractive because you’re not reacting to spot prices moving up and down.

IPP is there’s a volume score because you have a large number of large customers, maybe tubers, earlier cold rollers, now there are not too many cold rollers who buy hot roll coils. They are all integrated. But these are the volume play, plus you have a value-added play in that. Downstream business for Tata Steel is very big. There our policy is more on transfer pricing, which is based on an onsite basis, but there is obviously a lag. So, if you look at some of the price increases that we take this quarter, by the time it passes on to our tubes division or the tinplate company on our answering policy, transfer pricing policies, it may be a month or two into the quarter or at the end of the quarter. So, there is a lag between that. But again, we see downstream like auto gives us stability in the business. IPP is more the one which you will leverage, when the stable businesses are picking up less volumes than we would like to sell them.

Operator

The next question…

T.V. Narendran

To answer your question, I would say, on a long-term basis, auto and downstream should rank over IPP.

Operator

Thank you, sir. The next question is from Sumangal Nevatia of Kotak Securities. Please go ahead, Sumangal.

Sumangal Nevatia

Can you hear me this time?

T.V. Narendran

Yes, we can hear you.

Sumangal Nevatia

Okay. Thanks. Thanks. Okay. First question is just some clarification on the U.K. topic. The entire transformation from BF to TAF, what is the estimated CapEx you’re looking at? And what is the plan to fund the remaining 50%, assuming we get a 50% grant from the government?

Koushik Chatterjee

So I think if you have heard Naren a little while back, our original ask was for a configuration which had an EAF and also the downstream TSC or thin slab caster, so — and the rolling mill. So that all was the configuration that we were discussing with the government. And we said for that, we need to get 50% support. I think what the government has given is partial of what our ask was. And therefore, we are relooking at what should be the resizing of the configuration, if to make it investable and bankable and value creative. So, I think these three are the foundations of what we are looking at. And I don’t think what we had asked for has happened, and therefore, the original configuration is to be rethought.

Sumangal Nevatia

Understood. Is it possible to get what is the ask in terms of billion dollars.

Koushik Chatterjee

No. So at that point of time, it was multiples of the 300, which we had got. But I think — let us not look at that because it’s no longer relevant. What is relevant is what we will now work on and are working on and which matches up to the partial grant that the government is willing to give and then go back to the government and saying that this is what we can do at best.

Sumangal Nevatia

Okay. Got it. But given that the U.K. doesn’t earn any free cash flow. And then how will the remaining part be funded? Will they raise debt? Or will there be some support from India entity.

Koushik Chatterjee

No. So that’s why I’m saying that when you do the capital allocation, when we see, for example, say that this year’s capital expenditure is say, INR12,000 crores, INR13,000 crores, et cetera. We think every entity into account, it’s not an India alone. So, I think we — and this is going to be almost like a new investment. It’s not putting money into the current asset. So, this will be — as I said, the financial closure of it will have elements of government support. It will have elements of Tata Steel support. Some thing if the existing business can give or can not give, then it will be externally funded. So, it will be a combination, but I yet don’t know what will be that configuration, let’s work towards it, and then we will certainly come out and talk about.

Sumangal Nevatia

Got it. That’s very clear. And I mean, just hypothetically, if it’s possible to discuss what could be plan B here? I mean, we’ve been in discussions with the government since more than two years now. Is there a fix timeline we are looking to close this? And what is plan B is divestment or shutting down the plant and auction for us?

Koushik Chatterjee

So, there is a plan B, there a plan C. But I think unless we cross the hurdle on the planning, now that the government has given us a formal proposal or a formal support structure. Let’s work on this and see whether we get to that. Otherwise, there are consequences plan Bs and plan Cs that we can go for.

T.V. Narendran

And I think, to be honest, whatever we do, we also need to discuss with the other stakeholders there, the unions and everybody else. So, it only it would be fair for us to internally discuss before we announce whatever we want to do. Yeah.

Operator

Thank you, sir. [Operator Instructions]

The next question is from Anupam Gupta of IIFL. Please go ahead.

Anupam Gupta

What is the outlook for MSR and coal cost for Inndia operations for the next quarter — for this quarter, that is fourth quarter?

T.V. Narendran

Yeah. So the net realization for this quarter in India, we were expecting it to be about INR14,000, INR1,500 per ton higher than last quarter. I say this because while — from December, the prices have been going up. I’m looking at the average of last quarter because October prices were quite high average of this quarter, that this one. In terms of coal, the coal costs are expected to be about $10 — on a consumption basis of about $10 per ton lower this quarter compared to last quarter. The other point I want to make is this quarter between Europe and India, we’ll also have about 0.5 million tons of additional volumes compared to last quarter.

Anupam Gupta

Okay. And just one more question. So, we understand that profitability in U.K. will improve in this quarter versus last quarter, what you highlighted. But let’s say, over the next one year before your any transformation CapEx happens, do you think it can go back to, let’s say, cash neutral situation or you will continue to have some support coming from India or, let’s say, local level debt coming in Tata Steel Europe?

Koushik Chatterjee

So — no, so I think we didn’t say it would improve. I think what Naren’s comment was it will not worsen is the point. And as you mentioned and I mentioned earlier also that we’re coming to the end of life of some of the critical facilities, which will mean that there will be challenges on costs, and we are trying to run it in a most optimal manner, which will require the minimal support from India. That is what our target is, till we come to a decision, which is relating to what we have discussed fairly at length in this call and how do we look at the future as far as U.K. is concern.

Anupam Gupta

Okay.

T.V. Narendran

Clarify Koushik’s point, I said we will improve, but we will not be out of the woods.

Anupam Gupta

Yeah. Yeah. I understand that. That’s okay. Thank you.

Operator

Thank you, sir. Next question is from Sumangal Nevatia of Kotak Securities. Please go ahead.

Sumangal Nevatia

Hello?

T.V. Narendran

Yeah, Sumangal.

Sumangal Nevatia

Sorry. So, just one pending question. I mean, when do we expect the commercial volumes from KPO 2, is it 1H 2025 or more like second half of FY 2025?

T.V. Narendran

Firstly, from next year, you will have the full CR, which is also part of the commercial volumes of KPO. But we should keep in mind that this is value-added to existing hot roll coils. It’s not incremental volume, let me put it that way. Incremental volume will come from the next — from FY 2025. I mean, some of the incremental volume will also come from the second half of this year, simply because we’ll have an additional caster in the steel mill shop. We are still working out the volumes that will come out of it, and we will give you that guidance in the next analyst call. But — so starting from this year, but most of it will start coming from FY 2025, where first half or second half, I think we’ll give you guidance when we meet — when we talk the next time.

Sumangal Nevatia

Got it. And just one last question. The Europe in the past, you said that $50, $60 per ton at the entire Europe level is very cash breakeven considering the CapEx, maintenance CapEx and interest obligations. I mean, when do we see we reaching to that level? Is it more towards the end of FY 2024 or more like an FY 2025 as we see today?

Koushik Chatterjee

When you say Europe, I think Netherlands is what we just mentioned. As far as U.K. is concerned, the levels are somewhere a little higher than that.

T.V. Narendran

So, Netherlands has always been EBITDA positive, cash positive. So, I think last quarter was an exception of being EBITDA negative. But I think on an annual basis, even last year and next year, there will be EBITDA positive for sure. In terms of cash positive, of course, next year, we have those…

Koushik Chatterjee

Post relining, it will come back.

T.V. Narendran

Yeah. So, Netherlands is not the challenge. The challenge is obviously in the U.K.

Sumangal Nevatia

Got it. Thanks and all the best.

T.V. Narendran

Thank you.

Operator

The next question is from Prashant Kutty of Emkay Global. Prashant, please go ahead.

Prashant Kutty

Stable Q-o-Q despite such challenges. Sir, my question is more on the coking coal side and the structural issue over this. Sir, you are being used to buying this coking coal at very high prices. And in fact — sorry for that word, but arm-twisting or extend by the other side. Sir, if you take a step back and just look at it from an outsider, three steps back actually for — as an outsider. Sir, this is opposed to be a mutually — mutual long-term relationship in which both parties need each other. So — but here is it — this thing completely one-sided and also I believe the 90% of the volumes are sold on a linked to the index, where the index is recited by 10% of the spot. So this is — it seems to be some sort of anomaly.

Sir, what can we do to take a step back and say collectively be as in Tata Steel as a leader, not only in India, also in Asia because there are also poor regions that currently take a step back and say, okay, we need coal, coal guys need us and there is coal — bit after making some profit on the same. So, can we have a new dialog or new system of pricing this as an, okay, we can pay you this much based on what we have made in the last quarter, last couple of quarters. And something like that the way we have negotiated with auto guys. So, what is the thinking on this.

T.V. Narendran

So, I think it’s obviously in any commercial three markets, the power will shift from the customer to the supplier or supplier to the customer, right? So, when steel prices go up, we get a lot of noise from our customers saying that it shouldn’t go up. And it’s — I think, in some sense, if you look at the coal company, they will tell you the same thing. The issue is that coking coal is not a very liquid market, unlike thermal coal, it’s a very consolidated market. What is also happening is you have the big miners and you are the smaller miners. The smaller miners are not getting the funds that they used to get earlier, the financing or the insurance that they used to get earlier because coal in gender is seen a bad word without drawing a distinction between thermal coal and coking coal. You can theoretically do, without thermal coal you can’t, do without coking coal for at least the next 30 years, right? So, there is the situation.

For India, we are very dependent on Australia as a source. We are vulnerable to weather or climate events, and that makes the liquidity even worse or two years back, we had a problem in the railways there. So, these events happen, which shrink the coking coal prices.

The part that you may — point you made about the indexes a point where the steel industry globally has taken up both in Europe and in India saying that the index — or most of our contracts are indexed, and that index we believe is not truly reflective of all the transactions in the market. This is something which is being discussed with the people who issued the index as well as between suppliers and customers. But I think, yes, we have a good long relationship with many of the suppliers, but they are doing — they seem to be doing what is right for their shareholders, and we are doing what we think is right for our shareholders. So, I think we, obviously, have to find that balance. But I — the challenge is going forward, this is not a sector which is getting a lot of investment for growth, because of the fact that it’s cold. But India is already the largest importer of coking coal and Indian steel capacity is going to double over the next 10 years and will double again over the 10 years after that. So till such time, we have enough gas or hydrogen as an alternate to coking coal, we will be vulnerable to the volatility in the coking coal market.

Prashant Kutty

Okay. Sir, understood. So, even now without any weather event or extra, they’re going for like 60% of that Asian benchmark steel price. They’ve always want like 50% to 60%, ideally it should have been 25% to 30% for everybody to — they may — let them like more margin, no problem. Let’s make more ROC, no problem. It is not that they are like very, very handsome and we are making suboptimal. So that is the only concern. Sir, being a mutually — mutual relationship long term, that’s the only point I wanted to raise.

Sir, apart from that, the net NRV losses and inventory losses across India and Europe, if you could quantify that please, this quarter, how much was that INR4,000 crores [ph].

Koushik Chatterjee

There is no NRV as far as India is concerned. There was NRV to the extent of about $55 million in the — as far as Europe is concern.

Prashant Kutty

Understood, sir. Thanks, sir. Thanks and wish you all the best.

Koushik Chatterjee

Thank you.

Operator

The next question is from Anupam Gupta of IIFL. Please go ahead.

Anupam Gupta

Yeah. Sir, I had one question on iron ore sourcing for you. So, you have that iron ore mine at NINL. So, including that and other mines which you have, can you just lay out what iron ore sourcing change like over the next five, six years and also include let’s say, once the existing mines — mining lease gets over in 2030.

T.V. Narendran

So, basically, our desire is not to buy any iron ore, and we’ve not been buying iron ore. We’ve been buying pellets, because we are — we have enough iron ore to take care of our iron ore needs, but we didn’t have enough pellets to be care of our pellet needs. But where the pellet plant coming up in Kalinganagar, which has already come up and over the next few years, we’ll build another pellet plant in the Angul facility, which is a Bhushan facility. We will be self-sufficient in pellets. So, hopefully, from the second quarter of the next financial year, we shouldn’t be required to buy any pellets, and we want to keep it that way. The iron ore expansion is being planned to keep pace with our steel expansion, and so that will continue.

As far as post 2030 is concerned, as of now we have about 550 million tons of iron ore reserves for post 2050 — I mean, 2030 because we have the Gandhalpada mine, which is a greenfield mine which we bid for and got, which we will develop by the pace that will be needed. And then we have the Kalamang mine which has came to us from Bhushan, the Neelachal mine, which has come to us with the Neelachal acquisition. There’s also [indiscernible] mine in Jharkhand, which has come to us with the Usha Martin acquisition. So, all this put together, we have, at this moment, about 550 million tons for post 2030. We will continue to participate in auctions as they come up going forward. We will also have options on our existing mines and we go out for auctions in 2030.

Anupam Gupta

Okay. That’s helpful. Thanks a lot.

Operator

Thank you very much. That was the last question for today. I would now like to hand the conference back to Ms. Samita Shah for closing coming. Over to you, ma’am.

End of Q&A

Samita Shah

Thank you, Vinshi [ph]. Thank you everybody for joining us for this call. I hope lot of your questions were answered and found that useful. Look forward to connecting again at the next call. Thank you, and bye-bye.

T.V. Narendran

Thank you.

Koushik Chatterjee

Thank you.