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carbon emissions: Tata Steel plan for port Talbot to lead to huge savings: Koushik Chatterjee


Tata Steel’s resolution for its Port Talbot plant will see the UK government make one of the largest-ever investments in the steel industry as they collectively move towards sustainable production. The steelmaker will be setting up a three-million-tonne electric arc furnace (EAF) at Port Talbot, which will not only lower carbon emissions, but will also be high on profitability. Tata Steel will save as much as 150 on every tonne of steel that it will produce at this plant, which in turn, will boost its operating profits to 8-10%, chief financial officer and executive director Koushik Chatterjee tells Nikita Periwal in an interview. Edited excerpts:

Tata Steel was initially looking at a support of 50% of the capital expenditure along with some operational expenditure from the UK government. Is the current proposal satisfactory?

The original configuration that we were looking for was a much larger capital expenditure. Two things have happened. We have reconfigured the project to be more capital efficient so that we retain parts of assets that can be upgraded, and capex can be made smaller. The grant also became higher. So, we have bridged the gap to make it more viable. There is support in the form of policies as well. For example, the carbon border adjustment mechanism was not on the table initially. But in our conversations and on the government’s own initiative, the government has moved on the consultation in March 2023, and has started the ball rolling. That also has a big impact as far as the viability of the project is concerned.What savings you are looking at once the plant becomes operational in three to four years?
On a current cost to a steady state cost, we see about 150 per ton of cost saving, which is huge. And our estimate for the Ebitda margin in this project is 8-10% from the current negative levels. So, that’s a significant swing in the profitability, because 8-10% in an EAF is the top quartile of profitability, which is what we want to become.
This implies a lot of cash flows coming in. Where will this be utilised?
We will take that call as the cash gets generated, because it is important for this business to create value for the people who are putting in the money, which is the shareholders. And for the government, it is the sustainability of the site because it’s coming as a grant.

How do you plan to fund the remaining 60% cost of the project, and what about the restructuring?
The 60%, as of now…we will bring in as equity. As for the restructuring, that’s what we are engaging with the unions on because they are a very important stakeholder, and we want to take them through the risk and opportunities that lie ahead for Tata Steel UK.How will this capex impact your leverage and can the cost of financing be a risk if the steel cycle were to turn adverse?
So, in all our assumptions, we have taken a mid-cycle assumption. It will be fair to say that we had factored in the capex in our long-term planning. For example, our net debt to Ebitda threshold is at about 2.5 times on a long-term average basis; we will maintain it because all our growth is based on financial prudence. And we need to ensure that our balance sheet continues to be healthy, strong. It is important that all challenging businesses are converted into profit-making ones.

By the time this plant is up and running, what is your expectation of demand in this region and what is the IRR that you are targeting?
The IRR [internal rate of return] needs to be higher than the cost of capital, and for this project, it is at around 15-16%, compared to the cost of capital of around 11-12%. The market in the UK has been steady at about 9 million tons. And if there is more infrastructure spend and industrialization, then steel demand will remain robust. UK anyway imports about 55% of the steel that it needs as a country. So, if we are competitive, we will ensure that we will sustain profitably. The global decarbonisation process will be material and steel intensive and, therefore, we think that the demand will remain robust.

Is the new plant that’s coming up the lowest in terms of carbon emissions globally?
The carbon emissions will be comparable to any other best-in-class EAF project, which is around 0.4 tonnes per tonne of crude steel.


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