Testing time

Calcutta, Jan. 31: The high cost of operations of Corus mills across Europe will change the cost structure of the Tata-Corus combined entity.

The production cost of benchmark hot-rolled (HR) coil in various Corus sites are over $400 a tonne higher than that in Tata Steel's Jamshedpur unit.

Given that Corus will bring to the table 18 million tonnes (mt) capacity, more than three times the 5.5 mt of Tata Steel, the weighted average cost of production of the the combined entity would go up substantially from the standalone level, an expert said .

Industry experts feel that Tata Steel has to work on bringing down the raw material cost for Corus. Since the Anglo-Dutch steel maker does not own any mine, its raw material cost is high.

Compared with this, Tata Steel owns all its raw material sources, making it a low-cost producer of steel.

"At present, the average export price of steel is about $530 a tonne. At this level, the combined entity is comfortable. But both has to work together to bring down the cost structure before the next downturn," a steel industry expert said.

Tata Steel is expecting the upturn in the industry to continue, which justifies the kind of money it shelled out to buy Corus.

Tata Steel feels synergy benefits worth $350 million three years down the line would ease up the cost structure. Apart from sending semi-finished steel to Corus, the company may also look for acquisition of iron ore assets to bring down the overall cost of operations.

The offer of 608 pence is at the top end of analysts' expectations, valuing Corus at around seven times its forecast of earnings before interest, tax, depreciation and amortisation (EBITDA) for 2006. Mittal Steel had paid 4.6 times Arcelor's EBITDA.

Considering that Europe and the US are likely to be heavy users of steel, at least for the next five to seven years, Corus is likely to act as a gateway to the developed world for the Tatas.

Corus's acquisition will make Tata Steel the world's fifth-biggest steel maker, extending the big-bang consolidation move unleashed by Mittal Steel last year by buying Arcelor.

Top five players of the world now corner about 20 per cent of the world steel production. However, top three iron ore producers — CVRD, Rio Tinto and BHP Billiton — control three-fourth of the iron ore exports. Industry experts feel that this consolidation will give further muscle power to steel producers to negotiate better prices from raw material producers as well as steel buyers.