Tata Steel's return to profit raises hope of turnround

A mild recovery in European demand helped Tata Steel, India's largest private sector steelmaker by revenue, to post a modest net profit of $81m in the third quarter, raising hopes of a wider turnround for the sector.

Tata earns more than half of its revenues outside India, the legacy of its $13.1bn purchase of Anglo-Dutch steelmaker Corus in 2008, although its European division has suffered heavy losses in recent years, forcing a $1.6bn write down last year.

The Mumbai-based company reported net profits of Rs5bn ($81m) in the quarter to December, a marked improvement on the disappointing $139m third-quarter loss it posted during the same period last year

But Tata's results were slightly below analysts' expectations, with Thomson Reuters predicting the group would earn net profits of Rs7bn during the quarter.

European steel demand is forecast to rise by 2.4 per cent this year, raising hopes of a wider rebound after many years of decline, according to a Financial Times poll of 15 steel analysts.

Tata's return to profitability in the third quarter also follows ArcelorMittal, the world's largest steelmaker by sales, which last week forecast higher profits for 2014 driven by a pick-up in European steel demand.

Similar confidence has been shared by SSAB, a smaller Swedish high-strength steelmaker, which said recently that Europe's steel market had bottomed in 2013.

Tata's profitability stems from its smaller but more successful domestic Indian division, although this has also struggled of late following a slowdown in Asia's third-largest economy.

The group does not publish separate figures for its lossmaking European arm, but in a statement it said its overall performance showed that "positive earnings momentum continued even in a seasonally weak period".

Tata also cited operational improvement following recent capital investments in Europe, including the refurbished blast furnace it opened last year at the UK's largest integrated steelworks, in the Welsh town of Port Talbot.

Karl-Ulrich Kohler, chief executive of Tata Steel Europe, said: "The asset base we restored and upgraded last year has . . . led to the continued year-on-year turnround in financial performance."

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Tata's European weakness has raised frequent speculation that it will ultimately be forced to cut jobs or sell its least unproductive assets, most of which are in the UK.

The group's stock has risen around 10 per cent since the start of February, largely on the back of investor optimism over the outlook for European steelmakers.

But industry analysts warn that issues of weak demand and overcapacity will continue to dog the continent's steel sector, weighing on the performance of groups such as Tata and preventing a fulsome recovery for the sector as a whole.

"We are a lot more confident on Tata Steel moving into 2015, because we don't expect any further deterioration in Europe now, and there is likely to be some rebound on volumes," said Kawaljeet Saluja, a metals analyst at broker Kotak Institutional Equities in Mumbai.

"But this has to be put in context, because things have been so bad, that any improvement is a huge relief. The idea that Tata Steel Europe is going to turn a profit after tax any time soon remains a dream."

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