2.0.3: Application of Position Analysis to TATA Steel (3): P.E.S.T.E.

L Analysis
Economic:
In the last 12 months, the financial market has been volatile triggered by the s
ubprime mortgage crisis in the US. This has adversely affected the liquidity and
the risk perception of the international capital markets. Inflation has increas
ed around the World boosted by mainly increase in food and energy prices. The re
al effective exchange rate for the US dollar has declined since mid-2007 as fore
ign investment in US bonds and equities has been dampened by reduced confidence
in both the liquidity and the returns on such assets, weakening of US growth pro
spects and interest rate cuts. The main counterpart to the decline of the dollar
has been appreciation of the euro, the yen, and other floating currencies such
as the Canadian dollar and some emerging economy currencies.
The acquisition of Corus is being financed by a substantial amount of debt. This
puts pressure on Tata Steel and should the business environment deteriorate, th
e necessity to service this debt could restrain Tata Steel in its future investm
ent and capacity expansion plans.
Due To Subprime Crisis in USA a subsequent tremor all along the world, especiall
y in developed market in Western Europe make the vulnerable position of Corus ev
en more risky. UK, Germany and Netherlands the main market for Corus products ar
e facing the fear for recession on negative growth.
The steel industry is highly cyclical, receptive to general economic conditions
and reliant on the condition of a number of other industries, including the auto
motive, appliance, construction and energy industries. If these industries exper
ience a downturn, Tata Steel too would too take a hit, thus negatively impacting
it's rating.
Corus follows the policy of entering into long term supply contracts with raw ma
terials vendors. Thus there can be a huge time gap between variation in prices u
nder purchase contracts and the time when Corus can make a corresponding price c
hange under its sales contacts with its consumers. Moreover, Corus may not be ab
le to pass on the increased raw materials costs to its customers. Such developme
nts would lead to a downside in our rating.
Steel production processes are energy dependent and price movements in the energ
y market would accordingly affect Tata Steel's bottom line.
Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus,
but the cost of the integration goes much more beyond the financial aspect. The
re are other factors that will add to overall integration costs such as:
Cross Cultural Integration.
Employer-Employee Relationship.
Political:
Tata committed a huge amount of investment in politically unstable country like
Bangladesh, Iran, Mozambique and Thailand. The entire process of setting up plan
is getting delayed in question of gas supply (in Bangladesh); Iron ore mine lea
se in Iran is escalating the Project cost.
Increased infrastructure spending by the Government of India and development of
roads could generate significant savings in freight and transportation cost, mak
ing Indian steel companies and other industries globally competitive.
Impact of Liberalization: The economic reforms initiated by the government in 19
91 have added new dimensions to the industrial growth in general, and steel indu
stry in particular. Some of the important features due to liberalization are:

Licensing requirement for capacity creation has been abolished.

Steel industry has been removed from the list of industries reserved for the sta
te sector.
Automatic approval granted for foreign equity investment in steel has been incre
ased up to 74%.
Price and distribution controls were removed from January 1992.
Restrictions on external trade, both in import and export, have been removed.
Import tariff reduced from 105% in 1992/93, to 30% in 1996-97.
Other policy measures like convertibility of rupee on trade account, permission
to mobilize resources from overseas financial markets, and rationalization of ex
isting tax structure.
The Government plays a key role in the economics of TATA Steel. It has a role as
a resource allocator (the mining policies of the Government), as Competitor (th
e public sector steel companies) and as Regulator. In volatile times the regulat
ory risk rises with measures like reduction in import duties, levy of export dut
ies and withdrawal of DEPB benefits, threats of price curbs etc. Tata Steel coun
ters this risk by being a role-model corporate citizen and playing an important
role in contributing to the Nation building. Tata Steel is the second largest st
eel producer in terms of Geographical spread of its facilities.
Social:
Tata Steel Ltd has been awarded the Golden Peacock Global Award for Corporate So
cial Responsibility (CSR) for the year 2009. The award looks for continual commi
tment by business to ethical behavior, to economic development and to improving
the quality of life of employees and their families, as well as to engagement wi
th local communities and society at large. Look at table appendix 1.0.2, page an
alysis on Tata Steel Competitor.
Legal:
Tata steel requires huge chunk of land. Sudden spree of big corporate houses for
grabbing land makes the situation even more competitive. Look at table appendix
1.0.2, page analysis on Tata Steel Competitor.

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