Tata Steel Limited (500470) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tata Steel Call. Please note that this meeting is being recorded. [Operator Instructions] I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma'am.

Thank you, Kinshuk. Good evening, everybody. Thank you for joining us on this call and especially given it's very short notice. You may have seen the press release, which we issued an hour or so back, which talked about our plans for our operations in the UK. We wanted to discuss -- share some details with you all and also answer any questions that you may have in this regard. Before I hand it over to our CEO and MD, who will be joining us shortly, I will also request our ED and CFO, to walk you through some of the details. And before I hand it over to them, I would just like to mention that the safe harbor clause, which is normally included in our presentations, we'll cover the entire discussion. So with that, I think there's some technical glitch. Let us just wait for a minute and just wait for him to join. He's actually in the U.K., and I think just -- there is an issue. So just bear with us for a minute, please. Yes, we can hear you, and we're ready to start. So we were just welcoming everybody to the call and just waiting to start. I would request you, Naren, to actually make a few opening comments, and then I will request Koushik to actually walk us through some details before we open the floor for questions. So over to you.

Thanks, Samita. Good morning, good afternoon, good evening to everyone who's dialed in. We had some developments in which we wanted to update all of you about. This is regarding our operations in the U.K., you must have seen the press reports that we've come to an understanding with the government in the U.K. on investments in the U.K., both from the government and from Tata Steel to secure the future of a site and build a more competitive site, which makes greener steel. I'll request Koushik to walk you through the details of the understanding that we've come to with the government. Also, this is to be followed by meaningful consultations with the unions and then a final conclusion on the way forward. Over to you, Koushik.

Thank you, Naren. Good morning, good afternoon, and good evening to all those who have joined in at very short notice. As you would recall, we had in our earlier call, said that we are entering into a decisive phase for the future of Tata Steel U.K., and we need to address the structural issues facing the site in the business. We have spoken in the past about the structural issues and challenges that face us in Tata Steel U.K. essentially due to several assets approaching the end of life of -- especially in Port Albert on the heavy end. These results obviously in higher outages, higher operating costs and pressures on quality on the materials produced. This has also adversely impacted the financial performance, which has deteriorated significantly over the years. In financial year '23, the EBITDA was negative GBP 127 million and in the first quarter, the negative EBITDA was a loss of about GBP 39 million and our cash funding requirement was about GBP 163 million. This is obviously not a position that is financially sustainable and we have been working for some time now on crafting a sustainable path forward for this site and the business and have evaluated several options. Reinvestment in the existing asset is either economically or environmentally viable as the carbon cost currently is around almost GBP 70 million a year. Any other counterfactual would have been a long run process and would have resulted in significant cost with implications across the company. In our discussions with the U.K. government, which Naren and I have been updating you in every call, we wanted to address actually 3 or 4 key outcomes. One, U.K. is a fairly stable and large geography of 9 million tonnes of total steel consumption per annum with value-added product mix and customers. We have a meaningful presence with a market share of over 50% in the automotive, 43% in construction and about 62% in packaging net steel demand in the U.K. We have a strong and valued relationship with the customers, and we would always be seeking to continue to serve them in the future. Second, we have to address the issue of decarbonization as this has become actually a very important business driver for the future sustainability of the business. Third, we wanted to ensure that any solution enables the business to be competitive and the future of Tata Steel U.K. is secured both operationally and financially. And fourth, a solution, which would preserve a significant amount of employment in the business and the larger ecosystem in the U.K., especially in South Wales. We are thus embarking on a transition which helps address the issue at a structural level and sets up Tata Steel U.K. for a sustainable and profitable future. As you would have read in the press release, we have reached an arrangement or an agreement with the U.K. government to set up a 3 million tonne electric arc furnace-based green steel making at Port Talbot with a capital cost of GBP 1.25 billion. This is supported by up to GBP 500 million of grant by the U.K. government, which is about 40% of the total project cost. This is to be finalized over the next few months post the consultation process. During the transition and depending on the outcome of the consultation with the unions, the business will also require, in addition, the restructuring cost support. This year will be one of the first significant green steel projects in the U.K. and indeed, amongst the first in the Europe. It will reduce Port Albert as a site, its carbon emission by around 5 million tonnes per annum, equivalent to about 7% reduction in the U.K. business sector. Once the EFs are commissioned, the Tata Steel U.K. carbon emission intensity is expected to move from 2.16 to about 0.4 tonnes per tonne of crude steel produced. The project will also include a high degree of circularity as it will use the locally available scrap. U.K. presently generates around 10 million tonnes of scrap on an annual basis, which is largely exported and then imported back as steel. This facility will enable U.K. to leverage its domestic resources in state and save around 5,000 jobs in the process. Subject to all the relevant information and consultation process, it is proposed that this investment would be operational around 36 months and received all the regulatory approvals and planning approvals. With the U.K. government support, the proposal has a strong business case and an investment case and making it actually the best outcome for everybody, be it the company, the site, the employees, the shareholders and every other stakeholder. We believe that this investment case is strong for a number of reasons. From an operating perspective, the problem has always been the legacy heavy end upstream, which is where because of all the reasons I mentioned above the cost of production of hot-rolled coil has been much higher, making the entire operations very challenging. Our Downstream operations are deeply entrenched in the industrial chain in the U.K. We are the largest steel producer and have a leading market share in our chosen segments. By replacing the aging and uncompetitive heavy end assets with new green facilities, the operations will be well positioned to be structurally competitive and leave the benefits of the U.K. transition to a green and industrial economy. This includes the implementation of the carbon border leakage controls, which the U.K. government has already begun consultation in March 2023. This also includes the mandatory product standards and other policy measures, which will help the market to grow for low-carbon products. You are aware that the EU has outlined the carbon border adjustment mechanism and the transitional phase starts next month and is also expect to keep the steel prices higher across the region. Tata Steel in U.K. is primary market locally in the U.K. and in Western Europe. The U.K. government has also introduced specific legislation for energy-intensive industries through the British industry supercharger scheme, which has drastically reduced the network cost and is making the industrial energy cost competitive in the U.K. Moving on to the impact on to Tata Steel. As part of the transition, Tata Steel will also restructure its consolidated balance sheet, and that will reflect that noncash impairment of any legacy investments, including historical funding and support for the losses that have been incurred in Tata Steel U.K. At the same time, the Tata Steel's financial outlook will improve on account of the elimination of steady cash losses once the transition happens and all the parental support that keeps on ongoing for the U.K. business. As I've said, the spend on the proposed project supported by the U.K. government has a strong and robust investment case. And once we go through our consultation process, we will come to a definitive outcome. We are certainly focused on managing the consolidated cash flows of Tata Steel in such a manner so as to prioritize the growth in India and also pursue the decarbonization aspirations in both U.K. and Netherlands. In India, we remain on track to nearly double our steelmaking capacities to 40 million tonnes. As you are aware, we continue to prioritize the completion of the 5 million tonne capacity expansion in Kalinganagar. We're also focused on value-added downstream growth and product mix improvements. NINL as we had reported earlier has steadily ramped up its operation and functioning close to the rated capacity, and we remain committed to value accretive growth across all other chosen segments. Separately, Tata Steel has a stated ambition to achieve global leadership in key technology areas and to leverage the broader ecosystem beyond its own research and development facilities. It is now entering into a memorandum of understanding to establish a center for innovation at the Henry Royce Institute at the University of Manchester to focus on advanced materials for Tata Steel's current and future interest and another one at the Imperial College in London focused on sustainable manufacturing. Moving forward, these investments further build Tata Steel's external collaboration network with academia in areas of interest to Tata Steel in the U.K. and across the world. Tata Steel will continue to engage proactively and responsibly with its stakeholders over the coming months and will initiate formal consultation in relation to the proposed project as well as to the transition with its employee representatives as soon as possible. Tata Steel will also work to finalize the terms of the grant funding agreement with the U.K. government and engage with the Welsh government to seek requisite approvals and permits for the proposed project. The company will obviously disclose detailed transition and restructuring plans in due course, subject to the outcome of all applicable consultation process. With that, I'll complete my comments, and I open the floor to questions, if any. Thank you so much.

Thank you, sir. We will now begin with the question-and-answer session. We will be taking questions on audio and chat. [Operator Instructions] The first question is from Sumangal Nevatia of Kotak Securities.

Yes. Good evening, everyone, and thanks for this opportunity. Firstly, congratulations to the team on this development. My first question is just to understand a little bit more on the grant. One is, is this grant a bit lower than what we were expecting because I believe the past was somewhere around 50%? So one is that. And we were also talking about some grants on a regular basis as far as OpEx is concerned, so are there any such commitment at this pace? And also, I would like to understand what sort of commitments have Tata Steel given in exchange of this grant, especially in terms of employment in U.K.

So Sumangal, thank you for your questions. We have asked the government, as we ask in everywhere in Netherlands also for a material grant. There is no finite number that we have always asked. We wanted this to be a collaborative and participative process. And as you can see, 40% of the total CapEx is from the U.K. grant, which will come as we spend the money on the capital project. And that, I think, is very, very significant. And possibly the largest ground that the U.K. government has given in the history. So I think at least from steel industry perspective. And this investment by itself will be the largest investment in many decades. The second part is OpEx grant. We have not asked for anything. What we have really requested is to look at the energy cost, and that has been asked for many, many years. And as I mentioned in my narrative, the energy network cost is a broader policy strategy that the government of U.K. has undertaken, which will result in the cost coming down in significant terms as it is happening anyway in the U.K., and that is all that we have looked at. We've also looked at -- asked for policy support, as I mentioned, that the U.K. government has already moved on the carbon border adjustment mechanism, which is in some ways similar to the -- in Europe. And we're looking at policy support to ensure that the domestic scrap is value-added and a globally best-in-class ecosystem on scrap is developed in the U.K. by whoever. So I think that is something that we have done. Beyond what we have disclosed, there aren't any further commitments from Tata Steel perspective. Tata Steel will go through the consultation, we'll go through the transition and we'll look at -- based on the inputs from consultation and as the full meaningful process gets completed, we would look forward to this transition.

Understand. Understand. Koushik, now just my second question, with respect to employment, I mean, what is the current count? And what will the new configuration have if there is any visibility on that? And what sort of time line are we looking at for the consultation? And at the same time, the CapEx timeline of over what period this will be spent? And when do we expect the plant to start, basically completion of the plant?

So Sumangal, at this point of time, let the consultation happen, just now all of Tata Steel U.K. employees, including Downstream, about 8,000-plus people, let the consultation process get completed, then we will come back. And once it gets completed, which typically mandatory is about 45 days, but it kind of takes around 45, 60 days, maybe it's plus/minus because it's after all the conversation and meeting down with the union reps and understanding their views. So it's ballpark in that region of 3 months. And that will give us the full sense of where the transition in terms of numbers, what will get affected? What are -- exploring all the options and discussing with the unions meaningfully. So those will -- we will be coming back in the end of the consolidation process, and we'll certainly disclose and talk to you and disclose the details of that consultation process. Today is just the announcement where we are announcing the arrangement that we have entered with the government. The detailing will start from as soon as Monday, and then we will have to go through this process. Similarly, the CapEx, as I said, typically, it should take 36 months from receipt of all approvals. There are some approvals that we will be initiating. We will be working with the Welsh government, the various other stakeholders, energy providers and so on and then come back again in due course of time. So as I can say that this will be an update on every quarterly call and give you a sense of where we are headed and how we are heading.

Got it and all the best to the team for completing this process successfully. Thanks.

Next question is from Indrajit Agarwal of CLSA.

I had a couple of questions. First, if you can help us under currently, what would be the spread differential between a blast furnace based operation that we currently have in U.K. and the similar electric-arc-furnace-based operation?

So typically, if I were to look at a steady state situation between our existing cost base as well and comparing it with a steady state, for example, this project or for that matter, I don't know if I can name anybody, but roughly about GBP 150 to GBP 170 per tonne is the cost difference that we have -- we estimate when we shifted out of this to an electrical arc furnace in the U.K. context.

To add there, I think the point is our U.K. facility was not the perfectly balanced blast furnace operation because we didn't have enough coke. We used to buy coke. We didn't have enough gases. So we used to buy more electricity from the grid than a typical blast furnace operation. So the existing cost position for the Port Talbot plant is not really in the best quartile as far as the European steel producers are concerned, whereas with this shift in this configuration, we will be as competitive as anybody else in Europe. And the biggest advantage we have in the U.K. is U.K. has its own scrap, is one of the few European countries exporting a lot of scrap. So we want to make use of that opportunity and add value from the scrap that is available locally.

So the GBP 150 to GBP 175 per tonne includes the savings on carbon cost as well?

It is the total cost. So I think, as Naren mentioned, the U.K. plant, if you do a cost curve analysis on the existing blast furnace route, it will come in the fourth quarter. And therefore, it has got its own cost disadvantages structurally and otherwise. So I think the -- what I gave you the number of GBP 150, GBP 175 is essentially, the current cost position, including everything versus where we want to head to and on a steady state basis.

Sure. Second -- my second question is on the restructuring costs. You mentioned about some restructuring costs that will be over and above this CapEx. Any quantification or any broad heads towards which this cost will be incurred?

So this is what we will have to wait until the consultation gets done because that is where we would -- while we will discuss with the unions, we will understand the kind of impact it will have, the timing and all of that. And that's when we will be able to quantify the number, which, as I said, it's not something which is uncertain for a very long time, but we will have to go through it in the next couple of months. And maybe the next time we meet or very soon thereafter, we will be able to talk about it.

One more question, if I may. So after that, we have now probably entered into restructuring the U.K. asset and they have already initiated on the Netherlands [indiscernible] asset as well. As of now, so are we happy with the setup that we have in Europe? Or we are still looking for a partner or any plans to hive off? Or as of now, we are happy with what we have achieved, and we are going to achieve in the next 3 years or so?

So we already have a partner in the U.K. government, and they have the funding. So I guess that's where we are. And in due course of time, we are all optimistic that we'll have another partner in the Netherlands government. And as it happens, we will be certainly talking about it, too.

Sure. Congratulations once again. That's all from my side.

From Kirtan Mehta of BOB Caps.

Congratulations for sort of arriving at the viable solutions for U.K. In terms of the GBP 1.25 billion CapEx that we are committing, what would be the configuration of -- what would be the units under this CapEx? What is the configuration that is envisage around EF? And besides the EF, what all components would it include?

So fundamentally, the EF is the heart of the new configuration. So what we also have is an upgradation program for 2 of the casters and the hot strip mill and the EF. So this is -- in a year if it's more simpler than in the blast furnace group from a configuration point of view. So majority or more than majority of the cost of this is on the EF. And we have a balance of plant and essentially upgradation of the casters and hot strip mill, which is proposed to be retained in Port Talbot, and we are also looking at where do we do consolidated cold mill to ensure that the value-added products are also state-of-the-art.

The second question was again about the configuration in terms of sizing at 3 million tonne operations. So initially, the site had capacity of 9 million tonnes, which we had brought down to 3 million tonne. So are there any site constraints which restrict the operation at 3 million tonne size? Or it's primarily the level of grant that can be supporting the current size? So what has been the consideration to arrive at the 3 million tonne size?

Site in Port Talbot, the capacity is about 3.5, but we produce about 3 million tonnes. When we were at 9 million tonnes, we had other sites as well, which are no longer with us. So for this side, 3 million is the optimal size and our proposal is to have one large electric arc furnace, which produces around 3 million tonnes. So that makes it very optimal for us. And that would be amongst the largest electric arc furnaces in use. So we will try to maximize on the electrical arc furnace size as well.

Just one more question that I can sort of squeeze in. You talked about that U.K. government is taking the broader look at the energy network cost, and that would bring down the cost. Could you give us a bit more sort of understanding about what exactly is being undertaken and what would be changing there?

So there are 2 parts normally. There is a generative cost, which is reflected in the wholesale price. Then there is the network cost, which is the transmission cost and then that lands up into the users industrial or consumer space. So because of the cost differential that used to exist earlier, the U.K. government undertook a supercharger scheme whereby the network cost of large consumers have been reduced very significantly, so making the landed cost more equivalent to the wholesale price, and that's been a huge benefit. The second thing that is also happening is U.K. is getting more and more into renewables, and it's going to be one of the first 3 or first 4 largest producer of offshore energy. So I think those are the ways in which the cost is also coming down. And I think that's the migration that you can see if you track the U.K. energy cost, that picked up during the Ukraine crisis and natural gas prices had shot up. But over the last 1 year, it has kept trending down. And with more and more offshore energy coming in, the grid prices are expected to come down further.

Thanks for this clarification.

From Ashish Jain of Macquarie.

Sir, my first question is in terms of the assumptions we have made to be comfortable with the GBP 500 million grant. Is there any underlying assumption on power cost on employee cost? Because historically, they have always referred to as some of the key reasons of our cost structure in the U.K. And secondly, earlier in the call, you gave a number of GBP 30 million losses, EBITDA losses in U.K. in the first quarter. And we are also giving a commitment that we'll continue to supply to U.K. until the time the plant is commissioned from some source or the other. So how should we think about that because if the current run rate of profitability sustains, then the grant might just get wiped out purely on the back of the losses. So how should we think about that?

Yes, Ashish. So I think let me -- you have got multiple questions in your -- points in your question. So let me break this up. As I said that starting Monday, we will first have to look at having the conversation with the unions on the project and the proposal and where our current challenges are, what is -- what we can do in the medium term and what can we do in the long term. So this is a engagement that we are proposing to do, and we are talking to the unions to ensure that they are aware and we will exchange our thoughts and views and risks and opportunities that will come about. Once that is done, there will be a positioning of what would the restructuring of Tata Steel U.K. mean? What would be the timing? How would it impact us? Will it impact everybody else? And what is the -- if you look at the press release also, we have mentioned that what is -- what are we going to do during the transition time and within the transition time, we may have to import hot rolled coil from elsewhere. So all of those are part of this exercise. Our intention is to move beyond the CapEx and the restructuring to a cash-neutral position so that we can sustain the business, continue the supply of our products to the customers on an uninterrupted basis, which is critical because of our very meaningful market share. And then as the project comes in line, we do the transition back into integrated steelmaking. So this is the phasing of it. As I said, that there is some process -- due process that has to go through. Once that due process, which is also defined in a sense that it won't take endless time. But once the due process is done, we will come and give you the full picture, including the business assumptions that we have considered for this, as I said, that this presents a very attractive business case because the carbon cost itself is about GBP 70, GBP 80 per year. And I think many of these assumptions will hold true when we do the migration. And as I said, from an energy point of view, yes, energy was an issue. But the world of energy is also changing very fast. The regulatory framework is changing very fast. So those benefits will flow on into the transited view.

Right. So is it safe to assume that purely as a part of the negotiation with the government we are only getting this onetime amount because a lot of energy stuff you said is anyway as a part of the broader process that the government is taking. Labor seems like it is left to us to negotiate and discuss and settle. So probably from a government point of view, the GBP 500 million is all we are getting? Or is there something else which is a part of the broader deal?

So the government is not only GBP 500 million, but there is also a lot of policy supports that are coming in, which are critical enablers to make this transition. Labor is always -- employees are our employees. It's our responsibility always. So that will remain with us.

Also Koushik the power infrastructure, the government will help in that because the power infrastructure, which supplies the energy to an electric car furnace-based operation, needs to get upgraded. And that -- on that, the government is also working with us, not only to expedite it, but to make sure that it happens.

Right. Sir, just one last question I had. As per our '23 annual report at the Tata Steel Europe level, there was a GBP 1.3 billion loan to Tata Steel Europe from the parent. As a part of this restructuring, will that be adjusted, written off in the books of -- in the books? Is that the way we should think?

So that, I will come to you in end October when we come with our results or I think 31st of October or 1st November. So when we do the Q2 results, I will come and give you specific answers to what restructuring we are going to do. Yes, as I said, there will be a restructuring in some of the other, the GBP 1.3 billion represents 3 parts. Just to give you a clarity, it's not on U.K. only. There is some amount of working capital loan, which is on Tata Steel Netherlands, which is effectively trade finance, which is securitization, et cetera. There is some amount of the legacy senior facilities debt, which is about EUR 300 million, which is on the old acquisition cost, which is still there. Then there is leases of around, I think, GBP 200 million on that GBP 1.3 billion, and then there is working capital loan of Tata Steel U.K. So there are -- because you're seeing consolidated Tata Steel Europe, these are 3 or 4 things. Some of it will continue. Some of it will get restructured. And when we talk about it in the Q2 results, I will give you specific inputs on what happened to each of them.

The next question is from Ashish Kejriwal of Nuvama.

Sir, my question is that when you spoke about $150 to $170 per tonne cost saving, difference between the existing blast furnace and proposed EF. If you do the just math, 3 million tonne is just 1, 1.5 years of cost, which is -- we can easily accrue from our own operation. Then why we have waited for so long and trying to discuss with the government of our grant of GBP 500 million only. That's one. And second, during the transition period, will we continue to operate the same way we have been doing until new capacity comes in, I mean, the operational performance?

So if you have read the second question first. If you read the press release, we are going to [Technical Difficulty] with the union on the deep restructuring that we need, especially in the context of the fact that the heavy end is unsustainable and carbon-intensive and financially challenging for us to continue. So you can do your own influences, but I can talk specifically once the consultation is over because there is a due process that we need to follow. As far as the fact of waiting too long, there is always all the stars have to get aligned, and that's when it happens because, a, GBP 500 million is not a small number, GBP 500 million is a very significant number in the context of the capital estimates that we are doing. It's just not the GBP 500 million grant, but it is also a lot of policy supports that has to emerge, which is what I mentioned and Naren also talked about. So all of these had to come to fruition. And that is the reason when we had also had to look at the project configuration earlier was slightly different. It was more CapEx heavy, we reworked it, and it took some time and came to something which is fit for purpose and creates value for everybody. So it's not that time was wasted on anything. And in between, you also had '21, '22, which resulted in the business which was self-sufficient in that year. So there are multiple things on these.

I think it should be kept in mind that until 5 years back, carbon cost was not significant. So today, the carbon cost is significant. And also going forward, the free allowances will get faced out as a carbon border adjustment mechanism comes in. So what didn't make sense 5 years back makes more sense today.

Sure. So just to get a sense, you said GBP 70 million carbon cost per year, which we incur for U.K. operation?

Yes. That's correct. You see it's all dependent on the price of the carbon because there is generation of carbon, then there is free allowances that come, which, as Naren mentioned, it's also going to keep coming down. So the gap will continue to increase. And then you have the market price of carbon, which is what you have to purchase or pay for.

Understood. And sir, just to clarify on the CapEx part, this GBP 700 million we have to incur and government will simultaneously CapEx that? Or will it be once we commission the plant and then they will give in some power grants?

No, this is paid in areas of maybe a quarter or so. That's what we are talking about.

The next question is from Tarang Agrawal of Old Bridge Capital.

Just one question. I know it's under consultation right now, but do you anticipate significant restructuring cash outflows in this process?

So I don't know how we can talk about it specifically in the context. But the -- based on the transition plan, there will be cash outflow because there will be -- depends on how we look at the transition and the restructuring. But whether it will be significant or not depends on where we stand. But as I said, if you hold on until the completion of the consultation process, I would be more appropriate to give those numbers and the detail behind it. But fundamentally, it is the cost of the restructuring and the scope and nature and timing of the restructuring. That's what we are looking at.

Okay. That's one. Number two, when you say that the cost per tonne would come off by about GBP 150 to GBP 170. Is this assuming that the facility was in existence today? Or are you considering what would have been our costs 3 year ends of our current setup versus the proposed setup?

So if I were to look at our current state, when I'm comparing what our current state is versus the investment case that we have built based on the state that we will be in. And we're looking at the fundamentals, then that is where the differences are. And as Naren mentioned, that structurally, the current state has fair bit of deficiencies in cost because of the age of the plant and various other stuff. And post restructuring, post transition, post new assets what will be the cost structure and that difference on a steady state is what I mentioned.

The next question is from Yash Patel of ICICI Prudential. It looks like we have lost our line with Yash. We will now proceed to the next question. The next question is from Ritesh Shah of Investec.

Sir, just a couple of questions. First, sir, you gave a number of GBP 160. Just correct me, I joined in the call a bit late. The carbon intensity for electric arc furnace, did you indicate around 0.4 versus probably for U.K., what we have right now is around 2.2.? Are these numbers broadly right?

Yes, you are right. [ 2.2 ].

Right? So if you look at the differential is $1.8, if you assume the carbon price right now, I don't know what it is, but if you assume say $100, are we looking at straightway a differential of $180 per tonne?

No, no. So I think you look at it -- see the -- there is a free allowance still continuing until 2032, okay? So when you emit and net off against free allowances, the carbon will be a very small portion because the -- there is no coal consumption in the scrap, it's only the energy related. So I think the equation which I compared to was not related to carbon, it was related to the raw materials, the power cost, the utilities, the employment costs and maintenance costs and so on. So it's a complete list and not just a carbon differential.

So sir, if we remove the carbon part, allowances and the carbon intensity differential and the carbon price, how much will be the cost differential instead of GBP 160 if you just strip out carbon as an element?

So that's why I said that it is the total cost, so the carbon will be about 50, 60 part. So at least 100 differential will continue to remain.

Right. So that's 100 excluding carbon. Now if you look at our last -- just published the U.K. sustainability report, I think we have very categorically indicated that the U.K. energy prices are 60% higher. And this is despite, I think, the prevailing 2 schemes, wherein the company is already availing the benefit. So in your remarks, you indicated that we will continue to benefit from the ongoing government schemes. So the question is then why do we say that our energy prices are 60% higher compared to rest of Europe? So does it give us a level playing field, given we are also categorically indicating that we are not looking at any OpEx subsidies? So how does this change the cost curve line, specifically for energy cost?

Yes, I'm not sure whether we are comparing the right numbers. And maybe off-line, I can explain to you what has been given in the sustainability report of TSUK because the British Supercharge scheme came after that. And we can do the numbers and give you the full details. That's not a problem. But I stay back with the differential on the cost. And I think the energy cost is coming down. And our purchased electricity will significantly increase compared to currently because we do have coal generation at this point in time. That will keep going down. So the total carbon -- sorry, the electricity purchase [ pound million ] will increase, but the cost per unit will continue to keep coming down because of the way in which the mix in the grid electricity costs in Europe are happening. And in the 2023, you would be also looking at the first quarter of the last year, which had a higher energy costs. As I said, it is more last 12 months phenomenon that is happening. So those details we can discuss when we talk specifically on the assumptions that we have considered.

Sure. And sir, just last question. How is EF a solution? Because if you look at eventually scope 1, 2 and 3, effectively the power what you are getting, it is probably not green power. And specifically, what we intend to do for Netherlands based on my reading, I understand we are effectively going for green hydrogen based DRI, while the CapEx intensity is significantly higher. So EF, it looks good on the face of it. But does it solve the problem? Or are we looking at further CapEx wherein the eventual goal is green hydrogen based DRI? So are we standing at something beyond GBP 1.2 billion?

See, on a like-to-like basis, irrespective of the source of energy, the carbon footprint, assuming a lot of the power is coming from coal or whatever, the carbon footprint of an electric arc furnace operation is typically 20% of our blast furnace operation, okay? So it's 0.4 to 2. Now on top of that, if you use green energy, you can bring down that 0.4 or 0.5 to lower levels. Okay? So when we say -- when Koushik said 0.4 compared to 2.1, that's assuming the existing grid mix. And -- but what we are hearing from the U.K. government is also that over a period of time, the green sources of energy will be a bigger and bigger part of the mix. And if that is so, the carbon footprint can come down even further. So that's a natural advantage of electric arc furnace because it doesn't use coal directly in the process. And even if you use scope 1, 2, 3, this difference exists.

So we won't go for green hydrogen based DRI?

That is -- so when you talk of Netherlands, et cetera. See, the difference between Netherlands and U.K., U.K. has a lot of scrap, which it is exporting. So that's why we are trying to use that scrap because that's a natural strategic advantage U.K. has just like India has iron ore. So you leverage that. You can add green DRI into the EF. Nobody stops you from doing that. But for that, you need to have green hydrogen available in plenty and cheap, right? So in Netherlands, the government is planning to make available a lot of green hydrogen over a period of time. Hence, planning there is to have a gas-based DRI and eventually green hydrogen-based DRI. And in fact, the Netherlands government is also expecting us to provide a lot of the base load for the green hydrogen. So it's a mutual benefit in some sense of the term. In the U.K., where as of now, there is no green hydrogen available in plenty and cheap. This is the best option, particularly given that we have scrap in the U.K.

If I just push a little further, sir. So are we looking at scope 1, 2 and 3 eventually? Or we are assuming that CBAM will be scope 1 and 2, and we'll be happy with EF 0.4 and we assume that eventually government will supply us with green power and scope 3 won't matter. So I'm asking this question because I just wanted to have some comfort that there won't be any incremental CapEx beyond GBP 1.2 billion and if eventually CBAM changes its regulation, including -- and it includes scope 3, which I believe eventually, it would happen, then again, it puts us back to the burners 5 years out wherein we have to do more CapEx.

So Ritesh, let's talk straight then. The renewable power component in the U.K. today is getting to be the third largest renewable power offshore wind in particular. So the cost of power in U.K. and some countries in EU, like Spain, will be the lowest in that region. So we -- in our assumption, we have not taken those cost reductions. We have assumed an average base, which is consensus based of the energy consultants in that place. I think that the U.K.'s energy competitiveness will continue to increase. That is one. There are also single source both from nuclear as well as offshore who are willing to do 20-, 25-year power purchase contracts. We will have to go through that process and evaluate as we are currently in the first stage of that full transition. So I think you don't have to worry about the CapEx cost on this. I think the CapEx cost is what we have talked about is diligence enough to ensure that it is a competitive source. It uses competitive source of power even on grid or on a captive basis, when I say captive it is on a power purchase basis like what we do in India. So -- as far as CBAM is concerned, it is clearly scope 1 and 2. If scope 1, 2 and 3 is involved, so Scope 3, as you know, is mired around duplicate and double counting. So that first has to be sorted out, and we will stand in the front row as far as the cost competitiveness is concerned.

And also in steelmaking, the main carbon footprint is in scope 1. So if you can reduce the scope 1 percentage significantly, that more than makes up for anything else.

[Operator Instructions] The next question is from Satyadeep Jain of AMBIT Capital.

A couple of questions. One on the CapEx of GBP 700 million. Could you indicate how that is going to be funded? And in the interim 3 years, you're going to use substrate using the existing downstream mills. If I understood correctly, that is expected to be a positive cash flow, right?

Sorry, I lost you, but I hope -- I think I've heard you. So this funding of the GBP 700 million will happen largely through equity, internal equity that is, and we will contribute to that equity. It is -- will be spent over 4 years' time. So that is our current assumption. Though this business on a stand-alone basis can service a debt at a later point, we will figure that out. As far as substrate is concerned, I didn't get your full question, but all that I can say that once the entire consultation process is completed and we have understood or agreed on the transition, if the -- until the time the new facilities are built, we have mentioned that we will be looking at import of substrate beyond U.K. because in U.K., we were the only that product producer. So you can't source it there. So we will look at sources outside and we will come and clarify that, as I said, we do know where we want to do for, but I think it will be important to do so only after the consultation is over.

Okay. Second question on the scrap. You mentioned 10 million tonne scrap market. How much of that is prime scrap. And when you look at your sourcing, would you be looking at more prime scrap and would that mean the quality of products and the product mix realization a big thing. There would be no changes on that front. That's the second question.

I think we'll obviously have to segregate the scrap that we use depending on the product mix that we want to make. And U.K. has a strong manufacturing industry, a strong -- reasonably strong auto industry to whom we supply to as well. So there will be a lot of good quality scrap, which is available in the U.K., which we can use. The second part is, obviously, the other option available to you when you use an electric arc furnace operation is to change the percentage of scrap and DRI depending on the product mix that you want to achieve. So I think there are options available, and we'll be fine-tuning all this as we go forward.

The next question is from Amit Murarka of Axis Capital.

Just on the cost guidance that you've shared, like just wanted to clarify that this cost saving is indicated largely on the savings from raw material, right, which is coking coal and iron ore. There's no saving that in this estimate you're contemplating from, let's say, employee cost savings or anything like that in this number.

So we do have -- that cost saving, as I said, is a total cost saving. It's not just raw materials because raw materials, what we currently put into the furnaces includes coal, iron ore, coke, et cetera, which is going to get replaced by scrap. We will have a differential on the purchase of electricity. And there are other fixed cost reductions, then there are utilities, maintenance, employee cost. So all of that, it's a reconfigured cost base and cost position. So that is -- it's not just the raw material costs, somebody asks whether it's only the carbon cost or whether it is only the employee cost. So it's not just that. It is a combined cost base differential, which I gave. And I think I was replying to a question which said that compared to where you are, where you would be, and that is the essentially the answer that I gave.

Sure. So yes. So this does build in some traction in employee cost in that sense as well. Okay, got it. Also like will there be any tax benefit also that you could avail from this investment at least that GBP 750 million that you'll be putting in? Will there be any tied fiscal incentives as well to that in later years?

First of all, I must say that Tata Steel U.K. sits on more than GBP 2 billion of tax losses. So we would certainly want to utilize that. This company has to utilize that from the profit. So that itself is inherent in Tata Steel. So in fact, the number is possibly much larger, and I think this is certainly more than GBP 2 billion. And therefore, there is the -- from an underlying fiscal part what you would see is a much more profitable business going forward once the transition happened. Our focus and challenge is essentially to get to that transition as quickly as expected.

The next question is from Arijit Dutta of Kotak AMC. [Operator Instructions] It looks like we have lost our line with Arijit. We will now move on to our next question. The next question is from Gopal Sarda of SBI.

My question is, in your PAC's annual report of 2022, and I quote, it was mentioned that customers and society as a whole should recognize that decarbonization is likely to involve higher cost. And in this direction, I think you were also looking at support from the government that cheaper imports from geographies, which are not subject to the same level of carbon taxes should not be permitted. And where do we stand on this?

So as I mentioned, I think in some of -- the earlier question that -- and in my narrative that the carbon border adjustment mechanism consultation has got initiated in the U.K. already since March 2023, and we have the support of the government not only for us, but for the industry in general, that CBAM structure similar to the one that exists or has coming into being in European Union will be put in place. And that is obviously the one which will make a difference as far as -- ensuring that the import into U.K. has the same carbon tax as in Europe. So I think that's specifically answered in the proposal and our proposition for this project.

Sir, but will the customers be willing to bear this higher cost?

Well, that is the way in which customers are looking at green steel in Europe as well as elsewhere. And customers are looking at ensuring the very question that was asked on the carbon footprint of companies and the every tonne of steel or for that matter, every kind of material as inputs that goes into the final consumer. That is in the direction of travel as far as decarbonization is concerned, everywhere else in the world. U.K. is no different.

Thank you, sir. We look forward to be a partner in your growth journey.

I would now like to hand over the conference to Ms. Samita Shah for the chat questions. Over to you, ma'am.

Thanks, Kinshuk. I think there is a question in terms of the kind of support we are receiving from the government on the OpEx side, which we've already clarified that it's not really expected. We're looking at broader policy support, but not specific from an OpEx perspective. A lot of questions on the transition phase and maybe we could address them. Will we continue to operate the same way we have been doing until the new capacity comes in? How will the operations run? So I think a little bit of clarity on how will we manage during the transition phase. Will we continue to operate upstream assets? Will it reach end of life before that? Many questions around that.

So as I said that if you read the press release, it's very clear where we are saying that the upstream assets are coming to end of life. They are not just going to be sustainable. Our consultation process is precisely on that. As I said that there are 3 parts to it are immediate issues that we face in terms of our physical age of the assets and its impact on the business and the financials. So it wouldn't be that we will be able to continue in the same way because it's just not sustainable. And that's the reason why we've said that in the transition, we will be looking to import so that we can continue to supply our customers and keep the supply chain uninterrupted.

The next question is in terms of, I think, the grant where it says you've mentioned up to GBP 500 million. Does this mean that the grant can be lower? And if yes, in what cases will it be lower?

No, I think it's a fair thing to say that the grant being approved is GBP 500 million. And it is a physiology to say that if you are spending less, then obviously, the grant will be lower. But I think the understanding is at GBP 1.25 billion project, the grant will be GBP 500 million.

There are some questions in terms of the spend and what assets it will be spent on, GBP 1.25 billion. What assets actually it will be spent on?

So that I think also I mentioned that the bulk of the spend will be on the electric arc furnace. Apart from that, there is the upgradation of the casters and there's upgradation of the hot strip mill and also on the upgradation and consolidation of the cold rolling mill whenever we plan to do it.

Is the EF a replacement for blast furnace 5, while our blast furnace 4 will continue until its end of life to 2030? I don't know where that comes from.

I don't know where that has come from, but we have not mentioned anything about -- I don't know whether it's mixed up with Tata Steel Netherlands, but I think in U.K., we've never mentioned about the end of life of individual blast furnaces.

There is a question on the maintenance CapEx we've been incurring. How much of the maintenance CapEx have we been incurring over the last couple of years? And will that be saved because of scrapping of some of the capacity?

So if the transition -- when the transition happens and the upstream is kind of transited to a downstream-only facilities, obviously, the maintenance CapEx and the entire cost structure will change.

Where would you be on the European cost curve post the move to the EF site?

I think from an EF cost curve basis because normally the EF and the blast furnace of different cost curves generally. So on the EF cost curve basis, we would certainly be more towards the left and one of the most competitive sites from an EF perspective and in general from our hot rolled coil perspective too.

What kind of IRR or ROCE will this project generate over the long term?

So I think there is a diligence going on, but I think it's -- it will -- safe to say that it is something which will certainly meet our cost of capital and the total project on a steady-state basis over its useful life should be meeting the cost -- should be more than the cost of capital and should be in the region of 15%, 16%.

Is there any risk on the ground if there is a change in government?

We don't think so because this is going to -- that's why I mentioned that the next stage is to contractually get into a grant funding agreement to take out any risks that may or may not exist, but more importantly to get into a finality because we will be putting in capital on a firm basis and therefore, the grant also needs to be on a firm basis, which is what has been indicated by the government.

Will there be -- as a part of the overall scheme, will there be part of the impairment cost? And can you give us a sense of what that amount is?

I mentioned that, that as part of the balance sheet restructuring of Tata Steel because we will move into a separate profile of the business model and the assets -- current assets and the PPE, which exists in TSUK will be restructured and therefore, there will be impairment and this is a pending discussion with our auditors, post the announcement, and we will disclose it separately when we close the financials for Q2, but there is going to be impairment of material nature regarding the legacy investments that has been done in this company.

And there is a question on funding. I think we answered it, but I would just say it again since multiple people have asked. Will the funding be front loaded? Or will it be received in phases over 3 years?

It will -- the CapEx funding will be over a period of 3 years. It is not front loaded because unlike an acquisition, this is as much like a brownfield expansion that we have been doing in India. So it has got its own normal curve of investments, and it will be over a period of 3, 3.5 years. And as you know that even 15%, 20% of the total funding is required post the performance guarantee and commissioning. So it is phased spending. The restructuring may be more front-ended, but the CapEx spending will be certainly be over a period of time.

Thank you. And with that, I think we've ended with the chat questions. I'll hand it over to you, Kinshuk.

So ma'am, there are no more questions in the audio queue. That was the last question for today. I would now like to hand the conference back to you for closing comments. Over to you, ma'am.

Thank you. Thank you, Kinshuk. So thank you, everybody, for dialing in and for joining us on this call. We hope we've provided you the clarity. I know a lot of points are still open, but that's just because we just started the process, and it will take us some time to work through these issues. And obviously, on subsequent calls, the quarterly calls and any of the subsequent calls, we will keep sharing information as and when it gets finalized. Thank you once again, and have a good evening.

Thank you.