Tata Steel Ltd

NSE:TATASTEEL

Earnings Call Analysis

Tata Steel Focuses on Profitability and Investment

Tata Steel's consolidated revenues hit INR 55,312 crores, while EBITDA rose to INR 6,334 crores, a margin increase from 8% to 11%. India operations saw EBITDA margin soar by 400 basis points to 20%. The company's debt reduced by INR 1,500 crores to INR 88,230 crores, with stable net debt at INR 77,405 crores and strong liquidity at INR 23,349 crores. Losses at Tata Steel U.K. dropped to GBP 115 million from GBP 132 million, while Tata Steel Netherlands saw EBITDA losses increase slightly to GBP 117 million from GBP 110 million. Tata Steel U.K. plans to stop blast furnace operations by 2024, transitioning to electric arc furnaces, with over GBP 130 million in employee support and GBP 1.25 billion investment in the transition, backed by GBP 500 million from the U.K. government.

Navigating Market Shifts

The latest earnings call painted a dynamic picture of a company contending with diverse market forces. Globally, while the U.S. and EU saw steel prices rebound, Asia experienced pressure from elevated Chinese exports due to weak domestic demand. In India, a strong domestic demand sustained steel prices through October '23. This resilience in pricing contributed to India's delivery of nearly 4.9 million tonnes of steel, a rise attributed to increased domestic demands, notably in the automotive segment, which saw a 22% year-on-year sales boost despite a decline in vehicle production.

Strategic Initiatives and Capacity Expansion

The company's strategy underscores both growth and sustainability, aiming to expand steelmaking capacity in India. They've advanced the commissioning of a 5 million tonne per annum expansion at Kalinganagar, with production beginning shortly and an expected output of 0.7 million tonnes of steel by FY '25. They are also piloting projects to reduce carbon emissions and have secured the ResponsibleSteel certification for three of their sites. In contrast, the UK operations are transitioning toward electric arc furnace-based steelmaking, resulting in the planned closure of high emission furnaces by the second half of 2024, further underscoring the company's commitment to sustainability.

Financial Performance and Margin Improvements

Financially, consolidated revenues reached approximately INR 55,312 crores, with EBITDA at INR 6,334 crores, highlighting an EBITDA margin improvement from 8% to 11%. In India specifically, margins saw a notable improvement from 19% to 24%, despite operating challenges and the difficult environment present in the European markets.

Cash Flow and Debt Management

The consolidated operating cash flow stood robust at INR 7,879 crores, driven primarily by the India business segment. The company has been diligent in managing its capital, with capital expenditures totaling INR 4,715 crores for the quarter, cumulatively reaching INR 13,357 crores over nine months. They've also managed to decrease their gross debt by INR 1,500 crores while maintaining stable net debt at around INR 77,405 crores. Liquidity remains strong, indicating the company's healthy financial position to support ongoing and future initiatives.

Transition to Sustainable Steelmaking in the UK

Tata Steel UK plans for a drastic shift in production methods with the transition to sustainable, electric arc furnace-based steelmaking. This move, expected to be completed within four years at a cost of GBP 1.25 billion (with GBP 500 million in government support), signifies the company's serious commitment to reducing its carbon footprint. Tata Steel UK has pledged over GBP 130 million in an employee support package in the wake of this transformation, showcasing a conscientious approach to the resultant workforce changes ahead. Moreover, the company ensures business continuity for customers through this transition by planning to use imported semifinished steel.

Procurement and Price Risk Management

Addressing future procurement dynamics, Tata Steel plans to secure a mix of slabs and coils primarily from its mills in India and the Netherlands, along with other strategic suppliers. This strategy mitigates the risk associated with price fluctuations for their internal supply chain, although risks remain when sourcing from external suppliers. Downstream, the company offers a diverse product line with varying spreads, promising detailed future disclosures on product-wise profitability as they move through the transition.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you, everyone. Ladies and gentlemen, good day, and welcome to the Tata Steel Analyst 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.

[Samita Shah, executive]

Sorry. Good afternoon. Good afternoon, everybody, and welcome to this call to discuss our results for the third quarter of FY '24. We have with us Mr. T.V. Narendran, CEO and Managing Director, Tata Steel; and Mr. Koushik Chatterjee, Executive Director and CFO, Tata Steel.

I hope you had a chance to go through our results, which were published yesterday as well as the presentation, which is on our website. As usual, the entire discussion today will be covered by the safe harbor clause, which is on Page 2 of the presentation. We will make a few opening comments before opening the floor for questions, both audio as well as chat.

With that, I will hand it over to Narendran. Thank you.

[Thachat Narendran, executive]

Thanks, Samita. Good morning, good afternoon to all of you. I'm going to make a few comments and then pass on to Koushik for his comments, and then we'll open it up for the questions. During the quarter, the steel prices were mixed across key regions, driven by different factors. So in the U.S. and EU, the tightness in the steel supply and elevated raw material prices led to a rebound in steel spot prices towards the end of the quarter, while in Asia, sustained weakness in the Chinese domestic demand has led to elevated exports being on the prices in general.

In India, the steel prices had held up given the strong domestic demand until October '23, but steady exports from China had driven the buildup in the traders inventory, and this has resulted in a 4% to 5% drop in street prices in November, December. Despite this context, Tata Steel has improved on its margins in the third quarter aided by higher deliveries as well as net realizations in India.

Moving on to our performance. Our India crude steel production was around 5.3 million tonnes, driven by close to 100% capacity utilization on an overall basis. And production increased by 6% quarter-on-quarter and year-on-year basis.

India deliveries were close to 4.9 million tonnes and were up quarter-on-quarter as well as year-on-year. And this has been driven by a rise in domestic deliveries by about 10% year-on-year, which is broadly in line with the increase in the apparent steel demand in India.

Among the segments, the Automotive segment had the best ever third quarter sales and was up 8% quarter-on-quarter and 22% year-on-year. This was despite a 4% QR quarter-on-quarter drop in vehicle production. Our efforts to enrich the product mix has led to an increase in high-end sales to the automotive customers.

Our retail sales continue to be driven by well-established brands, such as Tata Tiscon, Tata Steelium and Tata Astrum, and during the quarter, Tata Tiscon volumes grew by 10% quarter across key projects across India, including the recently inaugurated Atal Setu in Mumbai, India's longest sea bridge where we supplied over 42,600 tonnes of Tata Tiscon rebars as well as Tata Tiscon -- I mean, Tiscon ready built solutions and structural plates.

In Netherlands, our steel deliveries were around 1.3 million tonnes in the quarter, up 5% quarter-on-quarter basis. Revenue per tonne was down between GBP 50 and GBP 60 per tonne on a quarter-on-quarter basis, and the demand dynamics and the reline of one of our blast furnaces obviously had an impact on the realizations and our performance there.

In U.K., the steel deliveries were around 0.64 million tonnes and were lower on a quarter-on-quarter basis in part due to the operational issues relating to the stuff given the aging assets.

Moving to strategic initiatives, we remain committed to responsible growth and are focused on sustainable value creation. We are focused on an agile business model and our strategy is calibrated to the operating geography. So in India, we are scaling up our steelmaking capacity to capitalize on the growth opportunity.

We commenced the phase commissioning of our 5 million tonne per annum capacity expansion at Kalinganagar. We have charged forward into the new blast furnace and expect to make it physically ready by next quarter and start production from thereafter. We target to produce about 0.7 million tonnes of crude steel in FY '25 in addition and ramp up further in FY '26.

And as part of our multipronged approach to progress on sustainability journey, we have undertaken pilot projects to achieve carbon avoidance in the blast furnaces by injecting biochar, hydrogen, all steel scrap and are waiting with technology partners on process improvements.

It gives me immense pleasure to share that now we have 3 sites, which have received the ResponsibleSteel certification, Jamshedpur is the first site in India to achieve the certification. And now both Meramandali and Kalinganagar have also achieved the same.

In the U.K., we will commence statutory consultations with the relevant stakeholders on the proposed restructuring as we transition to EAF-based steel making, which will save 50 million tonnes of CO2 emissions over a decade. It's a difficult situation for our employees. We fully empathize with that.

And it is for this reason that we've tried very hard for the last 15 years to support this business. But I think we have reached a stage where continuing as we did, is no longer an option, and we should -- we would be closing the first last one is by the middle of 2024 and the second last one is the second half of 2024. Thank you, and over to Koushik.

[Koushik Chatterjee, executive]

Thank you, Naren. Good morning, good afternoon or good evening to all those who have joined in. I will begin my presentation with the quarterly performance provided on Slide #29. Our consolidated revenues stood at about INR 55,312 crores, and consolidated EBITDA for the quarter was INR 6,334 crores.

So the EBITDA margin for the quarter improved by about 300 basis points from 8% in the previous quarter to about 11% in the December quarter, despite the challenging operating environment across geographies and the operating challenges in Netherlands and in the U.K.

In India, the margins improved by about 400 basis points to 20% from 20% in the previous quarter. Before moving to the stand-alone performance, I would like to mention that we have received the sanction for amalgamation of Tata Metaliks Limited and Tinplate Company of India Limited with Tata Steel.

Accordingly, the stand-alone financial statements have been restated from 1st of April '22 to reflect the merger. With this, the merger process for the 5 entities have been completed, another 2 are in the process, as highlighted in Slide 24.

For the quarter, Tata Steel stand-alone EBITDA stood at about INR 8,257 crores, which translates to an EBITDA per tonne of INR 16,923. If I exclude the FX gain of INR 9 crores, the EBITDA stood at about INR 8,247 crores. And therefore, the corresponding margin has improved from 19% in the previous quarter to 24% in the current quarter.

As provided on Slide 35, higher realizations as well as improved costs have led to margin expansion. The stand-alone NRs increased by around INR 1,100 quarter-on-quarter, while costs have been primarily aided by change in inventories. Within costs, the total raw material costs includes a slight increase in coking coal consumption cost by about $4 per tonne, which was offset by lower purchase including pellets.

Further within material cost for our federalized division business, there was a noncash credit of INR 1,000 crores on account of higher valuation of chrome ore inventory, rising on account of increased accrual of royalty charges payable on closing stock as on 31st of December due to a significant increase in the government notified rates by around INR 8,000 to INR 9,000 per tonne, which based on the norms for the inventory valuation gets loaded as part of the closing inventory even though the payout or the cash payout for such royalty happens only on the actual dispatch.

Correspondingly, this leads to an increased accrual of royalty expenses forming part of the other expense, which you may have noticed. In effect, the above treatment is, therefore, profit neutral, P&L is actually neutral on this because it's a classification adjustment in line with the norms of the inventory valuation as per the applicable accounting standards and disclosure requirements for financial statements.

At Tata Steel Netherlands, the EBITDA loss stood at about GBP 117 million compared to GBP 110 million in the second quarter. The delay in startup of the blast furnace 6 in IJmuiden has resulted in lower production, which had a significant impact on the recovery of cost and on the product mix. We now expect the blast furnace 6 to start by the end of this month or early next month.

As shown on Slide 37, the drop in revenue per tonne of GBP 57 per tonne was offset by improvement in cost. Material costs improved by GBP 59 per tonne, driven by drop in raw material consumption costs, especially coking coal and decline in purchase of slabs. The conversion cost there was broadly stable as decline in natural gas spend of GBP 17 per tonne was offset by higher employee benefit expenses due to labor agreement.

At Tata Steel U.K., the EBITDA loss was GBP 115 million compared to a loss of GBP 132 million in the second quarter. On a per tonne basis, the loss was lower by about GBP 69 per tonne quarter-on-quarter. The U.K. production was lower than the previous quarter as a result of the production shortfalls arising from the end of life conditions of several of its heavy-end assets has continued to weigh in on the U.K. business.

As shown in Slide 38, the revenue per tonne was lower by about GBP 15 per tonne given the subdued market dynamics during a seasonally slower quarter, which is the December quarter. The material cost improved by about GBP 48 per tonne, primarily on account of lower consumption of coke and iron ore. The conversion cost increased by about GBP 100 per tonne on account of fixed cost due to lower production.

Moving to the cash flows. The consolidated operating cash flow for the quarter stood at about INR 7,879 crores and were primarily driven by cash flow generation in the India business. As Naren mentioned, we are committed to responsible growth in India and have spent about INR 4,715 crores on capital expenditure during the quarter and about INR 13,357 crores for the first 9 months of this financial year.

The gross debt has decreased by about INR 1,500 crores to INR 88,230 crores, while the net debt has broadly remained stable at about INR 77,405 crores. The group liquidity remains strong at about INR 23,349 crores. Let me now make a few comments on Tata Steel U.K. announcement that we made last Friday, an extension of what Naren just mentioned.

Over the last few months, we had a detailed discussion with the U.K. multi-trade union representative body, which is called the U.K. Steel Committee and its advisers in which we carefully considered their endorsed proposal for maintaining a single blast furnace until the EAF transition. The company analysis was aligned on all assumption with the union advisers, and we found that it could progress on the union -- it could not progress on the union plan. as it is neither feasible nor affordable to continue the blast furnace production longer.

Further, the company undertook engineering studies that found that the execution of the electric arc furnace in an already operating steel melt shop would be fraught with risk and result in a suboptimal plant layout, delaying implementation of the EAF plan and in a way, jeopardizing the proposed business transformation program.

As a result, we have now proposed to close both the high emission blast furnaces and coke ovens in a phased manner in 2024 as articulated by Naren, and will commence such a statutory consultation process about restructuring as we transition to a EAF-based steel making at a cost of about GBP 1.25 billion with GBP 500 million support from the U.K. government.

Tata Steel is acutely aware of the impact of its proposal to wind down the heavy end of the Port Talbot on the individuals and the local community associated with our steel works, and we will meaningfully consult with our employees and work to provide them with a fair, dignified and considerate outcome.

Tata Steel proposes to commit in excess of GBP 130 million to a comprehensive support package for the affected employees. This is in addition to the GBP 100 million funding for the Transition Board set up by the company in which the company has contributed GBP 20 million, along with the U.K. and the Welsh government.

Tata Steel is committed to ensure sustainability of steelmaking for the long-term in Port Talbot and targets to commission the electric arc furnace in 4 years. It has already begun engineering design work and planning discussions with National Grid for the required infrastructure. We also have a detailed plan to continue to serve our customers through the transition period from our mills by utilizing the imported semifinished deal.

With that, I complete my presentation, and thank you for listening, and I now hand it over to the Q&A moderator.

[Operator]

[Operator Instructions] The first question is from Ritesh Shah of Investec.

[Ritesh Shah, analyst]

This question is pertaining to Tata Steel U.K. A couple of quarters back, you had indicated that the difference in Costco between blast furnace and electric arc furnace will be GBP 150 to GBP 175 per tonne, I just wanted to have your thoughts on the number, whether it is the same number, does it also include the carbon cost? That's A.

Secondly, we have indicated that we will procure slab either Netherlands, India or strategic suppliers somewhere else. So the question over here is how do we look at the inventory and price risk management given what we have seen in the prior quarters, the steel prices go down and we had to take a substantial inventory hit? That's a related question.

And third, during this transition period, what we understand the downstream assets will continue to operate. So what is the normalized spread that we can look at over here? Like is it $70, $80? How should we understand that? So that's the first question.

And second question, again, with respect to U.K., there is a statement that says wider restructuring of other locations, including CAPL and needed a bit of clarification because there are 2 numbers pertaining to employee cost, GBP 130 million and GBP 100 million. Is there some sort of escalation over here? If at all, it would be great if you could clarify it? I have a couple more, probably I'll join back the queue. I'll let just stop over here.

[Koushik Chatterjee, executive]

So can we take the second part first and then we can -- because it's much more specific. So what we talked about, the wider restructuring Ritesh is that 2,800 people, and the 2,800 people includes functions and other sites. So it's not just Port Talbot. It is a wider restructuring means it's not site-related only. It is the wider across the organization.

Your point on CAPL is also the point that this will run for this year and potentially will be closed next year. As far as the GBP 130 million and GBP 100 million is concerned, there are 2 different parts. The GBP 130 million -- what we have said is we are -- it's important to communicate properly to the people who are more affected. And therefore, we said -- and we have not yet concluded the consultation, in fact, is just formally starting.

So our point is that we have a corpus because there were a lot of misperceptions going around that we have a corpus in excess of GBP 130 million as part of the compensation for the people who would be affected. And the GBP 100 million is actually a transition board set up by the Welsh Government -- by the U.K. government in conjunction with the Welsh government and us, where U.K. government has contributed GBP 80 million, and we have contributed GBP 20 million.

And that is to look at a much wider ambit for the people, community who are affected in terms of retaining, rescaling, how to help them transit in this process.

So those are 2 different things related in some ways, but it is addressed differently. So I think I just wanted to clarify this. And as far as the cost curve differential is concerned, I think our assumptions remain the same because the business case has not changed, and we continue to believe that.

Procurement of slabs, I think it will be a mix of -- as you know, that we have said that we will continue to operate the hot strip mill. So it will be a combination of slabs and coils. And this combination will come primarily from our sister mills, whether it's in India or Netherlands and other strategic suppliers that we are stitching in.

[Ritesh Shah, analyst]

And the downstream spreads when we procure...

[Koushik Chatterjee, executive]

No, just to clarify further. So long it is within the system, so long it is supply from India or Netherlands or any part of India. That -- the price risk is any way factored in and will get nullified in the consolidated rate. So that wouldn't be the impact. For the supply that we bring in from outside, yes, that will have the price risk element.

[Ritesh Shah, analyst]

Right. And the downstream spreads?

[Koushik Chatterjee, executive]

So the downstream spreads are actually -- the downstreams are different. For example, we have a Zodiac line, which is automotive line. We have a packaging line, which is Tinplate. We have got the color-coated line. So the spreads are different based on the products. But we will -- as we get into that transition, we'll explain that because we'll give you product-wise spreads applicable for those facilities.

[Operator]

The next question is from Indrajit Agarwal of CLSA.

[Indrajit Agarwal, analyst]

So my first question is on the India business stand-alone. So can you help us run through the EBITDA bridge from 2Q and 3Q. Adjusted EBITDA per tonne in 2Q was about INR 13,400, from there, we have moved to INR 16,900. So what was the NSR, raw materials and other expenses that contributed to it? And what is the outlook for 4Q in terms of all these items?

[Samita Shah, executive]

We can hear you, Indrajit, but there's a disturbance behind. So we request you to go and mute.

[Koushik Chatterjee, executive]

So you wanted the reconciliation between the EBITDA per tonne from last quarter to this quarter, right?

[Samita Shah, executive]

Yes, that was his question.

[Koushik Chatterjee, executive]

So I think the -- if I were to look at it from an NR perspective, the steel NRs while it has increased by about INR 1,100 per tonne. If you look at the net of -- net effect, it is more around INR 90 per tonne from an EBITDA perspective. The coking coal consumption, which has increased by about $4 per tonne on a Q-on-Q basis, this has resulted in about INR 390 crores negative, which is -- which works out to be about INR 800 per tonne on the impact on the EBITDA negative.

But if I look at the purchase of finished goods and the semifinished goods, which decreased by about -- almost about INR 400 crores on account of lower purchase of scrap, pellets, other materials, that has resulted in an uplift of about INR 800 per tonne.

The big one was obviously the release -- in Q2, there was a release in the finished goods and semifinished goods steel inventory, which was about INR 570 crores. While in Q3, there is a buildup of about INR 900 crores of inventory, which works out to quarter-on-quarter swing of about INR 1,500 crores, which results in the cost reduction of about INR 3,000 per tonne.

And finally, in the quarter 2, there was an FX gain of INR 464 crores on account of the loans that we had to our Tata Steel Holding in Singapore of about $4 billion. That has now mostly got converted to equity. So -- which -- that gets nullified in a manner, therefore, you have impacts the cost by about INR 945 per tonne. So if you add up -- add and minus all the numbers that I talked about, you will find there is a INR 2,200 per tonne improvement in the EBITDA per tonne.

[Indrajit Agarwal, analyst]

Sure. And outlook for next quarter in the sense, how are you seeing the NR and coke components?

[Koushik Chatterjee, executive]

Naren, do you want to address that?

[Thachat Narendran, executive]

So the NRs we expect to be about INR 1,000 lower in India for Q4 compared to Q3 and the coking coal cost to be about $10 higher on a consumption basis for Q4 to Q3.

[Indrajit Agarwal, analyst]

Sure. One last question. Can you help us again reconcile the net debt movement from 2Q to 3Q? What was the working capital buildup, both for 3Q and for 9M?

[Koushik Chatterjee, executive]

So net debt number was flat, right? So it is almost about INR 7,000 crores. And we had -- if you look at it, we had a release in working capital on a consolidated basis. And some parts of that was absorbed because of the Netherlands cash utilization because of the losses. So the net of net was the same. There's no major movement as such.

[Operator]

The next question is from Amit Dixit of ICICI Securities.

[Amit Dixit, analyst]

Great. So I have 2 questions. The first one is on the restructuring provisions that we took, particularly for redundancy last quarter, which was to the extent of INR 2,600 crores. So this amount that we have committed so far, GBP 130 million on the account of corpus and GBP 20 million for the -- in that Irish Welsh fund. So is there -- at this point in time, is there any clarity that the total amount that you would be giving out could be higher than that INR 2,600 crores?

[Koushik Chatterjee, executive]

So the redundancy proposal -- sorry, the restructuring amount that we took last time had 3 components. One first component was provisioned for the redundancy. There was also mothballing or proposed mothballing of the outstrip mill and other facilities like the caster, et cetera. So it was not 1 number. It was 3 numbers. And I think we are -- at this point of time, even if before we have started consulting, I think we are within that zone. So I don't see on those 2 fronts to see.

And there are contract termination expenses, which is all the long-term contracts, which will get terminated. That was also included in that. So I think on a net basis, we still think we will be within that. There may be minor plus/minus that may happen, but it also depends on where that conversation ends up finally with the unions. It's a little premature, but I think we will not be too off the mark is what are, at this point of time, the judgment is.

[Amit Dixit, analyst]

Okay. The second question is on Tata Steel Netherlands. Now that relining would be complete by end of this month and possibly the production should start from February. So what kind of production stroke sales volume we can expect in Q4? And whether after this relining, there is some efficiency improvement, et cetera, that we see productivity improvement.

So any cost benefits that you see going ahead? And also if you could highlight the similar thing for -- as you highlighted for Tata Steel India, that what would be the coking coal cost and realization like in that geography?

[Thachat Narendran, executive]

So I think the BF 6 relining, as Koushik mentioned, is pretty much complete. I think the filling of the furnace starting today and the furnace should be in production next week. So that's the plan. For this quarter, I mean, for Q4, we are basically saying that the volumes will be about 0.5 million tonnes higher than Q3, of which, 0.4 million tonnes actually will be -- I'm talking of sales will be higher in India and 0.1 million will be roughly in Europe, which is going to be largely Netherlands because we only have 2 months of production and it needs to be converted into finished products, which can be sold.

But the plan for next year. Traditionally, Netherlands has produced around 6.1 million tonnes over the last few years. We want to take it up to at least 6.5 million to 7 million. I think that is what we hope to do once the furnace stabilizes, which is expected to happen in the next couple of months. So we will give you a guidance separately for next year, there you will see the improvements that we expect because of this work.

Because over the last few years, this furnace has struggled a bit. And now that it is relined, we hope that we'll have a more stable production going forward. As far as the guidance on coking coal is concerned. In Netherlands, the consumption cost is expected to increase by about $18 on a consumption basis and in U.K. by about $11.

[Amit Dixit, analyst]

And what about NR, sir, net realization?

[Thachat Narendran, executive]

So net realizations for, Netherlands, I think it is -- yes, U.K. is expected to increase by about GBP 40 per tonne because the U.K. business is a little bit more dependent on spot prices. So as the spot prices go up in Europe, U.K. will see a bit more of the benefit. Netherlands is expected to see a reduction of GBP 14 per tonne. Largely, because Netherlands has a larger share of annual contracts, long-term contracts and the long-term contracts, which were finalized in November, December were lower than the long-term contracts of the previous year.

So you will see a bit of that impact, which will be offset by spot prices. We are actually watching spot prices closely because as you know, the spot prices in Europe are going up because of the tensions in Red Sea and Swiss Canal and that is limiting the flow of material from Asia to Europe. So let's see where that goes. I think some price increases have been announced. So this is the guidance as of now, but we'll wait and see on spot prices.

[Operator]

The next question is from Ashish Kejriwal of Nuvama.

[Ashish Kejriwal, analyst]

Sir, my question is on the profitability of the -- our Netherlands operation as well as U.K. operation because U.K., our blast furnaces, we are going to close in phases next year, which means that we will continue to bleed before we go into a transition mode. So is there a possibility of giving some sense on the profitability of U.K. operation? And as far as Netherlands also, even after relining, when can we expect it to be EBITDA neutral or profitable?

[Thachat Narendran, executive]

Yes. So I'll address some of it and hand over to Koushik. So Netherlands, obviously, we expect next year to be profitable, at least it will -- should be EBITDA plus, and we'll give you some more guidance as we come with the next quarter's results. But clearly, this -- most of this year or pretty much 10 months of this year, we've operated with 1 blast furnace.

We should also keep in mind that a lot of sales this year was of material rolled out of high-cost slabs, which were produced the year before to keep in stock for the blast furnace relining, and that was produced in coal prices and gas prices were at its highest. So we saw all that flow through in Netherlands over the last 10 months.

So this year, we are starting with lower gas prices, lower energy costs and coal prices lower than what it was when we made those slabs. So we expect next year clearly to be better than this year. This year overall has not been a good year at all in Netherlands. So it will be positive EBITDA. How much positive and where will we end up, we'll give you a bit more color at the next quarter's results.

As far as U.K. is concerned, as also for Netherlands, we should keep in mind that the Q3 spreads -- spot spreads were the lowest in a very, very long time. So it was in that EUR 100 to EUR 130 per tonne range, whereas our long-term average, we always look at EUR 225.

So certainly, in U.K., while we will have operational challenges even as we start winding down the operations, we also expect the situation to improve as far as the spreads are concerned and as far as gas and electricity prices are concerned. So we do expect things to improve a bit in U.K. from that perspective, but they will be restructuring costs, et cetera. So I'll let Koushik comment on that.

[Koushik Chatterjee, executive]

Yes. So Ashish, I think just to add to what Naren just mentioned. In Netherlands, I think there's certainly as the production ramps up in blast furnaces in Netherlands. As he mentioned that we are targeting a volume of about 6.5% to 6.8% maybe 6.9%. I think that is important for us. And I think we will -- if the spreads improve with the -- currently, at least on the short term, we see because of the Red Sea crisis, then we should certainly have an uplift.

We are also undertaking a deep transformation program in terms of improvement in our cost position, not just by the volume but multiple areas. And I think that will also start flowing in, if I look at it on a full year basis next year.

So I think that is important. I think the most important bit is compared to this year and next year from a cash flow point of view, there must be -- we should see Netherlands business of ours in the operating cash flow positive. That's going to be critical with very much lower CapEx because it will be more on sustenance CapEx, not these heavy CapEx that we have seen this year.

As far as the U.K. is concerned, I think the way to look at it would be, yes, you are right that it is a phased closure and therefore, we would -- our focus is to actually at least half the losses of next year -- of this year into next year. And I think that would be a zone that we will be working on. There will be redundancy costs, et cetera. But as the -- I think Amit asked the question, we have provided for it from a profitability point of view.

And the -- also in our own plan, the people will move out in a phased manner. And with that phased manner, the cash flows will also move out -- move happen in a phased way. So I think that is something that is being worked out. And when we come in with our March numbers in -- with our final results, we should give you a very specific range of flows out of cash -- cash outflows next year.

But fundamentally, next year will look to be significantly better from our international operations, both in terms of reducing our losses in the U.K. significantly as well as improving significantly as far as Netherlands is concerned.

There will be an impact of CO2, which will impact Netherlands, and that's what we are working on because there is a tail in defect on the CO2 that comes in because of lower production. But that is being worked on and how we mitigate that with other measures is the one that we can talk about when we speak about the final results.

[Ashish Kejriwal, analyst]

So sir, just to clarify, the cash outflow of the restructuring cost is yet to happen, which we have not taken into account in our cash flows yet?

[Koushik Chatterjee, executive]

No. And that will happen -- that cannot happen until we close the furnaces and that will happen post we close the furnace in a phased manner as people move out -- the affected people move out, and that's the part of the consultation that we will have.

[Ashish Kejriwal, analyst]

And secondly, Naren, you have mentioned or guided about a $10 increase in coking coal for quarter 4 and even in third quarter, we saw just $4 increase in coking coal. Whereas when we look at the spot prices, it is much higher, maybe $50, $60 higher. So are we -- is there any change in blend, which led to the lower cost for us as compared to industry? Or are we buying from Russia at lower cost or how we are managing it?

[Thachat Narendran, executive]

Yes. So I think, firstly, we are not buying from Russia. Secondly, we use a lot of leaner blends. Apart from the PCI, we also use a lot of leaner blends. If you look at the last few quarters, the gap which is there between the leaner blends and the prime coking coal had come close to 0. It went up because of the disturbance of the Ukraine war and multiple impacts of that. So the advantage that we had of using leaner blends, which I think we used quite a bit, we lost for some time.

Now we're getting that benefit because the gap is increasing. So that's why while the prime coking coal prices may have gone up, as you said, the consumption cost for Tata Steel, even last quarter, while we had guided $10, $15, it went up only $3. And we are able to manage that cost increase much better because, obviously, we have the advantage of using a lot of leaner blends. And the gap between those leaner blends and the prime coking coal as well.

[Ashish Kejriwal, analyst]

I hope this will continue.

[Thachat Narendran, executive]

Yes, sure, it will. I mean at least the gaps are not in my control, but use of leaner blends, yes. But whether the gap increases or not is a matter for the markets present.

[Operator]

The next question is from Amit Murarka of Axis Capital.

[Amit Murarka, analyst]

Just on this -- the entry that has happened on the chrome ore valuation, like I'm just not still not clear on that. And could you just help explain what has happened there?

[Koushik Chatterjee, executive]

Yes. So let me explain basic -- from a basic accounting point of view. So when you have -- so there is a royalty and that royalty actually rates have increased, as I mentioned, by over 8,000, 9,000. That volume is not sold, that is still in our stock. So what happens is by the accounting standards, you load the inventory with that royalty. So it's inventory debit to change in stock. And that change in stock is actually the credit to the P&L, as you see in part of the materials cost.

Now simultaneously, the royalty expenses are debited because that's the reflection. That is why the other expenses have gone up and a liability is created. When we actually dispatch the material, then that is when you pay the royalty. And therefore, that is the time when you do a liability debit to cash. So that's the sequence. So that's why I said it is neutral to the P&L because the credit has gone into the material cost and the debit has gone to the royalty expenses.

[Amit Murarka, analyst]

Got it. And besides this, there was no other inventory related change in the quarter, right?

[Koushik Chatterjee, executive]

No, not materially. I gave the full reconciliation a little while back, I think, to one of the questions.

[Amit Murarka, analyst]

Yes. Got you. And also like on KPO 2, what kind of volume can we expect in FY '25 to come through?

[Thachat Narendran, executive]

I think as of now, we've guided 0.7 million tonnes, but we will -- in the next quarter's discussion, we can probably be more precise. Because many of the -- from a volume point of view, for instance, the caster 2 has started, which -- just started 2 days back, which gives us an additional volume opportunity.

But the blast furnace is close to completion. The physical completion will happen in the next quarter and we will start being commissioning soon after that. So I think by the time we do the next analyst call, we'll have a more specific guidance, but just we're guiding 0.7 million tonnes.

[Amit Murarka, analyst]

0.7 million tonnes for FY '25, right?

[Thachat Narendran, executive]

That's right. That's right.

[Amit Murarka, analyst]

Okay. And also lastly, any progress or update on the climate transition plan at TSN? Any discussions that have happened with the government?

[Thachat Narendran, executive]

So there is a lot of discussions going on with the government. But as you know, Netherlands has recently had an election. So we're waiting for the new government to form. Netherlands normally has a coalition government, so it takes a few months after the election for the government to form.

But the conversation is going on with the bureaucrats in the government, and we hope to at least agree with the bureaucrats on the way forward and then wait for the political leadership to then come on board. So we expect over the next 6 months to take it to some sort of conclusion.

[Operator]

The next question is from Kirtan Mehta of BOB Capital.

[Kirtan Mehta, analyst]

In terms of the U.K. transition, we are showing a slightly slower path than what we had last year what we're discussing. So what would be the impact on the net debt for the company in terms of the -- by the [ FY '20 ] end particularly from the European cash outflow that we will be seeing? And how would that get offset from the Indian cash flow? Any color on that?

[Koushik Chatterjee, executive]

Yes. So I think if I look at it, it's a timing issue. And the timing, honestly, given the way the process works in the U.K. where if you were to live to the spirit of meaningful consultation, you have to give time to the unions to come back with a plan which they did.

We spent time along with them in terms of reviewing it and then coming to a point where we could -- where we had to say that we couldn't progress with it because they said that continue the -- sorry, continue the blast furnace 4 till the transition, which is another 3 or 4 years, which is not feasible, as I said, not affordable.

So that's the time that we have spent with them, but it gives substance to what we were doing. We didn't do lip service. And we are now wanting to progress more formally that this consultation takes legally a minimum of 45 days. We are -- we have been deeply engaged with the unions over the last 4 months. And therefore, we want to ensure that we give certainty to this situation.

So I think it's a quarter change from where we originally envisaged. And we are also ensuring that our sourcing and supply chain systems are robust. And honestly, we cannot talk about it, or we couldn't talk about it very significantly in the market until we actually launch consultation because our intent becomes more formal as we announce the consultation.

So I think there will be, as I said, but taking all things together, we should be looking at a substantially or as I said, harping the losses in the U.K. next year compared to this year and moving into positive territory towards the second half of the year -- financial year. So that is the way we are organizing ourselves.

I think from a net debt point of view, we will -- we're always focused on ensuring that the net debt remains within the target. So we'll see as to the pace at which the phasing finally of the people goes out because that is -- so the physical shutting down of the furnaces we have already announced. The next phase is in this consultation to look at the phasing of the people, the corpus of what we want to provide to the people has also been kind of put on the table.

So the only thing that will remain after this is the phasing and the restructuring cost. And therefore, the contract termination and other operational bits, which we will be working on. So I think when we sit in the next meeting, we'll be able to give you a more certain view of the phasing and the consequence impact on the cash flows on a consolidated basis.

[Kirtan Mehta, analyst]

One more question was on the India operations, where we are seeing, again, a bit of delay in terms of bringing up the TSK2 blast furnace from our initial envisage of February, March. Now probably we are looking at a sort of a September quarter where we think that the blast furnace will come up. Would you talk us through the moving parts which is sort of resulting into some of the delays from our earlier expectations?

[Thachat Narendran, executive]

So I think the physical completion, like I said, is expected to happen next quarter. There was a bit of delay because some of the parts that were coming in for the -- simply into the blast furnaces were damaged and we had to get it repaired. That cost us a few months. So that is one of the reasons that we had. Otherwise, beyond that, it was more smaller reasons of different elements of the blast furnaces coming together.

So there's no very big reason apart from this specific membrane that got damaged, which we had to use in the blast furnace. So that's what has pushed it, but we are still trying to see how much we can pull back, and that's why I said we'll give you better guidance by the end of the year when we do the next analyst call.

[Kirtan Mehta, analyst]

Sure. In terms of your guidance on the 0.7 million tonne steel production envisage from the TSK2, typically, if we look at sort of blast furnace ramping up to 80% utilization within a year of start-up. So are we envisaging a bit slower start-up in case of TSK2 than the normal industry norm?

[Thachat Narendran, executive]

No. So that's why I said, let's wait for another 3 months, we'll give you a better guidance. This is, as you know, one of the largest blast furnaces in the world. It's a 5,800 cubic meter blast furnace. So we just want to be a bit careful as we started and make sure that we do manage the ramp up well because it's bigger than anything we've handled in the past. So we just want to be a bit careful. That's all.

[Operator]

The next question is from Alok Deora of Motilal Oswal.

[Alok Deora, analyst]

Yes. So most of the questions were answered. Just 1 question I had, if you could comment on the demand scenario in the domestic market? And how are we looking at Q4? Because we are getting sort of mixed signs on the demand side. If you could just comment on that and any price hikes which we are looking to take?

[Thachat Narendran, executive]

Sure. So I think the demand has been quite strong, actually, as you saw year-to-date, the steel consumption in India has grown at about 10%, 12%. So demand has been strong. Pricing has not reflected that robustness of demand so far. So sometimes when you say there's a mixed view on demand, I think it's driven more by the traders and the distributors because oftentimes, if they have confidence that prices are trending up, they stock up.

And if they feel that prices are not so great, they tend to stock down. So that's what drives the demand in some sense at the point-of-sale level, I mean, from the steel company to the trade. But the consumption wise, which is going to be a reflection of how the end user industries are doing is quite strong. As auto is doing strong. Railways continues to invest, infrastructure investments are strong.

So when we look at different elements of consuming segments, it's quite strong. The fact that the demand is strong is the reason why even during last quarter, the steel prices in India dropped by maybe 3%, 4% compared to the 7%, 8% that it dropped internationally, right? So the price drop in India has been less than what it has been in the international markets.

What has happened is every time the steel prices start going up and international prices are low, there's always a threat of imports and that acts as a cap, and that is what has happened. What we are waiting to see is, of course, what is the situation in China. Even over the last 2, 3 days, there's been a fair amount of discussion not what they're going to do to revive the economy.

Second is what is their exports going to be? Because last year, you had a lot of exports in China because most people expected the Chinese demand to pick up strongly after the COVID restrictions were removed in the early part of last year. That did not happen, but production ramp-ups had happened. And hence, all of that found it's way to the export markets.

But as you will see from the numbers, the Chinese steel industry is not really making money. Their profitability is not great. And hence, you've also seen Chinese steel prices go up about $30 in the last -- during December. So either the prices have to start moving up or they have to start cutting production at some point in time.

So we expect a better balance on Chinese production versus demand this year than we saw last year. So the international prices will have an impact on the prices in the domestic market. That's why we've guided INR 1,000 less on a Q3 average versus Q4 average basis in India.

In Europe, spot prices are going up, as I said, for reasons -- for different reasons. But in India, let's wait and see how the Chinese market moves and maybe we will have a clarity only after the Chinese New Year. So it will take another 2, 3 weeks to have greater clarity.

[Operator]

Next question is from Satyadeep Jain of AMBIT Capital.

[Satyadeep Jain, analyst]

First question on the -- on India, on growth beyond KPO2. Tata Steel obviously has long-term target of 40 million tonne in capacity in India. As you look at maybe FY '27, where can the incremental growth after KPO2 come, what kind of ballpark capacity, is it going to be NINL or something else? And would we look at somewhat similar capital costs as we've seen for KPO2, that's the first question.

[Thachat Narendran, executive]

Yes. So I think the most ready part of our plan is actually Neelachal, because that's what we've been working on. We need to do some more work on that. And that's about taking Neelachal from 1 million to about 5 million tonnes. We have an option -- Kalinganagar also we want to develop a plan so that as we complete the Phase 2, we can start looking at Phase 3 because that means you need not decommission the vendors and things like that, and there are some advantages of that.

So we'll explore that. That is about Kalinganagar moving from 8 to 13. And we are also parallelly looking at the Meramandali plant, the Bhushan plant to go from 5 to 6.5 as step 1 because to go to 10, you need to acquire some land, et cetera.

So all these 3 are options available with us. Over the next 6 months, we will come closer to finalizing them because we've also changed the way we are doing capital projects. We are following an FEL approach, which means we go to a much higher level of -- we do the engineering first, the detailing first so that we have a far more precise understanding of cost before we take the board approval. So we are doing that FEL3 for Neelachal. We will be starting that soon for the Kalinganagar Phase 3 and work is also going on, on the Meramandali plant.

So I think the next 6 months, we'll be able to give you a bit more clarity of that. These are the big ones. Of course, there are the smaller ones going on. So in the next 2 years, you will, of course, see the ramp-up of Kalinganagar and that will give us the additional 5 million tonnes and there'll be a bit of increase in volumes in Tata Steel, what was Tata Steel long products in the long products business because we're adding a rolling mill in Jamshedpur and making some small investments in the steel mill shop in Gamharia, which is Usha Martin plant, that will give us another 0.5 million tonnes.

[Satyadeep Jain, analyst]

So these capacity expansions in Meramandali, in NINL would be somewhat similar CapEx cost as KPO2? Or could there be cost inflations?

[Thachat Narendran, executive]

Yes. So I think KPO2, we had a slightly different kind of thing. Neelachal should be lower simply because it's a long product plant, and so we just need to see how to work out the optimal CapEx there. That's what we're doing just now. The Meramandali also should be lower because it is -- you're not adding a full-fledged plant.

And Kalinganagar also we should take out the cold rolling mill. That's a significant part of the CapEx. So we have to -- that's about INR 6,000 crores out of the Kalinganagar expansion Phase 2. You're not adding cold rolling mills in any of these plants. So you will not have that. So if you look at it at the rolling stage, I think it should be at Kalinganagar levels or lower.

[Satyadeep Jain, analyst]

Second question on Europe. Any update on -- you did mention the industry supercharger scheme. Any update on what's happening? Is it setting stone? Is it going to come online in '25? And also scrap, given you'll require higher quality scrap for producing flat steel. How are you looking at sourcing strategy for that client's slab?

[Koushik Chatterjee, executive]

So in Europe, the supercharger scheme is already legislated. So the -- it's a network cost reduction of about 60%. It was -- and that's something that the U.K. government has already notified and is going through the subsidy control process, the EU stated process, not subsidy control process, stated process. And that should be applicable when our EAF is up. The CBAM will -- is also being notified and the consultation process is underway. So we expect that to be in force and by the time the EAF is commissioned in '27.

As far as scrap is concerned, we are now working on the U.K. scrap system, understanding the supply chain, looking at some of the opportunities that exist in different forms. So I think we have 2 years or so to work and set it in place, which also includes infrastructure, which includes also processing facilities.

Now whether that -- those entities can do it or we have to do it is the conversation that we will start. What kind of partnerships, alliances or opportunities that we look at is what we are scanning just now. So it's multiple work streams at this point of time as we proceed over 2024.

In particular, I think a lot of these will become clearer. We also don't want to go ahead of time, but in time, but we -- it's always good to ensure that, that supply chain is secured. So there is some work going on, especially in the infrastructure and logistics side for scrap and for processing a high-quality scrap, which will be required.

[Operator]

The next question is from Anupam Gupta of IIFL.

[Anupam Gupta, analyst]

Yes. So firstly, if you can give some more clarity on the volume. So you said 0.7 million tonnes. Yes. So on volumes, you said that Kalinganagar will contribute 0.7 million tonnes at this point of time. But overall, what is the volume guidance which you are looking at for India business for next year apart from the Kalinganagar facility?

[Thachat Narendran, executive]

Samita, do you want to give a number now or we will to do this in the next quarter.

[Samita Shah, executive]

Yes. So Anupam, as you know, we share annual guidance on volumes, et cetera, in our fourth quarter discussions because that's been the plan for the year's finalize. So I think Naren gave you a broad sense, but more specifically, we'll be able to discuss it next quarter.

[Anupam Gupta, analyst]

Sure, okay. And secondly, on -- you said that in terms of coal, the benefits is because of the mix which you have been able to manage better. So what is -- if you were to quantify what is the absolute, let's say, consumption costs which you are seeing in fourth quarter, when you say that you'll have $11 higher, what is the absolute number which you are looking at?

[Samita Shah, executive]

It's around $250 levels.

[Anupam Gupta, analyst]

So broadly around $50, $60 lower than what you have for the prime mix?

[Thachat Narendran, executive]

Yes. Because this includes -- this $250, $255, which Samita was talking about includes everything from PCI to the prime. So it's a full range of...

[Operator]

The next question is from Tarang Agrawal of Old Bridge Asset Management.

[Tarang Agrawal, analyst]

A couple of questions from my side. One on India. If you could give us your met coal mix between whatever you procure domestically versus pulverized versus premium low value versus leaner blends? I mean, a broad split in terms of what percentage of your overall procurement would be in either of these baskets?

[Samita Shah, executive]

Naren, if I could answer that.

[Thachat Narendran, executive]

Yes.

[Samita Shah, executive]

So Tarang, I think the mix actually changes quarter-by-quarter, and it's very dynamic based on the value in use principles which we follow. So we will really not get into the specific details. I don't think that's something which we would like to share. But it's a very dynamic number, which just changes quarter by quarter.

[Thachat Narendran, executive]

The only thing I'll add to that is domestic, our own coal is about 20%. And -- I mean, what we buy is 80%.

[Tarang Agrawal, analyst]

Okay. And how does that fall in terms of pricing, the domestic coal? Is it at par with the international coal that we see? Or is it captively from out of mines?

[Thachat Narendran, executive]

Domestic largely is from our mines, but we also participate in some of the options that there are because we have extra washing capacity. So if we get some coal from, let's say, one of the coal companies or public sector companies, then we buy that, wash it and use it.

[Tarang Agrawal, analyst]

But a large part of it would be through our own mines?

[Thachat Narendran, executive]

Absolutely. Yes.

[Tarang Agrawal, analyst]

Second, how far is the 2.2 million tonne CRM and the 6 million tonne pellet utilized?

[Thachat Narendran, executive]

So the pellet plant is 2 lines. One line is already fully commissioned. The second line started 2, 3 months back. So basically, it is -- we don't really need both the lines to now operate at full capacity just yet because once the blast furnace starts, we will need both the lines to operate at full capacity.

So our objective is not to buy pellets. So we are not buying pellets, we're hardly buying any pellets. So as the blast furnace ramps up, we will use both the lines available in the pellet plant. As far as the cold rolling mill is concerned, the cold rolling mill, we had scheduled to reach about 50,000 tonnes, 55,000 tonnes a month by this time, and we're already at that stage as far as the cold rolling mill is concerned.

[Tarang Agrawal, analyst]

Okay. Last question. There's a news around U.K. likely to levy carbon tax on imported steel from 2027 onwards. I think there was something that came out on 18 Jan. How does this development impact transition for Port Talbot?

[Koushik Chatterjee, executive]

That's actually the one that I mentioned, the CBAM, the carbon border adjustment tax, if you are talking about that, which is going to come in '26 -- '26, '27 because they've been doing the consultation just now, most likely '27. That actually helps Port Talbot because end of the day, any import into U.K. will have to pay the carbon tax whereas we being the only flat product producer will then on an EAF will be on a significantly low carbon emissions.

So therefore, the delta between an imported coil and what we produce from a carbon point of view, potentially, especially from blast furnace route will be significant. So that CBAM, as you know, in the EU has already started from a recording perspective, '26, it will start from a taxation perspective. U.K. will be more around in '26, '27, so which will be just in time as we commission our facilities.

[Tarang Agrawal, analyst]

Yes. So calendar year '27, sometime first half is how we are probably looking at our commissioning for our EAFs?

[Koushik Chatterjee, executive]

We -- in '27, I can't say first half or second half at this point of time, but there's also a concurrent stuff, which is required, which is the electric grid line, the electricity line, which is what I mentioned that the national grid, we are in conversation with, and they have agreed to a '27, earlier it was some time later. So we have now kind of confirmed and working through the process to get the required electricity line into Port Talbot. So that is '27. So I think some -- in the calendar year '27 certainly, we will be there.

[Operator]

The next question is from Ashish Jain of Macquarie.

[Ashish Jain, analyst]

Sir, my first question is for U.K. just to understand the onetime cost better. Is it fair to say that today, it is GBP 130 million plus GBP 20 million, is the potential onetime cost, if everything pans out the way we are thinking?

[Koushik Chatterjee, executive]

Yes. So I think we gave that number of GBP 200 million -- we took the provisions of around GBP 200 million plus. So GBP 130 million plus GBP 20 million is the number -- GBP 20 million is the number and GBP 130 million is the number which we said we are willing to go beyond GBP 130 million, depending on the negotiations that happened on the discussions that happened, but GBP 130 million certainly to be factored in. So it could be delta to GBP 130 million.

And depending on the -- it's -- also you have to look at it holistically and ensure that there is a balance between what we want to drive in terms of timing and the smoothness of this transition. And that's the consideration will help to -- help our colleagues, our employees who are infected.

[Thachat Narendran, executive]

But we didn't want to give a precise number now since we are -- that's part of the discussion.

[Ashish Jain, analyst]

Just a continuation of that. So when we say that whatever is the number of employees who will get impacted, the count, the rundown in the count will happen in the next 18 months. So for that period, they remain, we will continue to incur the existing compensation as well for those employees, right?

[Koushik Chatterjee, executive]

So it is not that it is starting 0 and the end is 18 months later. It's phased out. Yes. So as the phaseout happens, people -- we expect the people to move on. And give -- so the key area of that is and the reason why we mentioned that 18 months, the reason why we mentioned GBP 130 million is to bring some certainty to the conversation and the certainty to the process.

So people don't assume differently. After all, it's their work, their lives also. So I think it is that which required us as a responsible company to give certainty to the way we want to approach this. As you can see, there's a lot of news flow around it. But we want to approach it in a manner which is dignified, which cares for people and yet gets to the business objective which has been hurting Tata Steel for some time.

[Ashish Jain, analyst]

Koushik, I understand that. I was just trying to understand that given we will be importing steel and serving the U.K. market, in this transition period, and we will also not see a massive reduction in our fixed cost. Is there a chance that U.K. will continue to bleed from cash flow point of view, at least for the next 12 to 18 months?

[Koushik Chatterjee, executive]

So that's why I said it is not that fixed costs will not get reduced. Fixed cost will be reduced. And that is one of the biggest play that will have unfold in the next 12 months. In '25 -- '24, '25, I think the biggest part will be taking out of fixed cost. Because, for example, I'll tell you, when you don't have a line of sight or when you have a definitive line of sight, you don't take heavy cost to invest -- heavy cost to undertake other than to carry it on till the time it needs to be on a safe basis.

So there are many cost takeouts and cash. There was a program drive to save U.K., which has been launched, I think, about 8 months back. And that is -- that has got every little piece of cost savings embedded into it. So we are very focused in taking out the cost, and we should see the cost takeouts happen, not only just employees but also in the context of other overhead costs, other discretionary costs and so on.

So that cost takeout will happen. 2024 calendar and '24, '25 financial year will be the transition year. And as we move into '25, '26, I think we have -- we will have a clear transition model. And in parallel, the investment model and then '27, we get into the end state.

[Thachat Narendran, executive]

I'd like to add here, see, we should also keep it by the last 12 months or some of the highest energy costs and lower spreads. So we expect energy costs to be lower and the spreads to be higher. That will also help.

[Ashish Jain, analyst]

Okay. And sir, just 1 last question. The volume commitment in the U.K., is that like a hard commitment from our side? Or we have an optionality of -- based on our market conditions, we have any flexibility on that front? I mean it's like a binding thing for us, right?

[Koushik Chatterjee, executive]

No, there's nothing binding. It's the downstream that you want to operate and you want to operate profitably. So it is -- effectively the entire volume is based on what the downstream facilities will take and profitably serve the customers that we have already.

[Thachat Narendran, executive]

Are you talking of the transition? Or are you talking of the EAF?

[Ashish Jain, analyst]

No, no, the transition, the transition.

[Thachat Narendran, executive]

Then what Koushik saying is the right. Because the EAF size is committed, that is committed as per our agreement with the government and everyone else.

[Koushik Chatterjee, executive]

So engineering wise that is the most kind of optimal size that we wanted to build.

[Operator]

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

[Samita Shah, executive]

Thanks, Vinshu. There were questions on U.K., I think, which we have answered in detail. So I will shift to the questions which we have. I think they're largely on India. So the first question is with regard to TSK2, what sort of incremental employee cost are we looking at once it's commissioned?

[Thachat Narendran, executive]

Incremental -- in fact, the employee cost per tonne will come down actually. So I don't...

[Samita Shah, executive]

Yes. So I think they haven't sort of understood, but maybe we can clarify that we already have employee...

[Thachat Narendran, executive]

So I think Kalinganagar, when you look at it, the plant was originally designed for 6 million tonnes, which, as we were planning Phase 2, we decided to take it to 8 million tonnes. So a lot of our -- while Kalinganagar today is as it is one of our most cost-efficient plants because of the way it is configured, the way it is manned, et cetera. It will only get better as you expand because a lot of the utilities have been designed for more than 3 million capacity at which we are operating today.

So when we are at 8 million, we will be more optimal in terms of a lot of utility cost, labor cost because it's not that from 3 million to 8 million, you're going to double the workforce. The workforce, in most areas is pretty much in place. So our manpower productivity will improve. Our labor cost per tonne will reduce. Our conversion cost will reduce as we come to Phase 2, but Samita can separately give you guidance, which may be more specific.

[Samita Shah, executive]

Yes. I think that's just conceptually for you to understand. And I think that will really address the problem. The next question is actually on iron ore self-sufficiency. So what is the level of iron ore service efficiency in India, that's 100%. But the question is actually on the pellet plant.

Before commissioning of the pellet plant, how much pellet were you buying from outside? Was it a direct purchase? Or were we providing iron ore for conversion and paying only conversion charges? Because I think the idea is to understand the amount of savings from the new pellet plant.

[Thachat Narendran, executive]

Yes. No, I think -- I mean, firstly, most of it was at market prices. There were some that -- we were -- the only conversion we were doing is in our own plant, in the Usha Martin plant, what was erstwhile Usha Martin plant. But otherwise, pretty much, I would say, all the pellets were bought at market prices. So that's why there's a significant saving. I don't remember the number, but clearly, we have bought about 2 million tonnes -- 1.5 million to 2 million tonnes, if I remember right. I'm not going to recollect the exact number. Yes.

[Samita Shah, executive]

Yes. The next question is on M&A plans in India. So it says there are ESL Steel Assets, I presume this is Electrosteel, which they are referring to. That seem to be available and Tata Steel has been interested in those assets in the past? Would you consider buying this asset?

[Thachat Narendran, executive]

So we were interested in that asset at a point in time when we didn't have Neelachal. Now that we have Neelachal. I think we have enough opportunity to grow in long products through Neelachal, and we bid for Neelachal partly because there's 2,500 acres of land available for us to expand. So we would focus on growing Neelachal and unlocking the value from Neelachal.

[Samita Shah, executive]

Then there is a question on Chinese prices. Do you think Chinese prices will go up significantly given that they are importing cheaper coking coal from Russia, compared to Indian manufacturers who are importing Australian coking coal?

[Thachat Narendran, executive]

So that has always been there, and China also has domestic coal available, not of great quality. But they have to import iron ore. Iron ore, as you know, is today in that $130 reach, it had gone up to $140. And if you look at the profitability of the industry, they are struggling.

So I think that's where the hot rolled coil prices, domestic, which were gone down to $530 has gone up to around $570 levels. We do -- I think that's why I'll wait for another month or 2 to see what happens because more recently, we had the stimulus announcements, how will that impact the industry, et cetera, is something which we need to wait and watch.

But I do believe -- I don't see China exporting 90 million tonnes this year as they did last year. I think -- I hope that will start coming down because China has stated in the past that they don't want to export so much of steel and leave behind such a big carbon footprint. Because they also have a lot of work going on in China to reduce the carbon footprint. Whether it is a steel industry, trying to make greener steels, auto industry shifting to EVs.

So I do expect that China will really look at 90 million tonnes x 2, that's 180 million tonnes of carbon left behind just for exports, so that they will discourage that I'm sure at some point in time. But of course, what they're encouraging is exports of cars, exports of capital goods, which is more value addition rather than exporting basic steel. So let's wait and see. I think this year, we'll have a better sense.

[Samita Shah, executive]

With that, we will end the call. We've answered the chat questions and we'll end the call. So thank you, everyone, for your participation, and we look forward to connect with you again next quarter. Thank you.

[Thachat Narendran, executive]

Thank you.

[Koushik Chatterjee, executive]

Thank you.