Tata Steel Ltd (TATASTEEL) Q3 FY23 Earnings Concall Transcript

Tata Steel Ltd (NSE: TATASTEEL) Q3 FY23 Earnings Concall dated Feb. 07, 2023

Corporate Participants:

Samita Shah — Vice President, Corporate Finance, Treasury and Risk Management

T V Narendran — Chief Executive Officer and Managing Director

Koushik Chatterjee — Executive Director and Chief Financial Officer

Analysts:

Pinakin Parekh — JPMorgan — Analyst

Amit Dixit — ICICI Securities — Analyst

Indrajit Agarwal — CLSA — Analyst

Satyadeep Jain — Ambit Capital — Analyst

Ritesh Shah — Investec — Analyst

Kirtan Mehta — BOB Capital — Analyst

Tarang Agarwal — Old Bridge Capital — Analyst

Sumangal Nevatia — Kotak Securities — Analyst

Anupam Gupta — IIFL — Analyst

Prashant Kota — Emkay Global — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions]

I now would like to hand the conference over to Miss Samita Shah. Thank you and over to you, ma’am.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Good afternoon, good morning and good evening to all of you joining us today. Welcome to this call and thank you for dialing in. We have with us our CEO and MD, Mr. T V Narendran; and we have with us our ED & CFO, Mr. Chatterjee, who will discuss the results and walk you through any questions you may have.

Our presentation, which describes the results, has been uploaded on our website. Do go through it if you haven’t already and we will take questions in audio mode as well as chat mode.

Before I hand it over to them, I would just like to draw your attention to the clause on Page 2 of the presentation, which is the Safe Harbor clause, which essentially will cover the entire discussion today.

Thank you and over to you, Naren.

T V Narendran — Chief Executive Officer and Managing Director

Thanks, Samita. Good day, everyone. A bit of a narrative on the way we see the situation. The global operating environment has continued to be volatile during the quarter, amidst inflationary pressures, tightening financial conditions and the COVID overhang. And among the key economies, the U.S and E.U. witnessed a quarter-on-quarter decline in industrial output, while the Chinese GDP grew at its slowest pace since 1976.

Given this backdrop, global steel prices continued to remain under pressure for most of the quarter and resulted in subdued steel spreads. In the E.U., the steel spot spread, including energy and emission-related cost went close to $200 and in India, economic activity remained resilient; however, depressed international prices weighed in on the sentiment.

Moving to our performance. Tata Steel India deliveries stood at 4.74 million tons and were up 7% year-on year, primarily driven by the 11% growth in domestic deliveries. Our domestic deliveries grew at a faster pace than the Indian steel apparent consumption, which was about 8% year-on year and it reflects our strong market presence across segments and agile business model.

Some of the highlights were value-added segments like the oil and gas infrastructure, solar and retail housing grew by about 17% on a year-on year basis in part due to the expanding product range and innovative solutions. Tata Tiscon, which is largely sold to retail customers, registered a best-ever quarterly sales, and we continue to expand our physical reach via new dealers and virtual reach through Tata Steel Aashiyana, our e-commerce platform for individual homebuilders. And sales through Tata Steel Aashiyana have consistently grown over 50% in the last two years.

Our sales to the MSME sector has grown by 25% to 30% year-on year in the last two quarters and we have moved from tracking six segments to 80 micro segments which has helped us understand customers better and enhanced the ability to move material across micro segments based on demand.

Looking ahead, we expect Indian steel prices to move higher based on improved expectations about the Chinese demand and the sustained government spending on infrastructure in India. The raw material costs are likely to remain range-bound. And fourth quarter is also seasonally the stronger quarter in terms of deliveries and we’re looking to leverage the momentum.

We continue to progress on expanding our capacity across multiple sites in India as we look to grow to 40 million tons in India. And viewed in terms of deliveries, FY ’24 should fully reflect the 1 million ton per annum Neelachal volumes, while subsequent years FY ’25 and FY ’26 will reflect the 5 million ton expansion in Kalinganagar Phase 2 and 0.75 million ton setting up of the electric arc furnace mill in Ludhiana.

We are parallelly expanding our downstream operations at tinplate, wires and tubes. The ongoing expansion in tinplate is from 0.38 million tons per annum to 0.68 million tons per annum. The wire capacity is being expanded from 0.47 million tons per annum to 0.55 million tons per annum, and the tubes capacity from 1.2 million tons per annum to 1.5 million tons per annum.

Separately, phased commissioning of the 6 million ton pellet plant at Kalinganagar has begun and we should stop buying pellets from the second quarter of FY ’24, which will help reduce our cost. We are also looking to commission the PLTCM, which is a Pickling Line and the Tandem Cold Mill, which is part of the 2.2 million ton per annum CRM complex during this quarter.

On Slide 19, we have provided some domestic — details of domestic deliveries across sectors. And over the years, while we have sold more volumes in automotive and share has also moved to around 15% of our total sales and this is set to rise with the commissioning of the CRM complex and the incremental capacity at Kalinganagar. Similarly, the growth in long products will drive an increase in the high-margin retail housing business for us.

Moving to Europe, the steel deliveries stood at around 2 million tons in the third quarter. Though the volumes were higher by 6% quarter-on-quarter basis, the sharp drop in realizations on subdued demand and elevated costs, including energy, have weighed in on the steel spreads. Looking ahead, uncertainty persists about supply-demand fundamentals despite the recent pickup in the E.U. prices, driven by the hopes of a milder and shorter downcycle, Our steel realizations will remain subdued in fourth-quarter, given the lag effects of some of the contracts.

We continue to make progress on our sustainability journey to achieve net zero by 2045 via multiple pathways. We have already started initiatives such as charging more scrap into our furnaces. Our products like TiscoBuild Green Construction Blocks and Dhurvi Gold have — has slag as one of the inputs to achieve solid waste utilization as well as address customer needs for eco-friendly solutions.

Before I hand over to Koushik, I am also happy to share that Tata Steel is the only company in India to be recognized by the World Economic Forum as a Global Diversity Equity & Inclusion Lighthouse and we’ve also been awarded a Great Place to Work certification for the sixth time in a row.

Over to you, Koushik.

Koushik Chatterjee — Executive Director and Chief Financial Officer

Thank you, Naren. Good morning, good afternoon and good evening to all those who have joined in.

Let me give you a deeper sense of the financial performance. Our consolidated revenues for the quarter stood at about INR57,084 crores, while EBITDA stood at INR4,154 crores, which translates to a margin of about 7%. The standalone EBITDA margin was higher at about 18%. Overall, the profitability was affected by a sharp drop in the realizations and spreads in Europe during the quarter.

So first, the standalone and Tata Steel standalone India. The EBITDA stood at INR5,334 crores, which translates to an EBITDA per ton of about INR11,623. Excluding the ForEx impact, the EBITDA stood at about INR4,763 crores, and was up by about 15% quarter-on-quarter. India’s steel prices remain subdued for most part of the quarter. The fall in long prices — long products prices were higher than in the flat products due to extended monsoon and the stoppage of construction in Delhi in the NCR region as per the ruling of the National Green Tribunal. However, the raw material prices were also lower as coking coal prices declined by around $82 per ton on a consumption basis. The royalties also declined by about 14% quarter-on-quarter to INR775 crores. Overall, the drop in cost more than offset the greater-than-expected decline in net realization and that’s led to the margin expansion.

At Tata Steel Europe, the EBITDA loss stood at about GBP166 [Phonetic] million. As Naren mentioned, deliveries were up 6% quarter-on-quarter, but there was a sharp drop in realization within the quarter with revenue per ton being down by about GBP159 per ton. The sharp drop in realizations were part due to the higher spot sales and subdued demand, given the macro conditions in Europe and high stock of inventories with the customers. The costs were higher by about GBP31 per ton, while the coking coal consumption costs were down by about $95 per ton quarter-on-quarter, there was a NRV markdown loss of about 55 [Phonetic] million on the slab stocks being carried due to the forthcoming relining in Tata Steel Netherlands. Energy costs remained broadly stable on a quarter-on-quarter basis. The currency markets have also been very volatile and there has been sharp movement between the USD and INR and the euro-INR to name a few. This has led to an FX impact on the intercompany loans provided over time, and the result — and this resulted in a ForEx gain of around INR1,427 crores at the consolidated level.

Taxes for the quarter stood at about INR2,905 crores and are fundamentally made up of two-parts, A, the current tax, in line with the profitability in India, largely; and B, the noncash deferred tax charge, primarily due to the reduction in the surplus in British Steel Pension Scheme as a part of the de-risking, and I’m coming to that point soon.

We made further progress during the quarter on de-risking the British Steel Pension Scheme and expanded the insurance coverage from 30% to 60% now. This buy-in transaction and the actual movement during the quarter have led to the reduction of the surplus, but it still continues to be material in surplus. As mentioned in the previous quarter, the surplus reduction results in a reduction in the deferred tax liabilities in BOCI but given the large amount of accumulated losses and the deferred tax assets in Tata Steel U.K, we have to limit the movements by recording an offsetting deferred tax expense in the profit and loss account, which is why you see a non-tax deferred charge in the profit and loss. Depending on market conditions, the residual insurance of about 40% liabilities will be completed in the first half of the calendar year 2023, and there will be commensurate noncash deferred tax expenses depending on the size of the de-risking that we do.

Moving to cash flows. The operating cash flow for the quarter stood at about INR5,000 crores. versus INR1,700 crores in the previous quarter and primarily was driven by favorable working capital movement. The working capital release was due to reduction in inventory at Tata Steel U.K. and Tata Steel India on account of low commodity prices or lower inventory levels, but this was partially offset by increase in the slab stocks in Tata Steel Netherlands, as I mentioned earlier. As slab stocks gets consumed over the next two quarters, we expect working capital release at Tata Steel Netherlands also over the next — over the relining period which will be starting in April.

We continue to invest in growth in Kalinganagar and in NINL taking our capital expenditure to about INR3,632 crores for the quarter. The nine months capex has been about INR9,746 crores and we will be targeting to spend around INR3,000 crores in quarter four to ensure that we accelerate the completion of the Tata Steel Kalinganagar expansion project.

Our net debt has remained broadly stable at about INR71,706 crores and the liquidity remains strong at over INR15,000 crores. We are not able to deleverage in this particular year due to very high volatility in the earnings and working capital, our focus on completing the Tata Steel Kalinganagar project, acquisition of Neelachal, which was about INR10,000 crores this year, and the best ever dividends that we paid about INR6,000 crores. Even after this, our net-debt-to-EBITDA is within the long-term target levels of about 2. Our long-term target for deleveraging continues to be the same. We will continue to restart the deleveraging in financial year ’23 -24 and we will continue to ensure that our target of 1 billion is fulfilled and met during the next [Indecipherable] year and going forward.

Looking ahead, the next few quarters are likely to be weaker for Tata Steel in Europe as markets continue to be subdued. The realization for the fourth quarter are forecast to be weaker, and the drop will be higher than the drop expected in the coal and iron ore prices. Furthermore, Tata Steel Netherlands is undertaking a blast furnace reline in quarter four of FY ’24. We are working on minimizing the impact on all of these aspects, including the working capital and margins.

Moreover, there are few specific hazard challenges which we are addressing. Some of the heavy iron assets in Tata Steel U.K. are reaching the end of their useful life. Any long-term solution in the U.K. also has to address the rising cost of carbon and the local emission reduction goals. The U.K. government has provided us a framework of support for the proposed transition of Tata Steel U.K. to a low-carbon configuration. This framework consists of potential partial capital expenditure grant, policy on electricity pricing and regulatory intent to ensure a level playing field for green steel manufacturers. We are currently evaluating this offer of support. We are developing the options — investment options which will be — which has to be capital-efficient, economically viable, bankable, and value-accretive, which will be reviewed internally over the next couple of months and determine the way forward. In the interim, we will continue to run Tata Steel U.K. optimally for cash with minimal support from Tata Steel in India.

With that, I conclude my comments and we open the floor for questions and answers Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Pinakin Parekh of JPMorgan. Please go ahead.

Pinakin Parekh — JPMorgan — Analyst

[Technical Issues] where the company had effectively guided to a certain set of numbers for the India operations and for the Europe operations. Clearly, the earnings are far weaker than that, but it seems that the profitability is lower than peers as well. Can we — can you walk us through as to what happened in the India business in particular if the cost reduction is lower than what we have seen in peers, and how this will trend over the coming quarters?

T V Narendran — Chief Executive Officer and Managing Director

So Pinakin, in terms of cost reduction, I don’t know if you can be more specific, but generally one area where we had a slightly different issue in India is we were ramping up Neelachal. So if you look at it on a consolidated basis, you had the Neelachal business which was incurring costs, but not yet earning much revenue. That will get settled during this quarter because the production is coming up to peak and we’ll be selling. That’s certainly one area. But otherwise, I don’t know of any specific area where our costs have trended differently. I don’t know, if you can be more specific, maybe I can try and answer.

Pinakin Parekh — JPMorgan — Analyst

Sure. I mean, we were just — given that the December quarter and the coking coal cost benefit that was supposed to be there, the margin expansion was probably — markets thought that it could be higher than what we have seen. So just trying to understand, was there any particular realization of contract sales, volume issue or where other than coking coal costs, some of the other expenditure did end up being higher than what was earlier thought in November?

T V Narendran — Chief Executive Officer and Managing Director

No, when we had met in November, I think the guidance on the realizations were not as pessimistic as it turned out to be, right? I mean, if you really look, we went into that quarter, we thought that the prices will — had reached its bottom and will start moving up or if not moving up it will stay stable. But the realization in Q3 in India has been about INR2,000 less than Q2. Right?

Pinakin Parekh — JPMorgan — Analyst

Yeah,

T V Narendran — Chief Executive Officer and Managing Director

So certainly — so the margin expansion in Q3 was largely supposed to come from the drop in coal cost — consumption cost. The coal consumption [Technical Issues] by $90 a ton, which is what we had guided in November. We had said $90, I think we ended up close to that. But in terms of — since we had expected — we didn’t expect the prices to drop as much as it did, right, and, by that time, it was already towards the end of December. And secondly, we were also hoping to get the relief on export duty earlier than when it came. You know it came only in the middle of November whereas we had been hoping that it would have come earlier because the steel prices in the domestic markets were still quite low.

Pinakin Parekh — JPMorgan — Analyst

Sure, sure.

T V Narendran — Chief Executive Officer and Managing Director

[Technical Issues] We actually had a pretty good quarter as far as production is concerned and I think, at least in India, we didn’t have any issues.

Pinakin Parekh — JPMorgan — Analyst

Sure, fair enough. My second question is, just going back to Neelachal and you said that it was — it has been ramping up during this quarter. Now if you look at the medium-term ROIC target of 15% on a INR12,000 crore investment, it effectively implies a steady-state through-cycle EBITDA of INR2,000 crores from that acquisition. So when can we see that kind of earnings come through from Neelachal because clearly, at this point of time, it is a material drag on consolidated earnings?

T V Narendran — Chief Executive Officer and Managing Director

Yeah, so Pinakin, basically in Neelachal, we were EBITDA-negative in the last quarter and that [Technical Issues] changed, obviously, because one is, we are today producing at least 50,000 tons, 60,000 tons a month, and we hope to take it to 80,000 tons a month of steel, I’m not talking of hot metal. Hot metal, the blast furnace is already at 80,000 tons, 90,000 tons a month, okay? So we think that [Technical Issues] go up, the billet production is there and we are selling the product as Tata Tiscon.

So next year, for instance, you will see 1 million tons of production out of Neelachal, right? So [Technical Issues] return on investment on Neelachal was also based on the expansion of Neelachal beyond the 1 million ton. The INR12,000 crore valuation was not for 1 million ton capacity, but was for the opportunity for us to increase the size because if you look at 1 million ton capacity, we would have been closer to what we paid for Usha Martin or something like that, right? because they [Technical Issues] INR5,000 crores. What we paid extra was for the iron ore, which has come at a premium and we paid for the land, which is 2,500 acres of land. That’s what we paid the premium for. So that — to monetize that, we obviously need to expand Neelachal to about 4 million ton to 5 million ton at least, which we will do. We’ll go to our Board [Technical Issues] once we’ve ramped up to 1 million tons. We were waiting for this 1 million ton operating rate to be reached before we go and ask for more capital to expand Neelachal.

Pinakin Parekh — JPMorgan — Analyst

Understood. This is very helpful, thank you very much.

Operator

The next question is from Amit Dixit of ICICI Securities. Please go ahead.

Amit Dixit — ICICI Securities — Analyst

[Technical Issues] everyone and thanks for the opportunity. I have two questions. The first one is, as I see on the noncash deferred tax payment or provision in the consolidated numbers. So is it possible that, theoretically, if there is profit in Tata Steel Europe then this can be offset at a later date, so theoretically, we can get a lower tax rate? Or is it that the profit has to be in Tata Steel U.K. for the offset to take place?

Koushik Chatterjee — Executive Director and Chief Financial Officer

Yeah. Amit, the offset has to be in the entity which is carrying this, which is Tata Steel U.K.

Amit Dixit — ICICI Securities — Analyst

Okay, okay. The second question relates to the spreads in TSE. Now, while in the prepared remarks, you have mentioned that the drop in realization would be higher than the benefits of coking coal and stroke iron ore escalation whatever is there. Now, will there be any NRV provisions in this quarter as well, given that prices have moved up in Europe, 55 million was what was recorded in last quarter. Will there be something in this quarter also? And will we have EBITDA — more EBITDA compression or will we end up with a number lower than what we have in this quarter on per-ton basis?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So I think, to answer that question, first is, we have kind of taken all the NRVs that we could estimate. As you know the NRV is point to point. It is at the end of the quarter. So we had stocked up slabs in IJmuiden in Netherlands in anticipation of the blast furnace reline and as the blast furnace reline will take about 120 days, you had to have enough stock to run the business and service the customers. So this stock which has been accumulated over the last six months almost, was on account of the fact that at that point of time, the coal prices were about 450 — north of 450, iron ore prices were also high, which is why this NRV testing happened and that’s the write-down or the NRV mark-to-market is what we have taken in this quarter. If the prices don’t fall very sharply or significantly from here, I don’t see any material NRVs, I can’t rule out small changes in NRVs, but nothing material in that nature.

And we are just now actually — the other thing is, as I mentioned in my remarks, both in U.K. and Netherlands, we’re going to go — run flat-out for cash, and therefore, if that is the case, then we are also targeting significant stock level reductions from — as far as practical to run the business. And therefore the end March inventory numbers should also look much lower. Hence, the risk of the NRV comes down.

Amit Dixit — ICICI Securities — Analyst

Great. Now, one associated question, Koushik, is that the annual contracts that are going to be negotiated maybe from CY ’23, the expectation is that they would be negotiated at a significantly lower level, given that what we had in CY ’22. And the quarterly contract that possibly you will enter in March and all would again be at a significantly lower level because at that time Russia-Ukraine war was there, last time, when prices simply went over the moon. So do you expect that contracts — monthly contracts or quarterly contracts will be negotiated lower and therefore we can have this overhang of lower realization extending right into the first six months, lets us say, of FY ’24? That’s it.

T V Narendran — Chief Executive Officer and Managing Director

So, Amit, let me put it this way, the annual contracts that we had for last year, most of them were in excess of EUR1,000 a ton, okay? So this year, while the annual contracts are at a lower level depending on which sector which industry from maybe 100 to 150 or maximum of 200, but they’re still higher than the spot prices. That’s one point I wanted to make.

Secondly. The spot prices are what is going up now. If you’ve seen it, in Europe also it’s gone up by about EUR50 a ton. If you look at last quarter and it’s an extension of Koushik’s answer, the cost of Q3 is higher than the cost of Q2 because of these NRV provision. So despite the coal being $90 per ton cheaper and iron ore being $20 per ton cheaper, our cost is GBP31 per ton higher in Q3 compared to Q2, only because of this NRV provision.

So when you look at Q4, we expect that the realizations in Europe will be about GBP70 per ton lower than Q3, but we expect cost to be at least GBP100 per ton lower on a Q3-to-Q4 basis. So we see a margin expansion per ton this quarter. Of course, we are still looking at gas prices and many other moving parts just now, but at least from a margin per ton or EBITDA per ton point of view, hopefully, the worst is behind us for as far as Q3 is concerned.

Now going forward, the stocks that Koushik said, basically we had to build about 700,000 tons of stock, that will start getting converted into cash. While the blast furnace will be down, the sales will not be down to the extent of what production is down and that’s what the slab stocks are going to do. So — and since that NRV projection has been — NRV correction has been done for the slab stocks, if the spot prices and the steel prices keep going up, we shouldn’t have a problem.

Operator

[Operator Instructions] The next question is from Indrajit Agarwal of CLSA. Please go ahead.

Indrajit Agarwal — CLSA — Analyst

Hi, can you hear me?

T V Narendran — Chief Executive Officer and Managing Director

Yeah.

Koushik Chatterjee — Executive Director and Chief Financial Officer

Yes, yes.

Indrajit Agarwal — CLSA — Analyst

Okay, hi, thank you. I have two questions. First, if you can give us some indication as to what would be the relining capex and how long would the shutdown be? And in lieu of that, what is our cash fixed cost per ton in Europe? So at what EBITDA levels we will not need support from India? That is my first question.

Koushik Chatterjee — Executive Director and Chief Financial Officer

So I think the blast furnace shutdown is planned at about 120 days. And the cash part of it is already — it’s not the new cash will also come in, but it’s a question of — also ordering has also been done over the last one year. So some part of the cash has already gone out and there will be some spend, obviously, as the relining happens, because that’s the period. And it is in the ballpark of about EUR250 million to EUR275 million and that is the — of which, some of it has already been spent and some will be spent. And I think if I can put it in the reverse way, the Tata Steel Netherlands is actually sitting on EUR600 million of cash. So they don’t require any money from India.

Indrajit Agarwal — CLSA — Analyst

And U.K. would still need the cash infusion?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So that’s why I said that in my comments that we would look at running it on — for cash and we will minimize as much as we can. We’re looking at driving it, and including in this quarter, there is almost about INR1,000 crores of working capital release. So we will continue to push that very hard.

Indrajit Agarwal — CLSA — Analyst

Sure, thank you. My second question is on coking coal. While we understand your fourth quarter guidance, but given the news-flows around Australia, China trade opening up, how do you see coking coal prices trending on a more like six, nine-month basis from here?

T V Narendran — Chief Executive Officer and Managing Director

So I think coking coal is obviously not as liquid a market as one would like it to be and hence, it’s very vulnerable to these fluctuations. But generally, we do see — unless there’s, what do you call it, an odd event like the Russia-Ukraine situation, otherwise, we see coking coal prices between $250 and $350, it’ll fluctuate in that range. There would be some weather event in Australia for which it may spike up or something else. But we are not seeing coking coal prices drop much below $250 in the short-term or medium-term, because, honestly, there are not so many investments being made in coking coal, because generally, coal is seen as a bad basket to invest in. So this is where the challenge is. But I think this is the range at which we see coking coal prices. Today, it’s gone up closer to $350.

Your question on China buying coking coal, well, I think one thing which China has done well is they’ve managed for the last few years without buying Australian coking coal. So, they’ve managed to get the quality they wanted out of the facilities that they have. They’ve also been buying out of Russia. So I’m not sure it will make such a material difference as you could have done three, four years back because they have developed alternate sources over the last few years.

Indrajit Agarwal — CLSA — Analyst

Sure, thank you.

Operator

The next question is from Satyadeep Jain of Ambit Capital. Please go ahead.

Satyadeep Jain — Ambit Capital — Analyst

Thank you. A couple of questions on Europe. First on the profitability. I believe a couple of years ago, the company was embarking on transformation program. At that time, the thought was that at these rates of about EUR240 per ton, the company was looking at being cash breakeven. Given the current spreads are also about EUR200 per ton, not too far from there, at these levels, the company should have been possibly be at least EBITDA breakeven. Is there something — and maybe if the Europe — the U.K. plants are reaching end of life or is there anything else going on that is leading to that deviation from the targeted transformation plans? That’s the first question.

T V Narendran — Chief Executive Officer and Managing Director

Yeah. So, Satyadeep, I think two things, one is, of course our traditional view of spreads now needs to get corrected for energy costs and gas costs because traditionally, energy and gas was hardly — and carbon together was less than 10% of the raw material costs, whereas it went up last year to almost 40%. Right? So it played a very material role. Now it is coming back to around 10% to 20%, so it’s at a more reasonable level. So that is one thing. That’s why what we had traditionally seen as EUR225 and EUR250 spreads, we’re assuming that gas and energy prices won’t be as high as it is today. So that is one change.

Second point is, if you really split the U.K. and Netherlands, the Netherlands business has traditionally been EBITDA-positive, cash-positive for sure every year and pretty much all quarters. So it’s only last quarter is one of those quarters where it was EBITDA-negative, but largely because of the NRV provisions that we had to make on the slab stock, which itself was a unusual situation as a build-up to the blast furnace and all. U.K. is where we have a challenge because energy costs have always been higher and it’s become even higher. We have some challenges on end-of-life. So what happens in a end-of-life situation is the production levels are also not as stable as we would like it to be and that leads to unplanned outages. So that’s something that we are dealing with. So a lot of the underperformance has been in U.K. for the last quarter. Netherlands also has not had as good a quarter as they would normally have.

So we expect in Netherlands, at least, obviously — operationally this quarter is fine, but next quarter we have this blast furnace relining, after that things should come back to a stable state in Netherlands. The U.K. situation is slightly different. Cost situation is improving in both these places because energy prices have come back close to pre-Ukraine levels. So that’s the way we see it. I think Netherlands should continue to be cash-positive and EBITDA-positive and should not need support from India. U.K. is what, as Koushik said, we will take a call going forward what best to do.

Satyadeep Jain — Ambit Capital — Analyst

And the transformation…

T V Narendran — Chief Executive Officer and Managing Director

Sorry, to come back to that, yes, it has given us the numbers that we were chasing. You should also keep in mind that Europe is today in a high inflation environment. So the inflation is much higher than what we had thought two, three years back and that also has an impact on costs. So even if we have taken out a lot of costs, some of the costs, because of inflationary pressures, have gone up more than we had planned three years back.

Satyadeep Jain — Ambit Capital — Analyst

Understood. Sir, second question is on capex. So the $250 million to $275 million for relining, I think I was under the impression that this is going to be a partial relining, given the eventual transition to DRI sometime in future. Is this capex for partial relining seems somewhat high? And secondly on the — the media reports indicate possibly a $1 billion-plus requirement for conversions for U.K. plant. If I understand it correctly, the idea is to convert into a standalone EAF, given these scrap supplies there. The capex required for a standalone EAF should be, I believe, much lower than those media headlines. Is there a thought behind maybe not just looking at standalone EAF for possibly flooring [Phonetic] other options there? Those are the questions on capex.

T V Narendran — Chief Executive Officer and Managing Director

Yeah, so on the relining, it depends on if you’re comparing to a relining cost in India or something, obviously, $275 million looks high, but if you compare to what relining costs in Europe, it’s comparable. Having said that, this blast furnace is expected to run at least till 2035 even in our transition plan. So that’s why this is being relined for that kind of a life. The blast furnace which will go down first will be the blast furnace which is coming up for relining in 2026 or 2027. So we have two blast furnaces in Netherlands. So this is being planned to be run till 2035 even in our transition plan. Okay? That is one point.

As far as U.K. is concerned, the media reports on the numbers are speculative, so I don’t want to comment on that. But having said that, the proposal to the government was not just about in EAF, but it was also about the hot strip mill, which was also coming to end-of-life and some of the other assets which were important to keep the site sustainable. So that’s why the amount was more than what we would spend typically on a EAF. But given what we’ve got from the government, we are looking at what then could be the next best thing. What is the best that we can do with the kind of money that may be made available to us and the policy support that we will get from the government. So I think this is what we are working out based on the recent inputs that we’ve had from the government.

Satyadeep Jain — Ambit Capital — Analyst

Thank you.

Operator

The next question is from Ashish Jain of Macquarie. Please go ahead. Ashish, we are unable to hear you. We request you to please send in your question via chat. We will take it up in the chat questions section. We’ll now move on to the next question. The next question is from Ritesh Shah of Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

[Technical Issues] Yeah, hi, sir, couple of questions. Sir, first is, can you broadly give us some color on the assets that we have in Europe? I think in the prior question you indicated there are two furnaces in Netherlands, one, what is due for relining, it will be till 2035, the other blast furnace, it has its relining due by 2026. Is that right?

T V Narendran — Chief Executive Officer and Managing Director

Yeah, that’s right, 2026 to 2027, around that time.

Ritesh Shah — Investec — Analyst

Correct. Sir, how should we understand the same aspect for the U.K. operations wherein you indicate there are many assets reaching end of useful life? And if you could please put in perspective what you indicated that the framework that you are engaging with the U.K. government on practical grant, level-playing field, I don’t know whether it refers to CBAM or something else. If you could marry both those verticals together, it would be great, sir.

T V Narendran — Chief Executive Officer and Managing Director

Sure. So in U.K., if you look at — so one of the blast furnaces in the U.K. got relined about five, six years back, okay, or maybe 10 years back, 2012 I think it was. So typically a blast furnace, once it’s relined, will run for anything from 15 years to 20 years. So there is one blast furnace which can go on for slightly longer, the other is due sooner. But more than the blast furnaces in U.K., it’s the coke ovens, it’s the steel melt shops, there are many parts of the U.K. business which — where the assets are a bit old and needs support and that’s where our proposal to the government was to say that, instead of spending capital on assets which anyway don’t have a very long-term future, why don’t we use that opportunity to transition into a greener process route, particularly given that the U.K. has a lot of scrap, which it is exporting. But the challenge there was the energy costs in U.K. even before Ukraine was twice the energy costs in Europe. So our ask of the government was 50% — at least 50% of the capex that we need to spend should be supported and there should be policy support on energy costs so that we not disadvantaged compared to Europe. And thirdly, of course, the policy support that European steel companies are getting in terms of Carbon Border Adjustment Mechanism, etc.

The ask in general in Europe by steel companies of governments is typically on these principles that at least 50% of the capex that is required should be supported as grants, because the industry, through its cash flows, cannot justify spending all the capex that it needs for this transition. And secondly opex support because when you transition from coal to gas and hydrogen, your input costs are less dependent on steel prices. When you’re looking at metallurgical coal, there’s a correlation between the metallurgical coal price and the steel price. But when you are starting to use gas and hydrogen, the correlation is not there because gas and hydrogen are used for other applications as well. So the ask of the government is to also say that, how do you protect the industry, it is changing from one consumable to another, which is more vulnerable to other industries.

The third point, of course in Europe, is about the Carbon Border Adjustment Mechanism. But the last point is that we are also saying that there should be a level playing field, not only in terms of Carbon Border Adjustment Mechanism, but if there are some countries in Europe supporting their steel industry with, let’s say, 50% of capex, then the other countries also need to consider that because otherwise at the end of the transition, some of the steel companies in Europe will be disadvantaged compared to somebody else who has got more support from the government. So that has also been an ask on the principle of support and this is what is actually being discussed by us and our peers to the multiple governments that we — in the countries that we operate in.

Ritesh Shah — Investec — Analyst

Right. Sir, thanks for the details. Sir, if I had to conclude on that point, what is the aspirational ROI? In the presentation, we indicate 15%. So for standalone, whatever we do for U.K. operations, even factoring 50%, hypothetically, the government does contribute to the capex, what is the ROI that we’re looking at, at corresponding cost of capital? Just trying to make sense of the incremental ROCE.

Koushik Chatterjee — Executive Director and Chief Financial Officer

So, on that, Ritesh, it’s more linked to the cost of capital. So what works for — in India, for example, our hurdles are more around 12%. But in Europe, it will be around 10% — 9%, 10%. That’s the IRR hurdle for approval of capex but the ROIC that we’re looking for is always at about 15%.

Ritesh Shah — Investec — Analyst

Sure, that’s very useful. And I had a couple of questions for India operations. First is, do we see leeway to increase local steel prices? I’m more referring to — from an import parity math standpoint. Second is, volume guidance if it’s possible on FY ’25 basis, given I think the Street will start to look at the company on ’25 basis. And third is basically iron ore merchant sales, is there optionality that the company has over here, if at all, if you could detail any plans on this particular aspect? Thank you so much.

T V Narendran — Chief Executive Officer and Managing Director

Yeah. So I think steel prices in India is also reflecting the trends in international prices. If you look at prices in Southeast Asia, they’ve gone up $100 in the last four weeks and steel prices in India, we expect it to go up by that amount over January, February and certainly by March. So that’s something which is mirroring what’s happening in the international markets. The demand in India has been strong. There was, in between, a few shipments of imports which came in from Russia, etc., but I don’t see imports as a big threat just yet. In between, Japan was exporting a lot because the yen had gone to 145 [Phonetic], the yen has also strengthened.

So I think we are in a much better situation today as far as import rates are concerned than we were two, three months back. And I also think, in any case, the steel prices in India need to find a better balance than we’ve seen in the last three, four months. I think that’s reflected in the financials of the steel companies over the last two quarters, right, and particularly if the industry needs to invest for growth, we need better cash flows than we’ve got in the last two quarters. So that’s as far as steel prices are concerned. Sorry, what was the…

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

So I think there was a question on volumes. So Ritesh, as you know, we don’t give annual volumes in the — at this time. We will do that once they are finalized on our new plan, but maybe you can just walk him through the broad sense of what we expect.

T V Narendran — Chief Executive Officer and Managing Director

Yeah. So in terms of volumes next year, you will see Neelachal at full 1 million. We’ve not seen much of Neelachal this year because we started the plant within three months of acquiring it. But pretty much, the steel-making started in November and we had today — in fact, yesterday was the highest-ever production that Neelachal has ever had. We produced 3,200 tons of steel yesterday in Neelachal. So that means the going rate is already at the rated capacity. Right? So that is the incremental volume which will surely come for next year. We will also get some incremental volume out of the Kalinganagar. We have a new caster coming in, that should be up. And Kalinganagar also today is actually producing at over 300,000 tons a month, which is like 3.6 million rate. So we’ll get some additional volumes from the caster, we’ll give guidance when we do the annual results. These are the — and through some debottlenecking, we’ll get some volumes out, but how much more? We will guide you in the next quarter. In two years, we will have the Ludhiana plant also up, which is 0.75 million tons and by which time the Kalinganagar blast furnace should have also started.

Operator

The next question is from Kirtan Mehta of BOB Capital. Please go ahead.

Kirtan Mehta — BOB Capital — Analyst

Just continuing on the previous question, you’ve given some color on FY ’24 numbers. To get some more color on FY ’25 which is likely to be the valuation base for the Street, could you walk us through the ramp-up sequence of Kalinganagar expansion, post-expansion, how long would it take to ramp up to full capacity?

T V Narendran — Chief Executive Officer and Managing Director

So next year, what you will see is firstly, the pellet plant would have ramped up by the end of the first quarter, which means we don’t need to buy any more pellets which means there’s a cost saving for Tata Steel. Secondly, we — the cold rolling mill — not the galvanizing line, but the cold rolling mill will be ready. So we will have what we call Full Hard CR, which can be sold. So basically the hot-rolled coil gets converted into cold rolled. So there is no incremental volume but there’s incremental value which comes in from that.

Like I said, if we have the new caster in by the middle of next year, we will get some additional volumes from steel making [Phonetic], because today we make more hot metal than the steel melt shops can consume. So these are the areas where you will see the ramp-up. The blast furnace of Kalinganagar should come up only in FY ’25 and that’s when you will see the ramp-up. Typically, blast furnaces ramp up fast, unless you have a problem. The hot strip mill and the steel melt shops would also be ready and once you have the steel — once you have the blast furnace making hot metal ramping up, the steel melt shop and the hot strip mill is not an issue. If you remember, the Kalinganagar Phase 1 ramp-up was one of the fastest for any greenfield site. I think we did it in about 16 months, the full ramp up. So that’s typically what it would take. We should keep in mind that there’s going to be one of the biggest blast furnaces in India. So we will obviously ramp up, keeping the complexity of large blast furnaces in mind.

Kirtan Mehta — BOB Capital — Analyst

Thanks for these details. One more question from my side. If we look at the Tata Steel and its subsidiaries, there is a spread which has opened up to around 12% to 15%, if we take the conversion ratios in account. So in fact, if it all we back look at from this perspective, it would be market is pricing something like one to one and half years for a merger to consume it from this angle. Do you think that, that’s a fair estimate by the market or do you see the merger progressing bit faster than that?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So, Kirtan, I think the — we are at a stage where we have done the filing for — to the SEBI and the regulators and we will be looking at getting their clearances and since some of them are listed companies, I think a year is the ordinary course of business of the NCLT, we should be able to do that. I don’t see it one and a half years. In Bhushan we got delayed because of multiple reasons, but these are subsidiaries, which has been in our fold for long. So we are hoping that we can close it before one year.

Operator

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

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you, Rancho. I’ll start with the questions on India.

So we have a question on auto. You have said that auto sector is about 15% of our volumes. What would be the growth trajectory going forward for the company as an average and what is our targeted mix from the auto sector for FY ’24?

T V Narendran — Chief Executive Officer and Managing Director

So, obviously, our growth in auto will depend largely on the pace at which auto grows. Because we already have a 50% market share and normally auto companies like to buy from at least two suppliers, if not more. So we are not looking at a much higher market share than we have today. So our growth in volumes will largely depend on the growth in auto sector.

Having said that, once the cold rolling mill with its galvanizing line and the annealing lines comes in, in full — what is coming up just now is the — what we call the PLTCM which is basically the cold rolling mill, but the annealing and galvanizing facilities will be commissioned over the next 12 to 14 months. Once that comes in, then you will have a lot more to add to your product mix. So while we have a very high market share, let’s say, in hot rolled coils, which is over 55%, 60% in some cases, in automotive — in cold rolled and galvanized, we are in the 30% to 40% range. So there is a room for us to increase our market share in the galvanized — high end galvanized and cold rolled annealed products which we will do over the next three, four years.

But overall, if you look at it, auto will always account for 15% to 20% of our overall volumes. The other sector which is quality conscious, approval-based which we are pursuing in a big way, is oil and gas. And I think the Kalinganagar plant is ideally suited for the oil and gas segment and we are making a lot of headway there. So we expect that also to account for a big chunk of our value-added sales going forward.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

There are few questions on the volume guidance but I think we answered it earlier, so I won’t go through that.

There’s a question on iron ore merchant sales. Why do we not have — why do we not do some merchant sales when the optionality is available?

T V Narendran — Chief Executive Officer and Managing Director

Yeah. That optionality is available with the requisite permissions that we need to take which we’ve taken. We are doing some iron ore sales but largely our iron ore is meant for captive use because what we’re producing we’re consuming. Once the pellet plant is starting, we will be using more iron ore for the pellets, so — because we don’t have to then buy pellets. But having said that, whenever there is an opportunity to auction iron ore that we can’t use because of the grades or because of the weather [Phonetic] signs or whatever, then we do that and we’ve — I think one of the challenges today is not so much about auctioning it but about the logistics of it. And I think we have done quite a few rakes [Phonetic] of iron ore in the last two, three months. Not yet so material, but yes, it has started.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

There is then a question on RINL disinvestment. Given our deleveraging target for ’24 — the year ’24 and ahead, can we confirm that we are not going to bid for these assets?

T V Narendran — Chief Executive Officer and Managing Director

So, I think what we’ve always said is our existing sites allow us the runway to grow to 40 million tons right? So I think our growth ambitions can be fulfilled from our existing sites, but it will be premature for us to emphatically say yes or no because it is a competitive environment. And why should we announce what we want to do or won’t do ahead of when we need to do it.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

And there’s another question on India which says, can we assume iNR16,000 [Phonetic] ton — 16,000 EBITDA per ton for Q4.

So, as you all know, we don’t give a quarterly guidance, so we’ll not comment on that.

Just moving to Europe, there’s a question that, do we expect steel prices in Europe to benefit if the CBAM proposals are implemented?

T V Narendran — Chief Executive Officer and Managing Director

Yes, certainly, because we should keep in mind that in Europe today we pay EUR80 per ton for CO2. I mean, obviously, we get free allowances, so even despite that, I think we pay something like EUR100 million a year.

Koushik Chatterjee — Executive Director and Chief Financial Officer

It doesn’t cover fully.

T V Narendran — Chief Executive Officer and Managing Director

So the — because the free allowances we get are not — doesn’t cover our needs fully, right? So that’s a cost any — we are paying and everyone else in Europe is paying today. And as those allowances — free allowances go down, you will pay more. So that’s why there is a CBAM because if somebody can make steel which is more carbon-inefficient and ship to Europe without that cost, that’s very unfair on the European steel industry. If you look at Tata Steel in Netherlands, it is the second most carbon-efficient blast furnace in the world. It emits about 1.8 tons of carbon per ton of steel. So for a blast furnace emitting that kind of carbon to pay EUR80 per ton carbon costs and somebody who’s, let’s say, 2.5 not paying that cost is certainly unfair. So we expect that CBAM will come in. We expect that steel prices in Europe will reflect the costs in Europe because some of those costs are unique to Europe and the industry will need that support.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

There is a question around the energy costs. So, given that spreads have been or margins have been affected by coal costs and gas costs, could the company please report that separately under expenses for both Europe and India?

[Indecipherable] comment, but I would just say, all of you know that we give a lot more information than any other steel company in the world actually or any company in terms of the profit and loss details. But that is the question.

Koushik Chatterjee — Executive Director and Chief Financial Officer

It will get covered in the MD&A when you look at the annual numbers.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

The next question is a comment, I think. Are we regretting not considering divesting our international business when the situation was favorable? Will we revisit this in the next upcycle?

Koushik Chatterjee — Executive Director and Chief Financial Officer

It’s a hypothetical question

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah, so more of a comment. I think there is a question around debt reduction. Do you expect a debt reduction in Q4 FY ’23?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So we — actually in this third quarter itself, we’ve repaid about INR1,300 crores, but it got offset by the currency valuation. So, my principle, that I can articulate as a company, is we will look for all opportunities to reduce our debt. As I said in my comments that the completion of Kalinganagar is a priority but deleveraging is also a very important priority and therefore whenever we get opportunities we’ll do so. We do have some scheduled repayments ahead in ’23-’24 coming up. So there will be a natural deleveraging itself and then whatever we get from a surplus cash generation, we would look to prepay our leverage.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

There is a question on profitability of Europe for 4Q. It says, your commentary suggested the EBITDA per ton will further weaken over third quarter. Can you please clarify?

T V Narendran — Chief Executive Officer and Managing Director

No, I think we didn’t — we said it will not — it will improve compared to third quarter because while the — I mean our current estimate is the realizations on an average for Europe will be GBP70 per ton lower in Q4 compared to Q3, but the cost will be about GBP102 per ton lower, but we are watching all the cost very closely, including gas prices, energy costs, which have dropped significantly over the last few weeks.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

The next question on Europe is on U.K. What is the way forward on U.K., given the package is inadequate? When can we see some concrete steps that you will take?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So I think we are — as I mentioned in my comment, that we are looking at a optimal model which is investable, bankable, and fits the need of the company. This is not a excel model analysis, it’s an engineering analysis and it’s a technical analysis, which is underway, we’ve been doing it in the past when we looked at, as what Naren mentioned as the broader configuration, given the current offer of the U.K. government, we’re going to look at it. We’ve already started looking at it and we will come back to our Board and take guidance from that. So it will take a little bit of time, but not indefinitely.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

What is the kind of annual contract negotiation in Europe? Can you give us a sense of how different it is?

T V Narendran — Chief Executive Officer and Managing Director

Compared to previous year?

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah.

T V Narendran — Chief Executive Officer and Managing Director

Yeah. So, like I said, it’s depending on the industry, it’s I think in the range of 50 to 150 to 200 in that range, lower than last year’s annual contract prices, but most of last year’s annual contract prices were higher than EUR1,000 per ton. So I think it’s in the EUR850 to EUR1,000 range is what we see most of the contracts for this year, which is lower than last year, but higher than today’s spot prices.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

The next question is on Europe in terms of the investigations around environmental issues. Can you please give us an update?

T V Narendran — Chief Executive Officer and Managing Director

Yeah, so I think largely, it is to do with our operations in Netherlands. Obviously, we’ll — responding to the various notices that we get, etc. There are issues related to the coke plant there and the emissions out of the coke plant, and a few other instances of the past. What we have done over the last few years is, one is, of course, we have a roadmap to continue to improve the situation. Having said that, I must also say, like I said before, that our Dutch plant is certainly one of the cleanest steel plants in the world, but we are conscious about the feedback from the community and from the regulators and constantly trying to improve the facilities that we have there. So that work goes on. There are obviously investigations going on, there are questions being asked, which we are responding to, we are cooperating with the authorities and doing the best that we can. But having said that, I think we are a responsible corporate and we will do whatever is the right thing to do.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Okay. And one question before we go back to audio is on the ForEx gain this quarter. It’s quite a large amount, can you please explain this and provide some details?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So this is something which happens every quarter actually, there are gains and there are losses. So there is a Tata Steel investment in Tata Steel Holding, which is the holding company in Singapore for — and it is done through a debt mechanism. So whenever there is a FX movement every quarter, it is adjusted. Sometimes it’s negative, sometimes it’s positive. And this quarter, as I mentioned, the euro-dollar and euro-INR movements have been quite volatile resulting in an FX gain and that’s been accounted for in the others.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. We’ll go back. I think we have a few analysts for the audio questions. So we’ll go back to you, Rancho. Thank you.

Operator

Thank you, ma’am. Moving back to the audio questions, the next question is from Sumangal Nevatia of Kotak Securities. Please go ahead. Sumangal, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat questions section. We move on to our next question. The next question is from Tarang Agarwal of Old Bridge Capital. Please go ahead.

Tarang Agarwal — Old Bridge Capital — Analyst

Hello, am I audible?

T V Narendran — Chief Executive Officer and Managing Director

Yes, please.

Tarang Agarwal — Old Bridge Capital — Analyst

Hi. Three questions from me, two on Europe and one on India. On Europe, given that your current contracts have been priced at anywhere between south of EUR1,000 per ton, but if I look at the total cost, even if I eliminate the NRV of EUR55 million, the total cost at least for the last four, five quarters has been trending north of EUR1,000 per ton. So is there something that I’m missing here or from the point of view of how it’s going to play out on a per-ton basis?

Koushik Chatterjee — Executive Director and Chief Financial Officer

But it won’t be more than EUR1,000 a ton.

T V Narendran — Chief Executive Officer and Managing Director

I mean, I think, we’ll have to get…

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah, maybe we can connect — because I think the question is not actually very clear, the numbers we are not able to…

T V Narendran — Chief Executive Officer and Managing Director

I mean I don’t see the cost in Europe is more than EUR1,000 a ton so… Yeah, not sure where that’s coming from.

Tarang Agarwal — Old Bridge Capital — Analyst

Okay, I’ll take it offline. The second question is how fungible…

T V Narendran — Chief Executive Officer and Managing Director

Sorry, just, the only thing I can think of is we have a lot of downstream as well in Europe. So I don’t know if there is any confusion on those costs versus those realizations. Anyway, we can look at — but maybe Samita can clarify and be more specific.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah, I can connect with you because…

Tarang Agarwal — Old Bridge Capital — Analyst

I will, I will, I will. The second is how fungible is the cash between Netherlands and U.K.?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So in the past, we — when we used to run in Tata Steel Europe, we used to use it in a very fungible manner. Given the fact that Tata Steel Netherlands has a decarbonization project ahead of them, we are kind of escrowing and ensuring that we have that capital because that will be a very material investment that has to be done in TSN. But otherwise, cash moves really across all entities.

Tarang Agarwal — Old Bridge Capital — Analyst

Okay. And my third question that’s on the India business. Between BPR, downstream, IPP, and automotive, if you could give us a flavor in terms of how the realizations are different?

T V Narendran — Chief Executive Officer and Managing Director

So in terms of realizations, automotive contracts — the tenures are different of these contracts, right? So if you look at it, the automotive contracts are typically three months to six months, depending on the customers. Now — so if you have a rising market, the auto contracts will look less attractive because the spot prices have gone up above the auto contracts. In a falling market, the auto prices will look better. So that always happens, particularly when there is a lot of volatility. But fundamentally, the reason why we pursue auto customers is that they are not priced buyers. They look for buying from suppliers who are approved. Right? So that means your competition is limited to whoever has the approval for supplies and that’s why segments like automotive, oil and gas are attractive because you are not reacting to spot prices moving up and down, right?

IPP is where the volumes go, because you have a large number of large customers, maybe tubers, earlier cold rollers, now there are not too many cold rollers who buy hot rolled coils, they’re all integrated. But these are the volume play, plus you have a value-added play in that.

Downstream business for Tata Steel is very big. There, our policy is more on transfer pricing which is based on arm’s length basis but there’s obviously a lag. So if you look at some of the price increases that we take this quarter, by the time it passes on to our tubes division or the tinplate company on our arms length policy, transfer pricing policies, it may be a month or two into the quarter or at the end of the quarter. So there is a lag between that, but again we see downstream, like auto, gives us stability in the business. IPP is more the one which you will leverage when the stable businesses are picking up less volumes than we would like to sell them.

Operator

The next question is…

T V Narendran — Chief Executive Officer and Managing Director

The margin hierarchy, to answer your question, I would say on a long-term basis, auto and downstream should rank over IPP.

Operator

Thank you, sir. The next question is from Sumangal Nevatia of Kotak Securities. Please go ahead, Sumangal.

Sumangal Nevatia — Kotak Securities — Analyst

Am I audible this time?

T V Narendran — Chief Executive Officer and Managing Director

Yes.

Operator

Yes, we can hear you.

Sumangal Nevatia — Kotak Securities — Analyst

Okay, thanks. Okay, first question is just some clarification on the U.K. topic. The entire transformation from BF to EAF, what is the estimated capex we’re looking at and what is the plan to fund the remaining 50%, assuming we get a 50% grant from the government?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So I think if you have heard Naren a little while back, our original ask was for a configuration which had an EAF and also the downstream TSCR or thin slab caster, so — and the rolling mill. So that all was the configuration that we were discussing with the government, and we said for that, we need to get 50% support. I think what the government has given is partial of what our ask was, and therefore we are relooking at what should be the resizing of the configuration if to make it investable and bankable and value creative. So I think these three are the foundations of what we are looking at. And I don’t think what we had asked for has happened and therefore the original configuration is to be rethought.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. Koushik, is it possible to get what is the ask I mean in terms of $1 billion?

Koushik Chatterjee — Executive Director and Chief Financial Officer

No, so, at that point of time, it was multiples of the 300, which we had got, but I think let us not look at that because this is no longer relevant. What is relevant is what we will now work on and are working on and which matches up to the partial grant that the government is willing to give and then go back to the government and saying that this is what we can do at best.

Sumangal Nevatia — Kotak Securities — Analyst

Okay, got it. But given that the U.K. doesn’t earn any free cash flow, I mean how will the remaining part be funded? Will they raise debt or will there be some support from India entity?

Koushik Chatterjee — Executive Director and Chief Financial Officer

No, it — so that’s why I’m saying that when we do the capital allocation, when we say, for example say that this year’s capital expenditure is say INR12,000 crores, INR13,000 crores, etc., we take every entity into account, it’s not in India alone. So I think we — and this is going to be almost like a new investment. It’s not putting money into the current assets. So this will be — as I said, the financial closure of it will have elements of government support, it’ll have elements of Tata Steel support, something if the existing business can give or cannot give, then it will be externally funded. So it will be a combination, but I yet don’t know what will be that configuration. Let’s work towards it, and then we will certainly come out and talk about it.

Sumangal Nevatia — Kotak Securities — Analyst

Got it. That’s very clear. And I mean just hypothetically, if it’s possible to discuss what could be Plan B here? I mean we’ve been in discussions with the government since more than two years now. Is there a fixed timeline we are looking to close this? And what is plan B? Is divestment or shutting down the plant an option for us?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So there is a Plan B, there’s a Plan C, but I think unless we cross the hurdle on the Plan A, now that the government has given us a formal proposal or a formal support structure, let’s work on this and see whether we get to that. Otherwise, there are consequent Plan Bs and Plan Cs that can go [Indecipherable].

T V Narendran — Chief Executive Officer and Managing Director

And I think, to be honest, whatever we do, we also need to discuss with the other stakeholders there, the unions and everybody else. So it’ll only be fair for us to internally discuss before we announce whatever we want to do. Yeah?

Operator

Thank you, Sir. [Operator Instructions] The next question is from Anupam Gupta of IIFL. Please go ahead.

Anupam Gupta — IIFL — Analyst

What is the outlook for NSR and coal cost for India operations for the next quarter — for this quarter that is, fourth quarter?

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

NSR?

T V Narendran — Chief Executive Officer and Managing Director

Must be the realizations, yeah.

Anupam Gupta — IIFL — Analyst

Realizations, yeah.

T V Narendran — Chief Executive Officer and Managing Director

Yeah. So the net realizations for this quarter, in India, we are expecting it to be about INR1,400 per ton, INR1,500 per ton higher than last quarter. I say this because while from December, the prices have been going up, I’m looking at average of last quarter because October prices were quite high — average of this quarter, that is one. In terms of coal, the coal costs are expected to be about $10 — on a consumption basis about $10 per ton lower this quarter compared to last quarter. The other point I want to make is, this quarter, between Europe and India, we’ll also have about 0.5 million tons of additional volumes compared to last quarter.

Anupam Gupta — IIFL — Analyst

Okay. And just one more question. So we understand that profitability in U.K. will improve in this quarter versus last quarter is what you highlighted. But, let’s say, over the next one year, before your any transformation capex happens, do you think it can go back to, let’s say, a cash-neutral situation or you will continue to have some support coming from India or let’s say a local level debt coming in Tata Steel Europe?

Koushik Chatterjee — Executive Director and Chief Financial Officer

So, I think we didn’t say it will improve. I think what Naren’s comment was, it will not worsen is the point. And as he mentioned and I mentioned earlier also that we are coming to the end of life of some of the critical facilities, which will mean that there will be challenges on cost and we are trying to run it in an most optimal manner which will require the minimal support from India. That is what our target is till we come to a decision which is relating to what we have discussed fairly at length in this call on how do we look at the future as far as U.K. is concerned.

Anupam Gupta — IIFL — Analyst

Sure. Okay.

T V Narendran — Chief Executive Officer and Managing Director

To clarify Koushik’s point, I said we’ll improve, but we’ll not be out of the woods.

Anupam Gupta — IIFL — Analyst

Yeah, yeah. I understand that. That’s absolutely clear, yeah. Thank you.

Operator

Thank you, sir. The next question is from Sumangal Nevatia of Kotak Securities. Please go ahead.

Sumangal Nevatia — Kotak Securities — Analyst

Hello?

T V Narendran — Chief Executive Officer and Managing Director

Yeah, Sumangal.

Sumangal Nevatia — Kotak Securities — Analyst

Sorry. So just one pending question. I mean, when do we expect the commercial volumes from KPO2 [Phonetic]? Is it 1H ’25 or more like second half of FY ’25?

T V Narendran — Chief Executive Officer and Managing Director

No. Firstly from next year, you will have the Full Hard CR which is also part of the commercial volumes of KPO, but we should keep in mind that this is value-added to existing hot rolled coils. It’s not incremental volume. Let me put it that way. Incremental volume will come from the next — from FY ’25. I mean some of the incremental volume will also come from the second half of this year simply because we’ll have an additional caster in the steel melt shop. We are still working out the volumes that will come out of it and we will give you that guidance in the next analyst call. But — so starting from this year, but most of it will start coming from FY ’25. Whether first half or second half, I think we’ll give you guidance when we meet — when we talk the next time.

Sumangal Nevatia — Kotak Securities — Analyst

Got it. And just one last question. The Europe, I mean in the past, you’ve said that $50 per ton, $60 per ton at the entire Europe level is where we cash breakeven considering the capex, maintenance capex and interest obligations. I mean, when do we see we reaching to that level? Is it more towards the end of FY ’24 or more like an FY ’25 as we see today?

Koushik Chatterjee — Executive Director and Chief Financial Officer

When you say Europe, I think Netherlands is what you just mentioned. And as far as U.K. is concerned, the levels are somewhere a little higher than that.

T V Narendran — Chief Executive Officer and Managing Director

So Netherlands has always been EBITDA-positive, cash-positive. So, I think last quarter was an exception of being EBITDA-negative. But otherwise on an annual basis, even last year and next year, they will be EBITDA-positive for sure. In terms of cash-positive, of course, next year we have the…

Koushik Chatterjee — Executive Director and Chief Financial Officer

Post relining, it will come back.

T V Narendran — Chief Executive Officer and Managing Director

Yeah, so Netherlands is not the challenge. The challenge is obviously in the U.K.

Sumangal Nevatia — Kotak Securities — Analyst

Got it. Thanks and all the best.

T V Narendran — Chief Executive Officer and Managing Director

Thank you.

Operator

The next question is from Prashant Kota of Emkay Global. Prashant, please go ahead.

Prashant Kota — Emkay Global — Analyst

Stable Q-o-Q, despite the challenges. Sir, my question is simply more on the coking coal side and the structural issue over there, sir. You have been used to buying this coking coal and for very high prices and, in fact — sorry for that word, but arm-twisting to an extent by the other side. Sir, if we take a step back and just look at it from an outsider — three steps back actually from an — as an outsider, sir, this is supposed to be a mutually — mutual long-term relationship in which both parties need each other. So — but here it is — this thing is completely one-sided and also I believe the 90% of the volumes are sold on — linked to the Index, where the index is decided by just 10% of the spot volumes. Sir, this is — this seems to be some sort of an anomaly. Sir, what can we do to take a step back and say collectively — we as in Tata Steel as a leader not only in India as in — also in Asia, because we are also poor region that collectability take a step back and say, okay, we need coal, coal guys need us and this coal we buy it after making some profit on the stake. So can we have a new dialog or new system of pricing this as in, okay, we can pay you this much based on what we have made in the last quarter — last couple of quarters, something like that — the way we have negotiated with auto guys. Sir, what is the thinking on this, sir, actually?

T V Narendran — Chief Executive Officer and Managing Director

So I think it’s a — obviously, in any commercial free markets, the power will shift from the customer to the supplier or supplier to the customer. Right? So when steel prices go up, we get a lot of noise from our customers saying that it shouldn’t go up and it’s I think, in some sense, if you look at the coal companies, they will tell you the same thing. The issue is that coking coal is not a very liquid market unlike thermal coal. It’s a very consolidated market. What is also happening is you have the big miners and you have the smaller miners. The smaller miners are not getting the funds that they used to get earlier, the financing or the insurances that they used to get earlier because coal, in general, is seen as a bad word without drawing a distinction between thermal coal and coking coal. You can theoretically do without terminal coal, you can’t do without coking coal for at least the next 30 years, right? So there is this situation.

For India, we are very dependent on Australia as a source. We are vulnerable to weather or climate events and that makes the liquidity even worse or two years back we had a problem in the railways there. So these events happen which swing the coking coal prices. The part that you made — a point you made about the index is a point which the steel industry globally has taken up, both in Europe and in India, saying that the index or most of our contracts are indexed and that index, we believe, is not truly reflective of all the transactions in the market. This is something which is being discussed with the people who issue the index as well as between suppliers and customers. But I think, yes, we have a good long relationship with many of the suppliers, but they are doing — they seem to be doing what is right for their shareholders and we are doing what we think is right for our shareholders. So I think we’ll obviously have to find that balance.

But, the challenge is, going forward, this is not a sector which is getting a lot of investment for growth because of the fact that it’s coal, but India is already the largest importer of coking coal and Indian steel capacity is going to double over the next 10 years and will double again over the 10 years after that. So till such time we have enough gas or hydrogen as an alternate to coking coal, we will be vulnerable to the volatility in the coking coal market.

Prashant Kota — Emkay Global — Analyst

Okay, sir, understood sir. Sir, even now, without any weather event or etc., they’re gunning for like 60% of that Asian benchmark steel price. They always want like 50% to 60%. Ideally it should have been 25% to 30% for everybody to — they make — let them make more margin than us, no problem. Let them make more ROCE than us, no problem. Then it shouldn’t be that they are making very, very handsome and we are making suboptimal. So that is the only concern, sir. Being a mutually — mutual relationship, long-term, that’s the only point I wanted to raise. Sir, apart from that, the net NRV losses and the inventory losses across India and Europe, if you could quantify that, please? This quarter, how much was that? [Speech Overlap] INR1,000 crores?

Koushik Chatterjee — Executive Director and Chief Financial Officer

There is no NRV as far as India is concerned. There was NRV to the extent of about 55 million and the — as far as Europe is concerned.

Prashant Kota — Emkay Global — Analyst

Understood, sir. Thanks and wish you all the best.

T V Narendran — Chief Executive Officer and Managing Director

Thank you.

Koushik Chatterjee — Executive Director and Chief Financial Officer

Thank you.

Operator

The next question is from Anupam Gupta of IIFL. Please go ahead.

Anupam Gupta — IIFL — Analyst

Yeah. Sir, I had one question on iron ore sourcing for you. So you have that iron ore mine at NINL. So including that and the other mines that you have, can you just lay out what the iron ore sourcing will change like over the next five, six years and also include, let’s say, once the existing mines’ mining lease gets over in 2030?

T V Narendran — Chief Executive Officer and Managing Director

So basically, our desire is not to buy any iron ore and we have not been buying iron ore. We’ve been buying pellets because we are — we have enough iron ore to take care of our iron ore needs, but we didn’t have enough pellets to take care of our pellet needs. But with the pellet plant coming up in Kalinganagar which has already come up and over the next few years, we’ll build another pellet plant in the Angul facility, which is a Bhushan facility. We will be self-sufficient in pellets. So hopefully, from the second quarter of the next financial year, we shouldn’t be required to buy any pellets. And we want to keep it that way.

The iron ore expansion is being planned to keep pace with our steel expansion. And so that will continue. As far as post-2030 is concerned, as of now, we have about 550 million tons of iron ore reserves for post-2050 — I mean 2030, because we have the Gandhalpada mine, which is a greenfield mine, which we bid for and got, which we will develop at a pace at which we need it. And then we have the Kalamang mine, which came to us from Bhushan; the Neelachal mine, which has come to us with the Neelachal acquisition. There’s also Vijay II [Phonetic] mine in Jharkhand, which has come to us with the Usha Martin acquisition.

So all this put together, we have, at this moment, about 500 million tons, 550 million tons for post-2030. We will continue to participate in auctions as they come up going forward. We will also have options on our existing mines when they go up for auctions in 2030.

Anupam Gupta — IIFL — Analyst

Okay, okay, that’s helpful, thanks a lot.

Operator

Thank you very much. That was the last question for today. I would now like to hand the conference back to Miss Samita Shah for closing comments. Over to you, ma’am.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you, Rancho. Thank you everybody for joining us for this call. I hope a lot of your questions were answered and you found it useful. Look forward to connecting again at the next call. Thank you.

T V Narendran — Chief Executive Officer and Managing Director

Thank you.

Koushik Chatterjee — Executive Director and Chief Financial Officer

Thank you.