Arcelor entry set to heat up Indian steel industry
MUMBAI: The entry of ArcelorMittal, the world’s largest steelmaker, into the Indian market will force existing private sector players to increase efficiency and control costs, analysts say.
A third steel producer, after Tata Steel Ltd and JSW Steel Ltd, with both financial heft and expertise, is expected to be good for the domestic market.
On Friday, lenders to bankrupt Essar Steel declared that the highest bid was from the joint venture (JV) between Luxembourg-based ArcelorMittal, promoted by L.N. Mittal, and Japan’s Nippon Steel and Sumitomo Metal Corp. The JV had cleared off the ₹7,469 crore of outstanding dues of Uttam Galva and KSS Petron, the bankrupt companies connected to Mittal, and had tabled a resolution plan that offered ₹42,000 crore to buy out Essar Steel’s assets, which had accumulated debt of over ₹49,000 crore.
Essar steel has a 10 million tonne (mt) per annum mill in Hazira, Gujarat. The company is a fully-integrated flat steel manufacturer with ore beneficiation, pellet making, iron making, steel making, and downstream facilities, including cold rolling mill, galvanizing, pre-coated facility, steel processing facility, extra wide plate mill and a pipe mill.
In its FY17 annual report, the firm had said that it was the only private steel mill in the country which was allowed to supply steel for warships, submarines, battle tanks and armoured vehicles.
With Friday’s announcement, the JV led by ArcelorMittal is inching towards closing the Essar Steel deal. Mittal is known to have built his career on buying out stressed steel mills across the world—in Mexico, Romania, South Africa, and the US—and turning them into profitable ventures, usually by ramping up vol- umes just in time for the upward steel cycle and controlling costs.
Even as ArcelorMittal battles to gain control of Essar Steel in India, it is simultaneously acquiring Italy’s Ilva, Europe’s largest steelmaker by capacity.
“ArcelorMittal is very good at turnarounds, at taking businesses in bad shape and making them profitable,” said Atanu Mukherjee, president of global metals and energy consultant M.N. Dastur. “They bought the Calvert facility in US (from Thyssenkrupp) and it is now a world-class auto-grade steel manufacturing facility.” “Traditionally, India has had a very fragmented steel market with a lot of secondary producers,” he added. “This is a problem because it doesn’t give you economies of scale or the pricing power, and doesn’t help cost structure. With concentration happening among 3-4 larger players and some niche players in the value-added segment supporting them, India will have a more mature steel market without creating monopolies. The steel concentration ratio is moving up faster here than in any other country, but that is good for India.” The acquisition of Arcelor by Mittal Steel in 2005 weighed the new entity’s balance sheet down with debt of $35 billion. In its HI2018 results, the firm said that it had finally “transformed its balance sheet and has now achieved its financial priority of an investment-grade credit rating, following upgrades from all three rating agencies in 2018” and has resumed dividend payment to shareholders. Its net debt stands at $10.5 billion and earnings before interest, taxes, depreciation, and amortization is at $5.6 billion.
Mittal had made several attempts to get his foot in the door in India, notably with projects planned in Odisha and Jharkhand, but neither took shape. With Essar, he’s coming in not with just ready capacity to reckon with, but also at a time when India’s steel consumption is taking off. India currently has percapita steel consumption of only 70 kg a year, less than half the average of other developing nations. The World Steel Association expects Indian steel demand to climb 5.5% in 2018 and 6% in 2019, making us the fastest-growing market among the world’s top 10 steel consuming countries.