Steel com­pa­nies may undo over­seas ac­qui­si­tions

Resource Digest - - CONTENTS -

With the global busi­ness cli­mate con­tin­u­ing to look grim, In­dian steel com­pa­nies could undo over­seas ac­qui­si­tions and fo­cus at home where con­sump­tion trends are rel­a­tively en­cour­ag­ing.

In the last 10 years, al­most all large In­dian steel com­pa­nies like JSW Steel, Tata Steel, Es­sar Steel and Jin­dal Steel & Power have made costly over­seas ac­qui­si­tions. Most of them are in de­spair as China dumps cheap steel on the world.

Last week, the Ruia-owned Es­sar Steel Min­nesota filed for bank­ruptcy pro­tec­tion in the US. In 2007, Es­sar had said it would set up a $1.8-bil­lion unit in Min­nesota, but scaled down from a taconite steel mill to a pel­let plant after the 2008 fi­nan­cial cri­sis. The project was sched­uled to start pro­duc­tion in 2014 but cheap China steel has made pro­duc­tion un­vi­able.

From try­ing to com­pete with Arcelor­mit­tal, the world's largest steel pro­ducer, the Tatas are now strug­gling to re­tain their pres­ence in Europe. Tata Steel is in talks for a joint ven­ture with Ger­man Thyssenkrupp for its Euro­pean op­er­a­tions. Tata Steel’s de­liv­er­ies in the re­gion have dropped to 13 mil­lion tonnes in 2015-16, from 23 mil­lion tonnes in 2008-09.

Wel­spun Pipes, which in­cludes the US sub­sidiary’s op­er­a­tions, re­ported a loss of $7.1 mil­lion in 2014-15, against a profit of $9.9 mil­lion in 2013-14 as the top line de­clined and costs in­creased.

“Over­seas ac­qui­si­tions are ex­pen­sive to main­tain, there is a con­stant re­quire­ment of upgra­da­tion,” said Pritesh­jani, se­nior an­a­lyst with Reli­gare Se­cu­ri­ties. “With the global busi­ness cli­mate con­tin­u­ing to be dif­fi­cult, these ac­qui­si­tions have be­come a bur­den for com­pa­nies,” he added.

Tata Steel has in the last 10 years taken sev­eral steps to lighten the bur­den of its Euro­pean ac­qui­si­tion by job cuts and clo­sure of loss-mak­ing units. JSW Steel, whose $1 bil­lion US ac­qui­si­tion con­tin­ues to be EBITDA neg­a­tive, took a non-cash write-down of nearly Rs 100 crore in 2014-15.

“By tak­ing write-downs on ac­qui­si­tions, com­pa­nies sig­nal to in­vestors that they had over­val­ued an as­set,” said an an­a­lyst with a lo­cal bro­ker­age.

Calls to the Sa­j­jan Jin­dal-led JSW Steel and Tata Steel went unan­swered.

Even mine pur­chases have had not much ef­fect. Coal mines of the Naveen Jin­dal-led Jin­dal Steel & Power in Mozam­bique and South Africa have re­ported losses in the year ended March, says the com­pany’s an­nual re­port for 2015-16. The Delhi-based com­pany's Oman plant, on the other hand, earned a profit of Rs 6.18 crore in 2015-16.

In some cases, how­ever, com­pa­nies have made pru­dent moves. JSW Steel, for in­stance, has kept its Chilean iron ore mines shut since 2015 and is not will­ing to re­sume op­er­a­tions till ore prices re­cover. The com­pany also re­frained from en­ter­ing Italy by ac­quir­ing Luc­chini.

“It makes no sense for any new ac­qui­si­tion in the com­ing few years,” said Ab­hisar Jain, se­nior an­a­lyst with Cen­trum Broking.

With steel con­sump­tion in In­dia ex­pected to pick up and an am­ple gap be­tween per capita con­sump­tion and the global av­er­age, there is scope for steel pro­duc­ers in In­dia. Ac­cord­ing to Joint Plant Com­mit­tee data, im­ports have come down by 30 per cent dur­ing April-june and ex­ports have moved up nearly seven per cent. Con­sump­tion is up 0.3 per cent dur­ing the quar­ter de­spite June be­ing a lean month. April-may con­sump­tion was up 4.5 per cent, year on year.

“The sce­nario at home is bet­ter. Con­sump­tion is pick­ing up and de­mand is be­ing met by lo­cal pro­duc­tion. Even ex­ports are pick­ing up de­spite Chi­nese dump­ing,” said Bi­joy Thomas, an an­a­lyst with In­dia Rat­ings.

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