Mumbai: Tata group chairman Ratan Tata saw it coming three years ago, predicting iron ore miners would one day “rule” the steel industry, much as the 12-nation Organization of Oil Exporting Countries (Opec) dominates world oil trade by dictating crude production and prices.
“I really believe that owners of iron ore are going to rule the industry,” the head of the country’s largest diversified business group said in an interview with McKinsey director Ranjit Pandit, published in the consulting company’s quarterly journal. “They will be the Opec of the steel industry.”
Tata, now 70, made those remarks as he spoke broadly about plans to tap acquisition opportunities in developed markets and access raw materials. That was long before Tata Steel Ltd completed the $12.5 billion (Rs53,625 crore) takeover of Anglo-Dutch steel maker Corus Group Plc., the biggest acquisition overseas by an Indian entity, in April last year.
Corus’ purchase handed Tata two plants in Europe that will produce 20 million tonnes of the metal a year, and long--term iron ore supply contracts with Brazilian miner Companhia Vale do Rio Doce (CVRD) and South Africa’s Kumba Resources Ltd.
The acquisition accelerated an overseas shopping spree by Indian metal companies scrambling to secure raw material supplies to feed domestic plants, penetrate markets abroad and meet increasing demand at home, as global metal prices surged.
Led by the Corus takeover, Indian firms sewed up metal and mining assets valued at as much as $20.9 billion in 15 deals in 2007, according to investment bank Indus View. At least $2 billion transactions are waiting to be concluded.
Concerns of raw material shortages and high commodity prices are spurring the acquisitive interest of Indian companies in both operating and speculative mines, said Harish H.V., partner for corporate advisory services at Grant Thornton, which advises clients on mergers and acquisitions “We are discussing a few such proposals,” he said.
In the latest billion-dollar acquisition effort, Essar Steel Holdings Ltd is pursing a bid for US-based steel maker Esmark Inc. Last week, Essar raised its offer for Esmark by $2 a share, taking the deal value to $1.18 billion and seemingly thwarting, for now, a rival bid by OAO Severstal, Russia’s largest steel maker.
Sterlite Industries Ltd, owned by billionaire Anil Agarwal and part of his London-based metals and mining company Vedanta Resources Plc., late last month said it is paying $2.6 billion to buy the assets of bankrupt US copper miner Asarco Llc., formerly American Smelting and Refining Co., the third-largest copper producer in the US.
Agarwal, 54, who started as a copper wire trader in Bihar, paid a $400 million premium to edge out Anglo-Swiss miner Xstrata Plc., controlled by the world’s largest commodities trader Glencore International AG, which had revenue of $142.3 billion and assets of $60 billion last year.
The purchase of the Tucson, Texas-based company from a US bankruptcy court will give Agarwal access to a copper mine, a smelter and a copper-deficit market primarily in North America. Asarco produced 235,000 tonnes of refined copper in 2007 and its mines have estimated reserves of 5 million tonnes.
“Our acquisition is a diversification into a high-margin market like the US,” said a company official who worked closely with Agarwal to buy Asarco and requested anonymity as company policy doesn’t allow him to speak with the media.
The North American market has a deficit of 4.5 million tonnes of copper, said the official. With copper prices riding high, Sterlite expects the payback period for its investments to be as low as four years, with an expected cash profit of $640 million flowing in yearly.
Agarwal wants to command 20% of the global copper, zinc and aluminium markets and will need to acquire more companies if he is to achieve his ambition. But he has a potential fight on his hands with Grupo Mexico SA, Mexico’s largest mining company, which controlled Asarco before it filed for bankruptcy protection in 2005 and has vowed to do “absolutely everything” in its power to block his takeover.
Hindalco Industries Ltd of the Aditya Birla Group, Essar Group and JSW Steel Ltd have also bought overseas companies, mainly distressed assets, to sell value-added products in developed markets such as the US and Europe as well as South-East Asia.
On the heels of Tata’s Corus deal, Hindalco paid nearly $6 billion to buy Atlanta-based aluminium company Novelis Inc, whose products include cans it supplies to soft drink companies such as Coca-Cola Co. and PepsiCo Inc. and brewer Anheuser-Busch, the maker of Michelob and Budweiser beers.
Hindalco managing director Debu Bhattacharya said the benefits of the acquisition have started to accrue. He did not give specific figures ahead of Novelis’ earnings report on 19 June and Hindalco’s the next day.
Value-added aluminium products need technology and customer acceptance, said Bhattacharya.
“To be customer-friendly, you have to be close to the customer,” he said about the purchase of Novelis, which was preceded by a 2006 joint venture with Almex USA Inc. to manufacture high-strength aluminium alloys for supply to aircraft builders Boeing Co. and Airbus SAS and makers of light cars and trucks.
The Aditya Birla Group company is one of the earliest Indian buyers of an overseas asset, having purchased a copper mine in Australia years ago, as it looked to overcome sparse raw-material resources at home. “The mine has given this company a continuous flow of ore for 12 years. We have to look outside India as such mines are scarce in India,” said Bhattacharya.
India has a meagre 7 million tonnes of copper reserves compared with 70 million tonnes in the US and 360 million tonnes in Chile. Iron ore capacity is 25.2 billion tonnes, compared with global reserves of 370 billion tonnes.
Acquisitions abroad also help companies skirt tedious red tape in securing mines at home. The government process of awarding mines takes more than two years, said a company official.
Concerns that moves towards consolidation in the commodities sector would shift control over pricing are also spurring companies to scout for acquisition targets. Australia’s BHP Billiton Ltd and UK’s Rio Tinto Plc., two of the world’s largest mining companies, have been trying to form a single entity that will control 27% of global mining assets.
Sajjan Jindal’s JSW Steel Ltd paid more than $900 million to acquire three assets in the US from his elder brother P.R. Jindal. Essar purchased Canada-based Algoma Steel Inc. and Minnesota Steel Industries Llc., which controls more than 1.4 billion tonnes of iron ore resources before making a play for Esmark. Tata Steel, apart from acquiring Corus, has bought Thailand’s Millennium Steel and Singapore-based NatSteel Ltd.
JSW Steel also bought an iron ore mine for $55 million in Chile, from which it can extract 6 million tonnes of iron ore a year to make 4 million tonnes of steel. JSW finance director Sheshagiri Rao said the group wants captive mines to contribute 75% of its iron ore requirements as the company expands production of primary metal six-fold to 31 million tonnes by 2010.
Shoring up margins
The steel maker buys 80% of its iron ore requirements at global market rates, and captive mines would help it expand margins. “Our consolidated profits will be higher when captive iron ore will increase our margins,” said Rao.
JSW purchased a US-based steel-pipe maker to which it supplies steel slabs from its plant in India. That enabled the company to tap a potentially lucrative market in the US, where 270,000km of pipes are to be laid in the next few years to supply oil and petroleum products. West Asia is another prospective market, said JSW’s Rao.
But it is not the US that has driven up demand, caused prices of copper, steel and aluminium to surge and accelerated the frenetic race to secure supplies. Soaring consumption in emerging markets such as China and India that are building more ports, bridges, power plants and making more trucks and cars has led the US share of global metal consumption to decline. In the past eight years, the US share of world copper consumption has declined to 11% from 20% and aluminium to 14% from 25%, said a report by Citigroup Global Markets.
Investment in commodity indexes is up by $40 billion this year, a larger increase than for the whole of 2007, according to Citigroup. A Morgan Stanley study on metals and mines in February predicted that iron ore prices will jump 60% in 2008, 30% in 2009 and 10% in 2010.
Alan Heap and Alex Tonks, authors of the Citigroup report titled Great Bulks of Fire IV, predicted that metal prices will ease back with a slowdown in industrial production led by the US and Japan. Average metal price increases may moderate to 2.7% in 2008 from 4.1% the previous year and recover to 2.9% next year.
Consulting firm Ernst and Young, which advises on cross-border transactions, says the trend of global acquisitions by Indian metal makers will continue. Navin Vohra, a partner at the firm’s transaction advisory business, says the acquisitions are driven by companies seeking secure supplies of raw material for current operations and expansion.
But the Indian acquisition drive faces a Chinese hurdle.
Aggressive companies from China, which consumes a fifth of global steel production, are pushing up valuations in the race for global assets and Indians end up paying what is known in the financial industry as a “scarcity premium”.
The Congo government has announced that Chinese state-owned firms would build or refurbish railways, roads and mines in the country at a cost of $12 billion, in exchange for the right to mine copper ore of an equivalent value, The Economist magazine said in a March special report on China’s hunger for resources.
The sum is more than three times Congo’s annual national budget. It’s a tough choice Indian companies face between paying a high price at a time when commodities rates are peaking or waiting for a downturn and running the risk of being left with insufficient raw material to feed their plants.