JSW, JFE propose an exciting but tentative combination

JSW, JFE propose an exciting but tentative combination
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First Published: Thu, Nov 19 2009. 10 43 PM IST

Updated: Thu, Nov 19 2009. 10 43 PM IST
When JSW Steel Ltd announced an alliance with Japan’s JFE Steel Corp. on Thursday, the euphoria was short-lived. Its share price declined a bit, although it was up by 16% from a week ago. Lack of any short-term triggers such as an open offer and the initial stage of talks seem to have curbed investor enthusiasm.
The two companies have agreed on one project, to sell automobile-grade steel. Here too, the structure and financing has not been finalized. Broadly, they will collaborate on technology and material supplies. India’s emergence as a manufacturing hub for cars, especially small cars, is making steel companies seek domestic production facilities. Proximity to the car plants is a big advantage.
JFE has a similar venture, the Guangzhou JFE Steel Sheet Co. Ltd, to supply steel to the Chinese car market. Earlier, ArcelorMittal, too, entered into a similar agreement with Uttam Galva Steels Ltd for selling high-grade steel for use in automobile and consumer durable sectors in India.
Indian companies are very strong in the basic stages of steel production, but need foreign technology to make high-end grades. While some would prefer to acquire technology, tying up with some of the global majors eases the process. And in some cases, these companies come with their existing customers. Indian companies may have to yield a share in their business, but they benefit from a higher proportion of value-added products, leading to better margins, even as investments remain at an optimal level. Customer acceptance too is easier.
The auto-steel venture is only one small step, however, if the broad road map is considered. Of utmost interest to JSW shareholders is whether JFE will pick up a stake in JSW. News reports indicated that it may pick up a 10% stake for about Rs1,600-2,600 crore, but these have not been confirmed.
The road map talks about mutual shareholding, so the announcement, when it comes, will be a two-way stake sale. That will be a big move for JSW as JFE is a very large steel company, with sales of 3.4 trillion yen, or about Rs180,000 crore, in fiscal 2009. In contrast, JSW’s sales were Rs15,935 crore. Even a small stake in JFE may involve a large outlay. What shape could this collaboration take in the future? JFE has said in its near-term business outlook that it continues to look for overseas business development opportunities, especially in integrated steel factories. JSW’s has a proposed steel project in West Bengal with a 10 million tonnes capacity. In addition, the two companies will consider producing steel for other sectors.
But these are all on the drawing board at the moment, with sticking points likely to be the respective capital outflows for both companies, the stake dilution of the promoter groups, respective responsibilities and rights, and the price at which equity will be issued. If they find sufficient common ground, it could lead to a significant transformation in JSW’s profile and position in the global steel market.
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First Published: Thu, Nov 19 2009. 10 43 PM IST