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) of Luxembourg-based ArcelorMittal, promoted by Lakshmi Mittal, and Japan’s Nippon Steel and Sumitomo Metal Corp. The joint venture 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 joiint venture 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 volumes 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 AG) 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.
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 Steel, 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 per-capita steel consumption of only 70kg 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.
“For ArcelorMittal, the opportunity is huge," Mukherjee of M.N. Dastur said. “The other markets that they are in—mostly in Europe, US—those are saturating. The Essar Steel plant will really lay the foundation for expansion into India. They could, in fact, even increase capacity from the current 10mt to 20-25mt over the next decade. I don’t think that’s isn’t inconceivable."
Despite nameplate capacity of 10mt, the Essar Steel mill at Hazira operates at 6-6.5mt. The bulk of its capacity is fuelled by expensive imported natural gas, unlike its competitors, who use coking coal as feedstock.
“ArcelorMittal might need to invest ₹ 2,000-2,500 crore to de-bottleneck the plant, convert some of the direct reduction - arc furnace production to potentially blast furnace - basic oxygen route, and achieve full capacity utilisation of 10mt," said an analyst with a foreign brokerage firm. “If you look at Arcelor’s balance sheet, its debt-ebitda ratio is 1.2, or 1.3. It is now in a much better position to mobilise funds for the acquisition and operation of the plant. Making this investment is far more viable in terms of cost and time of setting up a greenfield project."
Ebitda is short for earnings before interest, tax, depreciation and amortization.
With automobile demand set to rise over the next decade in India, ArcelorMittal will leverage its partner Nippon Steel’s capabilities in creating high-end auto-grade flat steel.
“This will be the differentiator between ArcelorMittal, and Tata Steel and JSW in India," Mukherjee said. “The latter two are very good, and have partnerships with Nippon Steel and JFE Holdings, respectively. But ArcelorMittal has a long storied history in building steel for automobiles, in AHSS (advanced high-strength steels). This is where Arcelor is the best in the business."