JSW forges alliance with Japan’s JFE

JSW forges alliance with Japan’s JFE

Mumbai: JSW Steel Ltd and JFE Steel Corp., the second largest steel makers in India and Japan, signed a comprehensive deal that will begin with a collaboration to produce automotive steel and then expand to activities such as setting up new steel plants and the acquisition of iron ore and steel mines in and outside India.

The deal will allow JSW to move into the high-margin business of producing steel for car makers while it offers JFE entry into the fast growing Indian economy.

“We will supply automotive steel to India’s domestic companies like Suzuki, Toyota, Honda and Hyundai," Hajime Bada, chief executive officer of JFE Steel said in Mumbai on Thursday. “Globally these are customers of JFE Steel."

The two steel companies will also collaborate to build JSW’s greenfield steel project in West Bengal that will produce 10 million tonnes (mt) of steel. It plans to set up another 10 mt steel plant in Jharkhand. JFE has annual steel-making capacity four times larger than JSW’s current 7.8 mt.

Also on the agenda: “mutual stock holding" which means both the companies could buy stakes in each other.

Japan’s Nikkei newspaper reported on Thursday that the Japanese partner may pay as much as 50 billion yen (Rs2,600 crore) for a stake in the Indian steel maker.

“Under the umbrella agreement we have created a task force with representatives from both the companies to work out areas for collaboration" Sajjan Jindal, vice-chairman and managing director of JSW, said after announcing the agreement.“Everything is still at the discussion stage. Mutual shareholding is a part of the discussions, but what percentage, when and how will depend on the time. India is a big market for high-quality steel as far as auto is concerned and we will take advantage of (JFE’s) experience in producing high quality auto steel."

This is the third multinational steel company to enter India, after Sumitomo Metal Industries Ltd tied up with Bhushan Steel Ltd to make high grade steel, and in September world’s largest steel maker ArcelorMittal announced its decision to acquire 35% stake in 800,000 tonnes Uttam Galva Steels Ltd.

Analysts said the deal looks beneficial to JSW at first glance, especially since the company is weighed down by Rs16,600 crore of debt.

Bhavesh Umesh Chauhan, a research analyst with SMC Investment Solutions and Services, said JSW cannot afford to take more debt despite its ambitious expansion plans in the next two years. “They will need more than Rs5,000 crore to increase production to 11 million tonnes per annum (mtpa) by 2011, from 7.8 mtpa currently. Currently, they cannot afford to take more debt so dilution of promoters’ equity seems to be the better option."

Another analyst from a European brokerage, who did not want to be named because he is not authorized to speak to the media, said JSW will gain from the technology inputs of the Japanese company, but added there is a lot of interest about the potential stake sale by the Indian company.

“The Jindals own 45% of the company, which will come down to 42.5% when the company’s FCCBs (foreign currency convertible bond) will be converted in 2012. They have permission to raise $1 billion through QIPs (qualified institutional placement). My feeling is that they will probably prefer selling a stake to JFE rather than sell to different investors," he said. FCCBs are convertible bonds issued in foreign currencies while QIPs are sales of new shares to institutional investors.

JSW plans to set up a new 10 mtpa capacity in West Bengal at the cost of Rs35,000 crore. However, that project is currently on hold after the global economic downturn last year.

Sheshagiri Rao, joint managing director and group chief financial officer of JSW, said the company has invested only Rs100 crore out of the total cost of the West Bengal project and will review it only in 2010-11.

JSW officials said that they expect to make higher margins by selling this auto grade steel in India, a market where sales are growing at a 15% annualised rate, at a time when developed markets like Europe are in a decline.

Jayant Acharya, director, sales and marketing at JSW said auto companies would prefer buying this special steel in India rather than shipping them from abroad.

“So far we used to make equipment for the internal components of cars but JFE will help us get into the high margin outer body parts of vehicles which forms a critical mass for cars," he said.

“Currently, companies like Toyota, Maruti, Ford and GM used to source this steel from companies in Japan and Germany. They will prefer to source it from the domestic market if it is available here," Acharya added.

Domestic car market leader, Maruti Suzuki India Ltd, which procures 10% of its steel requirements from JFE, will be one of the key beneficiaries.

S. Maitra, executive director and managing executive officer (supply chain), at Maruti said, “the entry of JFE into India will help the company cut transport costs, customs duties and the protection it has to buy against foreign exchange volatility. Currently, Maruti procures half of its steel requirement from domestic steel manufacturers such as Tata Steel Ltd and Essar Steel Ltd," Maitra said.

Jindal also told Dow Jones that JSW has no plans to sell its struggling US operations despite low demand for its products.

Shally Sheth in Mumbai and Bloomberg contributed to this story.