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Aditya Mittal, chief financial officer of ArcelorMittal and chief executive officer of ArcelorMittal Europe, (Photo: Bloomberg)
Aditya Mittal, chief financial officer of ArcelorMittal and chief executive officer of ArcelorMittal Europe, (Photo: Bloomberg)

Opinion | The big Mittal surprise that could come good

The ArcelorMittal-Nippon Steel joint venture’s decision under Aditya Mittal’s leadership to ramp up Essar Steel’s capacity may turn out to be well timed if demand rebounds

As far as big decisions go, Aditya Mittal appears to have got off to a blistering start as chairperson of the new ArcelorMittal-Nippon Steel joint venture (JV) in India. The ink on the JV’s official acquisition of Essar Steel had barely dried when it announced a ramp-up of the domestic steelmaker’s capacity by 50%. Though the acquirer has had years to mull over its plans for the Indian market, given the long-winded and litigation-wracked process of bankruptcy resolution that followed its initial bid for the ailing Essar Group company, its push for such a major expansion so quickly still caught many by surprise. This is because of the gloom that seems to have settled over the industry in recent times. Steel consumption, after all, bears a strong correlation with a country’s economic performance, and India’s growth has been on a downtrend. Yet, a closer look shows that ArcelorMittal may not be off the mark in betting on rising sales. It could take a couple of years to expand operations and that is enough time for market demand to perk up.

While domestic steel prices have slid by around 10% since the start of this year amid slowing demand growth, which is estimated to fall to 4-5% this fiscal from the 7.5-8% growth recorded in the previous two years, according to Crisil, most observers expect the sector to at least attain stability next year. Further, if the government goes in for a big infrastructure boost as part of a larger package aimed at spurring economic growth, steel demand could easily rebound over the medium term, as construction uses up mega-tonnes of the metal. ArcelorMittal Nippon Steel India Ltd is currently operating well below its installed capacity, but it would expect to roar into the reckoning now that it is part of a global group that has proved how competitive it can be under diverse circumstances. If its furnaces are fired up to peak levels and the planned additions made, it could churn out 15 million tonnes a year. This would make it one of the country’s top steel producers.

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India’s total steel capacity is around 140 million tonnes, with no more than 6-7 million tonnes expected to be added over the next two years. This should ensure that capacity utilization rates go up over the next few years from current average levels of around 80%. Tata Steel and JSW Steel have pushed their expansion plans farther down the road, which should again offer the new player comfort. For now, ArcelorMittal has short-term challenges to see off. While its acquisition has iron ore pellet facilities in Odisha as well as a slurry pipeline from there to feed its steel plant in Gujarat’s Hazira, it would probably need to supplement its ore supplies. Mine leases are an option, but given the uncertainty over lease renewals and environment approvals in Odisha, these won’t be easy. Local iron ore prices are expected to firm up. Imports could fill in, but while global prices are off their multi-year highs touched last year, they’re not low. In contrast, rivals such as Tata Steel and the state-run Steel Authority of India Ltd have the advantage of captive mines. As iron ore typically makes up around a third of production costs, it could take a while for the JV to achieve a price edge. How it goes about it would test its mettle.

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