Steel global acquisitions

Businessworld

It seems the world is not enough for Indian steel companies. Close on the heels of Tata Steel’s acquisition of Anglo-Dutch steel maker Corus are JSW Steel and the Essar Group that have made acquisitions in the UK, US and Canada. This week, JSW Steel announced its intention to set up a 5 million tonne (mt) cold rolling plant in the US with an investment of $1 billion (Rs 4,400 crore), even as it snapped up Argent Independent Steel, a UK-based steel servicing centre.

And the Essar Group rounded off buying Canada’s third largest steel mill Algoma by acquiring Minnesota Steel, which has access to over 1.4 billion tonnes of ore and 7,000 acres of land. Reports valued the transaction at close to $90 million (Rs 396 crore).

India produced 42 mt of steel in March this year as opposed to 38 mt last year. A geographically spread-out presence will no doubt help Indian steelmakers buck the industry’s notorious cycles and their rolled products ought to find use in the US auto market. Tata Steel’s acquisition of Corus had a similar strategic imperative.

South-west USA has already seen European majors like ThyssenKrupp and Severstal setting up re-rolling operations there. Thyssen is using its slab making capacity in Brazil to feed its US plant. Analysts say that the region is poised to become an important beachhead for Indian companies in terms of cost efficiencies. It seems Indian steel companies are increasingly beginning to see the world as their oyster.

The Essar Group says it wants to replicate its Indian business models in overseas markets. This means hunting for acquisitions as well as greenfield opportunities. Recently, the company initiated a North America strategy after it announced plans to buy a steel maker in Canada (Algoma) and in the US (Minnesota Steel).

The US transaction, where Essar plans to build a greenfield plant of 2.5 million tonnes (mt) at a total project cost of $1.65 billion (Rs 7,260 crore, including the acquisition), shows the Ruias continue to believe greenfield projects play a significant role in this arena. In Trinidad and Tobago, it is also building a 2.5 mt plant — the group’s first attempt at a project of this kind overseas. Instead of forming a global supply chain (a la Tata-Corus), Essar seems to be banking on standalone assets that give it access to consumers and raw materials in the same market. Essar Group director Prashant Ruia tells BW’s Piya Singh what these acquisitions mean for the group’s steel business. Excerpts:




How will you fund these acquisitions?
I cannot disclose details as the $1.58-billion (Rs 6,952-crore) Algoma transaction is subject to shareholder approval. Broadly, it is similar to the Corus deal where we have put in equity and there is also a debt piece. In Minnesota Steel, the total project investment of $1.65 billion includes a greenfield project that we plan to put up in the next three to four years. Again, there will be a debt component to be raised in the US, as it is an American company. Besides, we are going to be a $10-billion (Rs 44,000-crore) group in 2007-08 with an EBITDA in excess of $1 billion (Rs 4,400 crore). Therefore, liquidity is not an issue.

After this wave of consolidation, experts see a scenario of four to five global players with capacities of, say, 80-100 mt each. How will Essar Steel figure? Our Hazira facility will go up to 8.5 mt, making it one of the largest facilities in the world at a single location. Algoma, subject to approvals, will add another 2.5 mt. Then we have Minnesota, at 1.5 mt, going up to 2.5 mt, and Trinidad and Tobago, which will add another 2.5 mt. So, we are talking about roughly 15 mt. Besides, we are still open to acquisitions. The idea is to build a global business and, let us be realistic, this is not small in the global pecking order.

In India, we have pending proposals for a 3 mt plant in Chhattisgarh and a 5-6 mt plant in Orissa. There are the applications to be filed with the government, land acquisition, environment and local issues. Do we have a plan to build in the East? Yes. Would I want to do it immediately? Yes. But it is going to take time.

Are there fewer opportunities now for big acquisitions in this sector overseas?The assets are there but valuations are high and steel prices are strong. We have an M&A team that looks at opportunities worldwide. When values are high, there is deal flow. But at this point we are focusing on building assets.

Essar Steel wants a global footprint with low-cost assets. Are Algoma and Minnesota Steel really low-cost?
Algoma makes its own slabs. It has its own blast furnaces and coke ovens. In the US context, it is low-cost. You cannot sit in India and talk about low-cost in the US. Neither am I going to make steel in Orissa for the US market. With the other projects, the cost of production will be low because of the way the project is configured. In Minnesota we have captive iron ore, in Trinidad we have low-cost natural gas. We have complete control over raw materials. Minnesota has access to 1.4 billion tonnes of ore. These are manufacturing operations and not trading or finishing ventures.

The acquisitions were made by overseas holding company Essar Global. Why?
The logic was to bring about a holding company concept that increases transparency, provides us a vehicle for international transactions and allows us to raise finances for our overseas acquisitions, without coming back to India like we have done in North America.