Steel companies may undo overseas acquisitions

Domestic market offers better scope

With the global business climate continuing to look grim, Indian steel companies could undo overseas acquisitions and focus at home where consumption trends are relatively encouraging.

In the last 10 years, almost all large Indian steel companies like JSW Steel, Tata Steel, Essar Steel and Jindal Steel & Power have made costly overseas acquisitions. Most of them are in dispair as China dumps cheap steel on the world.

Last week, the Ruia-owned Essar Steel Minnesota filed for bankruptcy protection in the US. In 2007, Essar had said it would set up a $1.8-billion unit in Minnesota, but scaled down from a taconite steel mill to a pellet plant after the 2008 financial crisis. The project was scheduled to start production in 2014 but cheap China steel has made production unviable.

From trying to compete with ArcelorMittal, the world's largest steel producer, the Tatas are now struggling to retain their presence in Europe. Tata Steel is in talks for a joint venture with German ThyssenKrupp for its European operations. Tata Steel’s deliveries in the region have dropped to 13 million tonnes in 2015-16, from 23 million tonnes in 2008-09.

Welspun Pipes, which includes the US subsidiary’s operations, reported a loss of $7.1 million in 2014-15, against a profit of $9.9 million in 2013-14 as the top line declined and costs increased.

“Overseas acquisitions are expensive to maintain, there is a constant requirement of upgradation,” said Pritesh Jani, senior analyst with Religare Securities. “With the global business climate continuing to be difficult, these acquisitions have become a burden for companies,” he added.

Tata Steel has in the last 10 years taken several steps to lighten the burden of its European acquisition by job cuts and closure of loss-making units. JSW Steel, whose $1 billion US acquisition continues to be EBITDA negative, took a non-cash write-down of nearly Rs 100 crore in 2014-15.

“By taking write-downs on acquisitions, companies signal to investors that they had overvalued an asset,” said an analyst with a local brokerage.

Calls to the Sajjan Jindal-led JSW Steel and Tata Steel went unanswered.

Even mine purchases have had not much effect. Coal mines of the Naveen Jindal-led Jindal Steel & Power in Mozambique and South Africa have reported losses in the year ended March, says the company’s annual report for 2015-16. The Delhi-based company's Oman plant, on the other hand, earned a profit of Rs 6.18 crore in 2015-16.

In some cases, however, companies have made prudent moves. JSW Steel, for instance, has kept its Chilean iron ore mines shut since 2015 and is not willing to resume operations till ore prices recover. The company also refrained from entering Italy by acquiring Lucchini.

“It makes no sense for any new acquisition in the coming few years,” said Abhisar Jain, senior analyst with Centrum Broking.

With steel consumption in India expected to pick up and an ample gap between per capita consumption and the global average, there is scope for steel producers in India.

According to Joint Plant Committee data, imports have come down by 30 per cent during April-June and exports have moved up nearly seven per cent. Consumption is up 0.3 per cent during the quarter despite June being a lean month. April-May consumption was up 4.5 per cent, year on year.

“The scenario at home is better. Consumption is picking up and demand is being met by local production. Even exports are picking up despite Chinese dumping,” said Bijoy Thomas, an analyst with India Ratings.