How insolvency is reshaping steel
It's helping the industry consolidate with investors keen to acquire assets that were once sound but turned insolvent due to poor financial management
 "How insolvency is reshaping steel")
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Why should a steel group become insolvent if in the first place it has not gone wrong in procuring the best available machinery? Due diligence of nearly 30 million tonne (mt) of insolvent steel capacity shows the units concerned were done in by either over-borrowing, escalation in costs and time overruns or the sharp retreat in steel prices during 2015-16. From Vedanta group Chairman Anil Agarwal to Tata Steel Managing Director TV Narendran, no one has complained about the quality of steel assets that found resolution through bidding under the National Company Law Tribunal (NCLT).
In every instance whether resolution was found, or stuck in litigation, the interest of bidders is based on a number of considerations. Industry leaders such as Tata Steel and JSW Steel will not let go of an opportunity to stack up on capacity that resolution of insolvent steelmakers offers, for that is one sure way of maintaining, if not growing, their share of the domestic steel market.
For Lakshmi Mittal, India, which continues to record buoyant steel demand growth, has held a long-standing attraction. Though he has quite a few significant acquisition trophies to his credit in other parts of the world, success has eluded Mittal in his quest to build a mega greenfield steel mill in India. That leaves him with the option to set foot in this country by acquiring a steel asset up for auction.
ArcelorMittal, with crude steel production of 93.1 million tonnes (mt) in 2017 derived from multi-location mills, claims “relevant credentials and experience” to become a strategic partner for Essar Steel with capacity of 10 mt. As it happens, ArcelorMittal nows finds itself twisting in the wind. First, promoter Ruias have come forward to settle the entire Essar dues of Rs 54,389 crore to take back control of the unit. And now State Bank of India has put its entire Essar loan on the block ready to accept a major haircut.
In the meantime, acquisition of the Electrosteel Steels (ES) 2.5 mt capacity mill at Bokaro in Jharkhand by Agarwal is seen as natural progression from his being a producer of iron ore to a maker of steel. Off to a modest start with likely annual production of 1.5 mt at ES, Agarwal has committed investment needed to ramp up output to 2.5 mt first and then build an additional capacity of 5 mt in adjoining areas. Even though he does not have the benefit of experience in managing steel assets, Agarwal is never short on ambition. As he ventures in steel, Agarwal is banking on the support he is getting from Jharkhand Chief Minister Raghubar Das who wants him to create one more Bokaro — the reference is to the SAIL’s modernised and expanded 7 mt plant — in the state.
The Indian steel sector is once again showing exuberance of the kind seen earlier this decade which, however, faded out as it did in the rest of the world in 2015, when prices fell to levels last seen during the depths of recession in early 2009. Atanu Mukherjee, president of consulting group M N Dastur, says: “Exuberant as they had been to build steel capacity during 2004-12, Indian steel promoters were spot on in most cases in buying the best machinery. This holds good for steel groups, which found themselves in the insolvency bay. But I will not say that production processes and operational structures were organised in the best possible manner in all cases. There were techno-economic reasons for some of these new assets not working well.”
In every instance whether resolution was found, or stuck in litigation, the interest of bidders is based on a number of considerations. Industry leaders such as Tata Steel and JSW Steel will not let go of an opportunity to stack up on capacity that resolution of insolvent steelmakers offers, for that is one sure way of maintaining, if not growing, their share of the domestic steel market.
For Lakshmi Mittal, India, which continues to record buoyant steel demand growth, has held a long-standing attraction. Though he has quite a few significant acquisition trophies to his credit in other parts of the world, success has eluded Mittal in his quest to build a mega greenfield steel mill in India. That leaves him with the option to set foot in this country by acquiring a steel asset up for auction.
ArcelorMittal, with crude steel production of 93.1 million tonnes (mt) in 2017 derived from multi-location mills, claims “relevant credentials and experience” to become a strategic partner for Essar Steel with capacity of 10 mt. As it happens, ArcelorMittal nows finds itself twisting in the wind. First, promoter Ruias have come forward to settle the entire Essar dues of Rs 54,389 crore to take back control of the unit. And now State Bank of India has put its entire Essar loan on the block ready to accept a major haircut.
In the meantime, acquisition of the Electrosteel Steels (ES) 2.5 mt capacity mill at Bokaro in Jharkhand by Agarwal is seen as natural progression from his being a producer of iron ore to a maker of steel. Off to a modest start with likely annual production of 1.5 mt at ES, Agarwal has committed investment needed to ramp up output to 2.5 mt first and then build an additional capacity of 5 mt in adjoining areas. Even though he does not have the benefit of experience in managing steel assets, Agarwal is never short on ambition. As he ventures in steel, Agarwal is banking on the support he is getting from Jharkhand Chief Minister Raghubar Das who wants him to create one more Bokaro — the reference is to the SAIL’s modernised and expanded 7 mt plant — in the state.
The Indian steel sector is once again showing exuberance of the kind seen earlier this decade which, however, faded out as it did in the rest of the world in 2015, when prices fell to levels last seen during the depths of recession in early 2009. Atanu Mukherjee, president of consulting group M N Dastur, says: “Exuberant as they had been to build steel capacity during 2004-12, Indian steel promoters were spot on in most cases in buying the best machinery. This holds good for steel groups, which found themselves in the insolvency bay. But I will not say that production processes and operational structures were organised in the best possible manner in all cases. There were techno-economic reasons for some of these new assets not working well.”