Steelmakers look for mergers to cut costs

Hopes of incremental value creation from joining operations of two entities are what drive mergers and acquisitions. ICICI Bank CEO Chanda Kochhar’s observation at the time JSW Steel bought into the struggling steelmaker Ispat Industries that the entry of a mighty strategic investor would inject strength to Ispat’s balance sheet and create condition of productive capacity utilisation is in line with this principle.

Mercifully, JSW honcho Sajjan Jindal was not put off by mountains of losses of Ispat. He claims to have the prescription to turn around Ispat within a year. As he will get high cost Ispat debts refinanced, he is to quickly raise the capacity of the acquired company’s mill in Maharashtra’s Dolvi and facilitate the opening of its iron ore and coal mines. Jindal also has the strategic advantage of supplying power to Dolvi mill at rates much lower than what Ispat is paying now and also pellets till Ispat commissions its own facility. Logistics will also come into play in significantly reducing distribution expenses of steel of Ispat.

Whether or not ArcelorMittal showed interest in buying Ispat at any stage, the fact remains no other group is as well placed as JSW, being surplus in power and pellets and also in a position to largely swap the southern market of Ispat with its western market leading to saving in transportation cost, in retooling Ispat. Orissa based Neelachal Ispat Nigam, jointly owned by MMTC and state development agency IPICOL but laxly run, is yet another takeover target.

Rashtriya Ispat Nigam Limited, in the midst of raising capacity of its Vizag mill to 8.4 million tonnes in the next five years from 3.3 million tonnes, is seen as the preferred bidder for 49 per cent MMTC ownership of Neelachal, which for lack of funding and promoter indifference remains a producer of coke and low value pig iron. The arrival of RINL with its domain knowledge and technology bank hopefully will create condition for Neelachal to become a 4-million-tonne integrated steel mill, true to its potential. Neelachal which has in its kitty good iron ore deposits in Orissa will fit in nicely with RINL’s multi-location growth programme that includes Karnataka and Orissa.

Two steel groups or constituents in any other industry will merge operations in the hope that underlying synergies will lead to cost savings, better capacity use and bigger product offerings. This happened when the behemoth of ArcelorMittal was created in 2006 by way of merger of the world’s two top of the heap steelmakers. Similarly, Corus operations have been made trimmer with considerable cost savings in the wake of Tata Steel buying the European steelmaker in January 2007 by paying $12.1 billion. Such are the potential benefits of merger that Japanese rivals Kawasaki Steel and NKK merged in 2002 to become JFE, Japan’s second-largest steel producer. In two years since merger, the operating profit margins of JFE more than doubled.

Now there are new compelling considerations for very large steelmakers to come under a single roof. As we are seeing in the case of Nippon Steel and Sumitomo Metal, which between them have a capacity of 47.8 million tonnes in mutually exclusive product profiles, steelmakers facing stiff rises in raw materials prices but not finding it easy to pass on incremental costs to consumers will seek gaining heft through mergers.

Give it to steel czar Lakshmi Mittal who well before scooping up Arcelor was found championing the cause of very large steel groups being created by way of capacity consolidation to move to a better position to negotiate prices with humongous resource companies and exercise discipline in capacity use in times of demand contraction. Steel guru Peter Marcus in tune with Mittal says, “Mills have learned that if you are bigger you have more clout and that you can be more flexible when you have to lower production, which affects prices.”

But, Mittal did not anticipate new waves of mergers in India and Japan. He said last year that “outside China, the steel industry is well consolidated. I really do not see major consolidation transactions in the steel industry, albeit there could be smaller opportunities available.” The proposed coming together of Japan’s No. 1 and No. 3 steelmakers which already have small crossholdings in each other is no doubt a very major consolidation initiative. JSW’s rescue act at Ispat is too a significant development in the Indian context as Neelachal’s takeover will be.

At the same time, Mittal’s hope that in the next four or five years China will have groups making 50 to 70 million tonnes of steel strikes a chord with Chinese authorities who are to give another determined push to consolidate capacity, including closing down of remaining polluting and old technology-based units. Capacity consolidation, though frustratingly slow is gaining pace in China. Last year, the country’s ten leading mills had a share of 48 per cent of the country’s steel production against 45 per cent in 2009. Interestingly, the authoritarian Chinese regime is not finding it easy to snuff out all the rogue steel units managing to survive through graft.  

Share this:
Tags:

About Jessica Priston

Ut tellus dolor, dapibus eget, elementum vel, cursus eleifend, elit. Aenean auctor wisi et urna. Aliquam erat volutpat. Duis ac turpis. Integer rutrum ante eu lacus. Vestibulum libero nisl, porta vel, scelerisque eget, malesuada at, neque. Vivamus eget nibh. Etiam cursus leo vel metus. Nulla facilisi. Aenean nec eros.

  • Website
  • Google+
  • Rss
  • Pinterest
  • Instagram
  • LinkedIn
  • Vimeo
  • Youtube
  • Flickr
  • Email

Related News

  • Cashback site Cashkaro now offers restaurant discounts

    India’s e-commerce market looks large and lucrative enough from the outside, but insiders know it is very challenging. In fact, the number of e-commerce sites and businesses is growing so fast here today that the competition is cut-throat. This

  • What is Viscose Material? Advantage and disadvantage of viscose.

    Viscose is a unique form of wood cellulose acetate used in the nnmanufacture of a number of different products. This includes items for nnthe medical industry, though it is perhaps most common as a major nningredient in the production of the fabric r

  • Honda launches new CBR 250R bike
    Honda launches new CBR 250R bike
    July 01, 2014 5:50 am

    New Delhi: Honda Motorcycle & Scooter India (HMSI) launched a new edition of its global sports performance bike CBR 250R priced between Rs 1.56 lakh and Rs 1.86 lakh (ex-showroom Delhi). The 2013 edition CBR 250R is available for sale across a

  • Zara has opened store at Ambience mall, Gurgaon

    Zara, has opened its new store at Ambience mall, Gurgaon. Spread over 28,000 sq.ft. across two floors the store has taken the space earlier occupied by Debenhams. With this Zara now has twelve stores in India. It is present in 86 countries with