The India story may have slowed, but for global steel majors ArcelorMittal and Nippon Steel
(AM/NS India), that have invested Rs 50,000 crore in Essar Steel, it remains a bright spot.
“On a medium-to long-run basis, the growth story is intact,” said Aditya Mittal, president, ArcelorMittal as well as group chief financial officer (CFO) and chief executive officer (CEO), ArcelorMittal Europe, during the group’s earnings call.
Aditya, who is also chairman of AM/NS India, was responding to questions from analysts on the Essar Steel acquisition and when the joint venture would actually generate a cash return for shareholders.
Mid-December, ArcelorMittal and Nippon Steel
jointly completed acquisition of Essar Steel under the insolvency law.
The joint venture — 60 per cent held by ArcelorMittal and the balance by Nippon Steel
— was renamed AM/NS India.
The growth story that Aditya was referring to, was that of India’s. “I know the headlines around India was negative, such as automotive demand declining sharply. But apparent steel consumption in India actually grew by about 4 per cent in 2019, and we believe it will grow even stronger in 2020,” he said.
He said, “In terms of how you should think about it, it’s all a deleveraging story. It’s a story in which we want to grow as the market grows in India and capture the value that is created. And so, I would think of it as value that is embedded in ArcelorMittal in owning a 60 per cent equity interest in a world-class facility in the world’s fastest-growing steel market,” Mittal said.
On whether it is a cash or growth story for ArcelorMittal shareholders, he said, “Every story has cash at the end.”
“Do you take the cash and return to shareholders? Or do you take the cash and invest in growth? And, as long as the growth story remains intact, the focus would be to invest to grow the business,” he added.
What may have reinforced his belief is AM/NS’s performance which has exceeded ArcelorMittal’s expectations. “We visited it in December again and have been in constant touch with the team. And, everything we have seen has impressed us. The company is on the right track,” he said.
In January, AM/NS India set production records run rate at 7.4 million tonnes. That’s an increase of 40 per cent since the time it was doing due diligence for acquisition towards the end of 2017. The increase was achieved with minimal capital expenditure. The run rate earnings before interest, taxes, depreciation, and amortisation (Ebitda) is $600 million, which is higher than the December figure.
Nippon Steel, too, in its investor presentation on Friday, said, it expected AM/NS India to be in the black from the first year. The total cash injection in the joint venture, Nippon said, was Rs 50,000 crore, that is, Rs 42,000 crore for repayment of Essar’s existing debt as well as Rs 8,000 crore for initial working capital, including capital expenditure. The investment is in the ratio of the holding in the joint venture.
Nippon has said it would make strategic investments in growing business fields and regions and that includes Essar Steel India. This comes at a time when Nippon intends to accelerate the reorganisation of or withdraw from unprofitable overseas businesses with no prospects of a future profit recovery.
Nippon said on Friday that it would shut nearly 10 per cent of its production capacity and was expected to book a record loss of 440 billion yen ($4 billion) this financial year.
The steel major said it had been facing unprecedented harsh conditions in which steel demand from the manufacturing industry had decreased and steel prices stagnated, prompted by the US-China trade disputes.
Additionally, Japan has been facing a declining and aging population.
In 2019, Japan recorded a decline of 4.8 per cent in production. Among the top 10 producing countries, in fact, most recorded a decline except the US which grew at 1.5 per cent, India at 1.8 per cent, China at 8.3 per cent and Iran at 30 per cent.