Target 300 million tonnes: Steel companies gear up for value creation

From among the first major dozen defaulters, Bhushan Steel was the first to emerge successfully from the IBC resolution process in May 2018
This should be an enabler for the steel industry to arrive at a capacity of 300 million tonnes, in accordance with the national steel policy, by 2030-31: Rescuing from ruin several million tonnes of sick steel capacity, owing thousands of crores to secured financial creditors and others, and also the promise of restoring their health and creating expansion by new owners.

The Insolvency and Bankruptcy Code (IBC), 2016, a one-stop time-bound resolution of cases of insolvencies, has laid the ground for ambitious steel groups with financial and technological muscle to acquire ailing steel assets.

From Tata Steel to JSW Steel to Vedanta from within the country and ArcelorMittal and GFG Alliance from outside but both with Indian-born promoters, industry majors saw in sick assets an opportunity to expand operations, offer synergistic benefits, or make entries into a market where demand for the ferrous metal was set to grow at the highest rate in the world.

From among the first major dozen defaulters, Bhushan Steel was the first to emerge successfully from the IBC resolution process in May 2018. This has proved to be “value accretive” for Tata Steel. More recently after months of agonising wait and uncertainty about the outcome, ArcelorMittal, in partnership with Nippon Steel, bagged Essar Steel at a cost of Rs 42,000 crore, making it the largest stressed asset deal.

That acquisition, with great promise of growth in capacity and product enrichment, brought to fruition Lakshmi Mittal’s commitment to “build a meaningful production presence in the country for over a decade”. All his earlier attempts to build greenfield steel mills in Odisha, Jharkhand, and Karnataka were futile because of issues related to land acquisition, iron ore mines linkages, and red tape. For identical reasons plus recurring violent protests, South Korean steelmaker Posco had to give up its plan of a 12 million-tonne plant in Odisha. Therefore, acquiring a major stressed steel asset was the only option left for Lakshmi Mittal and his son Aditya, who is chairman of ArcelorMittal Nippon Steel (AMNS), an India joint venture (JV) formed to run Essar Steel operations, to participate in “infrastructure building and urbanisation” here and also make a meaningful contribution to the steel capacity building programme.

The Mittals could not have asked for anything better for acquisition than the operationally well-integrated Essar with a capacity close to 10 million tonnes. In the two years ahead of ownership change, Essar, under Dilip Oommen’s leadership, lifted production by 2 million tonnes to 7 million tonnes. Oommen continuing to lead AMNS as chief executive officer brings continuity in management as the two joint venture partners, both global leaders in automotive and flat steel products, have stated their intention to make their technologies available here to make the Hazira plant an industry leader. ArcelorMittal owns 60 per cent in the JV and Nippon Steel 40 per cent.

Their track record is such that once the new promoters have completed the initial investment to take annual shipments to 8.5 million tonnes, along with improvement in operational efficiency and margins, they will be targeting a capacity build-up of up to 15 million tonnes. Hasn’t the Odisha government already asked AMNS to build a 3 million-tonne mill at Paradip, for which it had a commitment from Essar Steel dating back to 2005? Interestingly, while the pandemic has made groups exercise caution with fresh capacity building at acquired stressed assets, AMNS claims its expansion programme is sailing through as planned. Being port-based, the Hazira mill enjoys the advantage of easy imports of raw materials and export of steel products, which will support expansion.

Besides routine rehabilitation and capacity ramping up following acquisition of assets from the sick bay, the buyers in most cases bring something new to the table by way of technology, brand-building techniques, or manpower management. For example, UK-based Sanjeev Gupta’s GFG Alliance, on acquiring bankrupt Adhunik Metaliks and Zion Steel, said it would introduce here its green steel strategy, practised at its mills in several other countries. The strategy is a combination of recycling steel scrap with low-carbon renewable power. Odisha-based Adhunik makes steel both through the blast furnace and electric arc furnace routes.

None of the new promoters has any complaints about the quality of acquired assets. T V Narendran, chief executive officer and managing director of Tata Steel, says: “We were keen on Bhushan because we found it to be a good asset and we could ramp up production there without much capex. This is exactly what we have done. Our target was to achieve a rated capacity at Bhushan in two years. We have achieved that. Were it not for the crisis created by the pandemic, we would be comfortable operating Bhushan at a 5 million-tonne level.” Not only Tata Steel, the other acquirers such as AMNS and Vedanta are not taking long to derive value from assets that became stressed for the failings of past managements.

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