Steel, paper firms scout for raw materials abroad

A rising number of Indian steel and paper makers are scouting for raw material assets abroad in order to improve profit margins which have been hit by runaway input costs.

For instance, JK Paper, a Hari Shankar Singhania Group company, is looking for pulp plantations in Vietnam, Indonesia and Malaysia to shield itself from rising pulp prices.

In the last one year, international pulp prices have zoomed over 40 per cent. Pulp accounts for half the production cost of paper. However, companies have not been able to pass on the entire cost increase to buyers.

"Pulp prices are on a constant rise and impacting the company's profitability," said V Kumaraswamy, vice-president (finance), JK Paper. "We cannot own plantations within the country and, therefore, it makes sense to buy them abroad."

The company may have learnt from the experience of Gautam Thapar-controlled Ballarpur Industries (Bilt), the country's largest paper company, which, in 2006, acquired Malaysia-based Sabah Forest Industries (SFI) for $261 million along with JP Morgan. Sabah is an integrated pulp and paper mill, with access to a plantation spread over 289,000 hectares.

"After the expansion of our capacity in India (by June next year), we will import 60,000 tonnes of pulp from SFI. The cost of pulp would be 40 per cent cheaper and the group is expected to make an annual saving of $20-25 million," said B Hariharan, director (finance), Bilt.

Steel companies, too, are sealing deals overseas for critical raw materials. Since April 2007, spot prices of iron ore have shot up by 250 per cent.

Public sector undertakings Steel Authority of India, Rashtriya Ispat Nigam, National Mineral Development Corporation and National Thermal Power Corporation have formed a special purpose vehicle (SPV) for securing metallurgical coal and thermal coal assets overseas. The SPV is in the process of identifying suitable opportunities in various countries.

Tata Steel recently formed partnerships for iron ore and coal supplies. "We are actively looking for acquisitions and partnerships in the area of raw materials "� iron ore and coal - that would be relevant and viable for us," said A D Baijal, group director (global mineral resources), Tata Steel. "Our aim is to be present in every country that has ample iron ore and coking coal resources for development."

Last year, Tata Power acquired 30 per cent stake in PT Kaltim Prima Coal and PT Arutmin Indonesia, major Indonesian thermal coal producers, to support its upcoming projects of 7,000 mw on the west coast.