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

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.”
 

Mukherjee is referring to a melange of technologies and processes of iron and steelmaking at a single site. Consider Essar’s 10 mt mill at Hazira in Gujarat where you find blast furnace, Midrex and Corex technologies operating side by side. The mill is a long distance away from operating at capacity. Moreover, the government’s failure to make the promised gas supply on the basis of which Essar and two other groups built large gas-based sponge iron facilities painted them in a corner.
 
The 1 mt speciality long products mill at Jamshedpur of Usha Martin, which fell victim as much due to running up big debts as well as a split in the promoter family, has also been unable to normalise operations for having a combination of sponge iron units, electric arc furnaces and BF-BOF. Tata Steel subsidiary Tata Sponge, which is acquiring the Usha Martin steel business, will also have to seek resolution of regulatory issues concerning indiscretions of the erstwhile owner’s operation of captive iron ore and coal mines.
 
Insolvency resolution is helping the cause of capacity consolidation, which happened in fits and starts in the past. Steel has always been a kind of pendulum industry, whose fortunes oscillate with that of the economy. Steel prices have been softening since November, so steelmakers stand a better chance to withstand price shocks through a process of capacity consolidation.