Consolidation in steel capacity is the mantra that Lakshmi Mittal has been passionately preaching over the last few years. Now steel-makers everywhere, including our own Tata Steel and China’s Baosteel, are following Mittal’s advice to reap synergistic benefits, including lowering of costs and to be in a position to negotiate market risks better.
Mittal, who presides over the ArcelorMittal behemoth of 116.4 million tonne capacity, says it would be good for the industry to have a few groups with capacities of 100 million tonnes and more.
Tata Steel, which now owns 30 million tonne capacity following the acquisition of Corus, is targeting 100 million tonnes. This could happen with both new-capacity building and acquisitions.
In China, the steel capacity has more than doubled to nearly 550 million tonnes in the past four years. However, this includes a good amount of pollution. Beijing wants to scrap This, but has met with little luck so far. Also, another matter of concernm for China is that its steel industry is highly fragmented. They are now trying to correct this.
For example, Wuhan Iron & Steel, which cannot grow capacity at its existing sites for environmental reasons, will be a 50 million tonne group through acquisitions. Wuhan recently bought a stake in Kunming Steel. Baosteel’s projected rise to an 80 million tonne group from 28 million tonnes will be by way of both new capacity creation and acquisition.
Such global developments and nagging concerns about raw material security have led to the idea of a merger of Vizag Steel Plant and NMDC, both under the ministry of steel.
Besides the economic and commercial considerations, what is likely to take the merger proposal forward is that both Vizag Steel and NMDC are headquartered in Andhra Pradesh. It is learnt that the Andhra Pradesh Chief Minister, who had earlier opposed the merger of SAIL and Vizag Steel for political reasons, has impressed upon the Prime Minister the idea of the merger between NMDC and Vizag Steel.
The merger is the brainchild of Vizag Steel Chairman P K Bishnoi. Unlike SAIL, Vizag Steel does not own mines and so, is required to pay long-term contract prices as it procures iron ore from NMDC. In the last four years, contract prices of ore have risen four times, causing discomfort to steel-makers such as Vizag Steel without mine linkages.
Rising ore prices have, however, enriched the bottomline of NMDC, the country’s largest iron ore producer, with an output at nearly 30 million tonnes in 2007-08.
Apart from its exports of 3.78 million tonnes last year, NMDC met nearly half the requirements of ore for domestic steel-makers with no mine linkages. NMDC last year sold 24.4 million tonnes of ore in the domestic market.
Merchant mining would remain an issue when the merger is considered at the central level. Bishnoi, however, says, “This is not going to be a problem with Vizag Steel. Merchant mining can continue under the proposed merger dispensation.”
NMDC has its mining operations largely in Chattisgarh and partly in Karnataka. As it starts mining at Deposit No 13 in Bailadila in Chattisgarh with reserves of 300 million tonnes in three years, it is committed to give preference in supply to the state-based steel, sponge iron and pellet-makers. Therefore, the merchant mining nature of NMDC has to stay in any circumstances.
The demand of mineral-owning states that local value addition should be given priority is also to be considered. This is leading NMDC to build a 3 million tonne steel plant in Chattisgarh for which Mecon is to prepare a techno-feasibility report. As India attempts to become the world’s second largest steel-maker by 2015, NMDC has the task to step up iron ore production to 50 million tonnes by then.
Meanwhile, Vizag Steel should be lifting steel capacity to 6.3 million tonnes by February 2010 and to 7.4 million tonnes in 2011-12. At Vizag, where it has 20,000 acres, the firm could accommodate capacity of 20 million tonnes. Bishnoi says, “If we merge, we can grow steel capacity in Vizag, Chattisgarh and other places faster. The assurance of captive supply of iron ore will give us the confidence to grow.”
Bishnoi believes the merged entity will be so strong, that it could bid for resources such as iron ore and coal and also steel capacity abroad. The ball now is in New Delhi’s court.
