Steel companies’ output up after IRPs step in

6 November 2017

Steel companies battling insolvency resolution pressure have seen a jump in production after being taken over by resolution experts, several people related to the companies said.

Two major steelmakers — Bhushan Steel and Essar Steel — have shown a significant improvement in steel production after being taken to the bankruptcy courts. Debt-laden Bhushan Steel saw production spike by almost 45% between the end of July and end of August and by close to 30% between July and September end, typically considered a lax season for steel.

Since August, when the company was under court-appointed resolution practitioners after the board was suspended, saw some turnaround in terms of production levels that reflected in better cash flows.

Essar Steel, which has had acquisition interest from marquee steel companies like Tata Steel, ArcelorMittal as well as the company’s own promoters, has also seen a significant improvement in production, two people in the know of the company’s present affairs told ET. Higher production levels, accompanied by favourable steel prices and cost reduction, has pushed cash flow upwards by 50% at Essar, these persons told ET.

“The cash flow for the company has increased by 50% as the company benefited from higher steel prices and more volumes sold,” the source said. Not only the production was higher on monthly basis since the resolution began, the performance has also shown improvement on a year on year basis,” said one of those quoted above.

To be sure, external factors were not so favourable during the same period last year. Producers of flat steel have raised the price by almost `3,000 per tonne from August 1 this year as demand improved and international steel prices firmed up. Also, winter capacity closures expected to take place in China that dominates the world steel market assures stability in prices in the near term.

Bhushan Steel, eyed by JSW Steel, Tata Steel and ArcelorMittal apart from a clutch of private equity funds, saw production rise after the monsoon season, typically considered a lax season for steel, has since pulled production down a little. Bhushan Steel produced 2,25,000 mt of steel when the resolution practitioner (RP) took over the company on July 26. The company saw production rise to 3,25,000 tonnes in July to August before scaling back to 2,85,000 by end of September.

This was after the company saw credit from suppliers getting squeezed on account of credibility since the company is undergoing insolvency resolution.

“Though credit has shrunk, the company was able to make use of the cash due to be paid to operational creditors before the insolvency resolution process began,” a person aware of developments at the company told ET. According to the Insolvency and Bankruptcy Code, 2016, all liabilities on a distressed asset before the petitioning for the company began gets frozen and the creditors are able to claim payments due to them before the resolution process began, only after the process has ended.

Source: ET