India’s steel industry on the verge of realignment

Source: NIKKEI ASIAN REVIEW

The two major steelmakers now winding their way through India’s bankruptcy proceedings could end up triggering a realignment of the country’s steel industry.

The Reserve Bank of India, the nation’s central bank, last year identified 12 borrowers that need to be immediately dealt with under the Insolvency and Bankruptcy Code. The two debt-ridden steelmakers now up for grabs — Essar Steel India and Bhushan Steel — are on the list, along with several other steelmakers and companies that supply the country with infrastructure and power.

According to local media reports, ArcelorMittal and Numetal Mauritius — a special-purpose entity set up by Russia’s VTB Capital and other parties — were the only bidders for Essar, India’s fourth largest steelmaker.

ArcelorMittal, the world’s largest steelmaker, on March 2 said it would form a joint venture with Japan’s Nippon Steel & Sumitomo Metal in its bid for Essar.

Essar Steel, a unit of midsize conglomerate Essar group, can produce an annual 10 million tons of crude steel, equivalent to 10% of the country’s crude steel production.

Meanwhile, Tata Steel has made the highest bid for Bhushan Steel, the companies announced on March 7.

India is the world’s third-largest producer of raw steel. Its crude steel production last year jumped 6% to 101.4 million tons, according to the World Steel Association. India trails only China and Japan in steel production but is expected to move into second place this year if it maintains its current growth rate.

Indian-born Lakshmi Mittal has made a global force of what was once Mittal Steel. In his first overseas expansion, Lakshmi Mittal took his company to Indonesia. Mittal Steel later moved into Central America and then into the former Soviet Union. The steelmaker also acquired U.S. producers and eventually became the world’s largest.

In 2006, Mittal solidified its No. 1 status by acquiring Luxembourg-based Arcelor, the world’s second largest steelmaker at the time.

Now ArcelorMittal has its sights set back on India.

Acquiring Essar Steel would enable ArcelorMittal and Nippon Steel to expand their businesses in the growing Indian market.

At the end of March 2016, Essar Steel was 450 billion rupees ($6.92 billion) in debt. Of this, loans worth more than 310 billion rupees were classified as nonperforming. Creditors such as State Bank of India filed an insolvency petition against Essar Steel with the National Company Law Tribunal. Essar is now under Insolvency and Bankruptcy Code reconstruction.

However, some market watchers question whether ArcelorMittal and Numetal are even eligible to bid on Essar. ArcelorMittal was a shareholder of another steelmaker that had nonperforming assets, while the Ruia family, which holds a stake in Essar, also has a stake in Numetal Mauritius.

The Insolvency and Bankruptcy Code bars shareholders and affiliates of companies that had bad debt in the past from bidding in bankruptcy auctions for debt-ridden companies.

This may apply to the Essar Steel case. If both parties are ruled ineligible to participate in the auction for Essar Steel, bidding could go back to square one.

And that would be bad news for India’s banking sector. Last year, the country’s bad-debt problem swelled to about 8.5 trillion rupees.

Source: NIKKEI ASIAN REVIEW