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India distressed mills sale to lift steel output, sales

13 Mar 2018 13:05 GMT
India distressed mills sale to lift steel output, sales

Singapore, 13 March (Argus) — Indian steel output and domestic sales could increase over the next 12 months if the sale of distressed mills is concluded quickly.

Essar Steel, Bhushan Steel, Bhushan Steel and Power, Monnet Ispat and Electrosteel are on the auction block. Bidding has closed with lenders expected to announce new owners of the mills shortly.

A new bankruptcy law made it easier for lenders to put the mills up for sale to recover billions of dollars in outstanding debt to state-controlled and private-sector banks.

So far an ArcelorMittal-Nippon Steel and Sumitomo Metal joint venture has confirmed its bid for the biggest of the distressed mills, the 9.60mn t/yr Essar Steel while JSW Steel has confirmed its bid for Monnet Ispat. Tata Steel is likely bidding for Bhushan Steel and Bhushan Power and Steel while Vedanta has likely bid for Electrosteel, industry sources said.

The new owners are expected to ramp up output at these mills to rated capacities in the near-term which should lift crude steel output by 3mn-4mn t. Essar Steel, for instance, can only operate at aroud 6.10mn t/yr of its rated capacity of 9.60mn t/yr because of bottlenecks in its steelmaking and casting process.

Another round of auction of distressed mills is expected to start soon after the current batch is sold. These would be mostly smaller rollers and processors with a total crude steel production capacity of around 2mn t/yr. Since these mills make value-added products such as cold-rolled coil, they are likely to find buyers.

India's total crude steel output grew by 4.2pc in April 2017-January 2018 — less than half of the 8.5pc growth in 2016-17. Growth in finished steel consumption in April-January was 5.2pc.

Large steel-focused owners with a strong market profile would also help these mills cut procurement costs and lift sales volumes.

Indian mills import 50mn-60mn t/yr of coking coal with smaller mills often buying smaller lots at higher prices than the negotiated contract prices of larger mills with long-term arrangements with global suppliers. Once these mills are part of larger producers, they would be able to save on the cost of imported coking coal as well as lower shipping costs.

Large domestic steel buyers such as automotive manufacturers would be more confident of dealing with the units of large producers that could shift some volumes away from imports and lift domestic steel sales. The financial credibility of these mills has been quite low for some time which has led to hesitation on the part of buyers.

Indian steel demand is likely to increase by 5-6pc in the 2018-19 financial year, in line with demand increases in the current fiscal year. Growth in steel demand will come largely from government infrastructure spending with higher automobile sales also contributing.

The construction of new highways, bridges, airports, port upgrades and rail network extensions will support steel demand, although there are concerns that a growing fiscal deficit could curb spending. Steel demand growth is likely to lag India's GDP growth in 2017-18 and 2018-19. A sluggish real estate market with fewer new construction starts and slow growth in private-sector investment in fixed assets will continue to weigh on steel demand.

There are also concerns about US import duty on steel diverting volumes to India, although the country has imposed anti-dumping duty and safeguard duty on flat products since 2016. There is not much protection for long products except for a 10pc import duty although typically the country has been competitive on rebar, TMT bar, wire rod and billet.

Large Indian steel producers have sold around 10-15pc of their production in overseas markets over the past year, particularly in May-September when monsoon rains slow domestic sales. But the US tariff could lead to additional volumes flowing into India's preferred markets of Vietnam and the EU, which could slow exports over the next 12 months.

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