With the global business climate continuing to look grim, Indian steel companies could undo overseas acquisitions and focus at home where consumption trends are relatively encouraging.
In the last 10 years, almost all large Indian steel companies like JSW Steel, Tata Steel, Essar Steel and Jindal Steel & Power have made costly overseas acquisitions. Most of them are in dispair as China dumps cheap steel on the world.
Last week, the Ruia-owned Essar Steel Minnesota filed for bankruptcy protection in the US. In 2007, Essar had said it would set up a $1.8-billion unit in Minnesota, but scaled down from a taconite steel mill to a pellet plant after the 2008 financial crisis. The project was scheduled to start production in 2014 but cheap China steel has made production unviable.
From trying to compete with ArcelorMittal, the world's largest steel producer, the Tatas are now struggling to retain their presence in Europe. Tata Steel is in talks for a joint venture with German ThyssenKrupp for its European operations. Tata Steel’s deliveries in the region have dropped to 13 million tonnes in 2015-16, from 23 million tonnes in 2008-09.
Welspun Pipes, which includes the US subsidiary’s operations, reported a loss of $7.1 million in 2014-15, against a profit of $9.9 million in 2013-14 as the top line declined and costs increased.
“Overseas acquisitions are expensive to maintain, there is a constant requirement of upgradation,” said Pritesh Jani, senior analyst with Religare Securities. “With the global business climate continuing to be difficult, these acquisitions have become a burden for companies,” he added.
Tata Steel has in the last 10 years taken several steps to lighten the burden of its European acquisition by job cuts and closure of loss-making units. JSW Steel, whose $1 billion US acquisition continues to be EBITDA negative, took a non-cash write-down of nearly Rs 100 crore in 2014-15.
“By taking write-downs on acquisitions, companies signal to investors that they had overvalued an asset,” said an analyst with a local brokerage.
Source: Business Standerd