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Tussle for India's Essar Steel heats up

Indian NPL clean-up triggers steelmakers' consolidation

A worker at an ArcelorMittal steel mill. The world's leading steelmaker seeks growth in India by buying bankrupt Essar Steel.   © Reuters

MUMBAI -- The battle for control of Essar Steel is heating up after domestic major JSW Steel joined hands with its affiliate and Russia-backed Nu Metal & Steel to throw in a second bid for the indebted metals producer.

Other leading global steel manufacturers such as ArcelorMittal, which is attempting a joint acquisition with Japanese Nippon Steel & Sumitomo Metal, and mining giant Vedanta are also in the running after throwing their hats in on Monday for a second time to acquire Essar Steel, which faces nearly $8 billion in claims from its creditors.

"As part of its growth strategy, while expanding its capacities through brownfield expansions, it is also evaluating opportunities for inorganic growth," JSW Steel said in a statement on Monday.

ArcelorMittal joined hands with Nippon Steel & Sumitomo Metal after its offer was rejected by lenders of Essar Steel in February. A panel of Essar creditors dismissed ArcelorMittal's bid then, saying its past involvement in managing a local steelmaker that had willfully defaulted on debt precluded it from participating under Indian law.

Nu Metal too had to join forces with Indian JSW Steel and change its shareholding to remove a shareholder who was related to a bankrupt company.

Essar Steel is an integrated steel producer with an annual capacity of 10 million tons with a presence in Asia and North America where demand is strong. It has operations in India as well as a downstream complex in Indonesia. The World Steel Association expects Indian steel demand to grow by 5.7% to 92.1 million tons in 2018 from a year ago.

Essar Steel is one of the 12 large companies and of the four steel companies that have been referred to the National Company Law Tribunal for debt resolution by the government. According to ratings agency Moody's Investors Service, these steel companies together constitute about 35% of the nonperforming assets that Indian banks are trying to shed.

Other bankrupt steelmakers such as Bhushan Steel, Monnet Ispat, and Electrosteel Steels too have attracted huge interest from international players. Last month, Tata Steel informed stock exchanges it was the highest bidder to acquire a controlling stake in Bhushan Steel, while JSW Steel and AION Partners have successfully bid for Monnet Ispat. Companies such as Vedanta, Tata Steel and Renaissance Steel are also competing for Electrosteel.

Analysts say that global players are keen to invest in India where local consumption is surging. In addition, these distressed assets were on the block at low prices, making the deals all the more lucrative.

"The potential of the steel industry is very high given that per capita consumption of steel in India is much lower than global standards," said Madan Sabnavis, chief economist of ratings agency CARE Ratings. "The economy has the potential to grow at 8% to 9% which means there will heavy investments that will take place and that will go into metals like steel. That is the primary reason for global companies to show keen interest."

The bids come at a time when the administration of U.S. President Donald Trump is imposing heavy tariffs on imported steel to boost its domestic industry. India, though, exports just 3% of its steel and aluminum to the U.S. Analysts say that Indian steel producers will eventually explore other markets in the face of the U.S. import curbs.

Rahul Prithiani, director of research execution at local rating agency CRISIL, sees India exporting more to South Asia, Southeast Asia and the Middle East and some markets in Europe and Africa.

"Once the domestic market needs are exhausted especially for specialized product segments, we are likely to see a push in overseas markets," Prithiani said.

According to the International Trade Association, India's biggest steel export markets are Vietnam, Italy and Nepal. At the end of March 2017, exports of steel to Vietnam had increased the most, by up 3,076% in value against the previous year, followed by exports to Malaysia, Thailand, Belgium, Italy and Spain.

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