TOKYO/MUMBAI -- Nippon Steel and ArcelorMittal spent nearly two years clearing the way for their 500 billion rupee ($7 billion) purchase of Essar Steel India, leaping legal hurdles in hopes of gaining a foothold in a market that promised growth.
They completed the acquisition in the country that once thwarted Japanese mobile giant NTT Docomo's attempt to enter the telecommunications market. Tokyo-based Nippon Steel ultimately cut through the red tape but now faces an Indian steel industry that has slumped.
Nippon Steel and ArcelorMittal, the world's largest steelmaker, submitted a joint plan in bidding that closed in February 2018. Essar Steel put itself up for sale after a consortium of lenders initiated bankruptcy proceedings the previous June.
Under Indian bankruptcy laws, Essar Steel was supposed to settle on a purchaser by May 2018. But creditors of the indebted company filed suit against ArcelorMittal, citing the Luxembourg-based steelmaker's lack of qualifications to submit a bid.
The National Company Law Tribunal ruled this March for the acquisition by Nippon Steel and ArcelorMittal. But another dispute, over distribution of funds among creditors, still held up the deal.
A Supreme Court ruling in November removed the final obstacle, and the buyout was completed on Dec. 16.
The travails echo what Docomo went through when it purchased a piece of the Tata group's telecommunications arm in 2009. Troubles with regulators and increased competition made the Japanese carrier decide to walk away in 2014.
Docomo sought to sell back its stake to Tata. But the Reserve Bank of India, the nation's central bank, ordered that the shares be priced at a certain level. The issue took more than three years to resolve through the Indian court system and international arbitration.
The acquisition price for Essar Steel exceeded the initial 420 billion rupees. With Nippon Steel responsible for 200 billion rupees, Essar Steel marks the biggest overseas purchase for both partners.
"In reality, I wanted the purchase to be completed sooner," Nippon Steel President Eiji Hashimoto said.
Back when the company first bid on Essar Steel, India's fourth-largest steelmaker, the national economy was logging quarterly growth at the 8% level on an annualized basis. Steel was a main economic driver, thanks chiefly to double-digit growth in automobile sales per month.
India's crude steel output in 2018 surpassed Japan's and put the South Asian country in second place, right behind China. India was a more appealing market for steel back then, while Japanese and European demand was not expected to grow much.
But the landscape has since shifted. India's economic growth has slowed to 4.5%, and its auto sales missed year-earlier numbers for a 13th straight month this November.
The Indian real estate market has stalled because of a financing crunch. As of earlier this year, 560,000 housing units had construction delayed in seven major cities. In 30 cities, unsold housing rose 7% on the year to 1.3 million units in March.
As a result, the nation's monthly crude steel output began faltering in the latter half of 2018. Production shrank 3.4% on the year in October.
Essar Steel's domestic competition is going defensive. JSW Steel is reducing capital expenditures by 47 billion rupees to 110 billion rupees for the fiscal year through March 2020. Tata Steel in August reduced this fiscal year's capital spending by 30% or so to 80 billion rupees.
EBITDA at India's top three steelmakers, including JSW and Tata Steel, is slumping -- a reversal of the uptrend through the year ended March.
Hashimoto holds out hope that the market downturn will be temporary.
"It's only a matter of time before India's steel demand rises," he said.
SMBC Nikko Securities analyst Atsushi Yamaguchi expresses caveats about how the turnaround will look.
"India is certainly a growth market if you look 10 or 20 years into the future, but the fact that it is in an economic slowdown is a matter of concern," Yamaguchi said.