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Business deals

Nippon Steel's competition for Essar acquisition heats up

JSW Steel's entry into bidding casts doubt on Japanese company's midterm plan

A Nippon Steel plant in Japan: Acquisition of Essar Steel India plays a vital role in the company's midterm plan.   © Reuters

TOKYO -- Nippon Steel & Sumitomo Metal and ArcelorMittal, the world's biggest steelmaker, announced on April 2 that they would bid again for Essar Steel India. But the two now face competition from India's JSW Steel, which has also decided to bid for the troubled company.

For Nippon Steel, the acquisition of Essar, India's fourth-largest steelmaker, is crucial to its new midterm management plan. Market players are becoming increasingly wary of the purchase falling through.

Nippon Steel and ArcelorMittal agreed on March 2 to set up a joint venture to acquire Essar, which is in the process of bankruptcy proceedings. However, Essar's creditor committee decided to solicit new bids, saying that all previous bidders were ineligible.

The committee is expected to decide on the winning bid by the end of April.

Nippon Steel & Sumitomo Metal is desperate to win the bid as the acquisition is included in its new midterm management plan, which began this fiscal year. If the purchase fails or terms sour, the company may have to revise its midterm plan.

The highlight of the plan is a roughly 600 billion yen ($5.61 billion) business investment over the next three years. Nippon Steel's "aggressive midterm management plan," in which business investment was increased threefold from the previous plan's record of roughly 210 billion yen, attracted investor interest.

Domestic steel demand is strong, particularly in the automobile and construction sectors, but high growth is unlikely. Developing overseas operations is imperative, but the company is facing stiff competition from Chinese and South Korean steelmakers.

India, which is expected to see rapid growth on the back of a rising population, is a vital market for Nippon Steel.

In 2017, India's crude steel production topped 100 million tons for the first time. "The country's crude steel production is expected to surpass at least 200 million tons in the future," said Nippon Steel President Kosei Shindo.

This has steelmakers scrambling for the growing market.

"Building a blast furnace from scratch will require at least 1 trillion yen. Essar Steel has a production capacity of 10 million tons, but we can buy it for a bargain because it is bankrupt," said a Nippon Steel executive.

Rival JSW, in which Japanese steelmaker JFE Holdings has a stake and which lost out to Tata Steel in a bid for Bhushan Steel, is hoping to regain lost ground by purchasing Essar. "The price could exceed initial projections," said Atsushi Yamaguchi of SMBC Nikko Securities.

In March, Nippon Steel said it will make equity-method affiliate Sanyo Special Steel a subsidiary and will acquire all shares of Swedish special steelmaker Ovako.

Keiju Kurosaka of Mitsubishi UFJ Morgan Stanley Securities predicts that acquiring the two steelmakers will cost Nippon Steel around 100 billion yen, and buying Essar will cost another 200 billion yen or so. If the purchase price goes up, it could take Nippon Steel more time to recoup its investment.

In March, the U.S. announced a 25% tariff on steel and aluminum products from China and Japan. If exports to the U.S. are restricted, China's excess steel could upset Asian markets, with falling prices squeezing the profit margins of steelmakers.

Nippon Steel share prices have dropped 20% from the end of last year due to uncertainties over the steel industry, making it crucial for the company to present a clear growth strategy to regain market confidence.

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