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Cover Story

Bliss in The Brown fields
As long term demand upswing of steel & cement in india is assured, larger players in both Sectors probably look for distressed assets in the coming months
Issue Date - 18/08/2011
ArcelorMittal is back to its acquisitive ways again. This time, it has jointly bid with Peabody Energy to submit a bid of $5.2 billion for Macarthur Coal, an Australian company known for its production of pulverised coal. The target company isn’t exactly worried about the nationality of the acquirer that will use its coal, but has a genuine desire for a higher valuation. As this magazine goes to print, there are no rival bidders, but that could change pretty soon.

In the days when Arcelor-Mittal and Tata-Corus happened, the recurring logic was consolidation to leverage a global steel demand boom led by China. Currently, a theme quite often replayed is the drive for sustainable raw material linkages, which the Macarthur deal is an instance of. As raw materials are in short supply and iron ore price volatility has been an issue, this could be the difference between making it or not in the sector in the future. Here in India, ICVL (International Coal Ventures Ltd.) is looking to acquire mines in Australia to fulfil coking coal requirements for NTPC, SAIL, RINL, et al. Private players like JSW Steel and Tata Steel are looking hard for assets too.

According to PwC, steel M&As internationally have grown by over three times to $14.3 billion in 2010 compared to $4.4 billion in 2009. Demand cycle has been firmly on the upswing and average monthly steel prices on the London Metal Exchange for cash buyer have surged from $554.25 per tonne in January to $610.64 in July. PwC has estimated that global metal M&As should more than double to $60 billion in 2011 compared to $27 billion in 2010. Noteworthy deals in the first half of 2011 have been Concast Group’s acquisition of SPS Steel and Power’s Jharsuguda-based steel plant for Rs.8 billion and JSW Steel Ltd’s acquisition of Bellary Steel and Alloys Ltd. valued at $173.91 million and $45.65 million respectively. Sesa Goa, a subsidiary of Vedanta Resources, UK has acquired the assets of Bellary Steel and Alloys Ltd. for $47.83million.

Avinash Gupta, consultant with Deloitte India said, “Consolidation is typically driven when there is an overcrowding in the industry or a shortfall in terms of work for everybody.” In the case of cement, the situation is similar to steel, as the larger players are on the look out for capacity expansions as well. Take the recent example of Lafarge India – the Indian subsidiary of the world’s largest manufacturer of cement. To expand its reach and become a more national player, it is trying to purchase Chennai-based Ramco Group’s West Bengal cement grinding unit for around Rs.3.5 billion, which originally took an investment of Rs.1.20 billion to set up. Given the strong demand from building and construction, recent forecasts and upcoming development projects in India, most large cement producers are eying expansions of up to twice their capacities. For buyers in steel & cement, this is a better route to the greenfield option, which has become a red flag in India due to land acquisition controversies. On the other hand, the sector has a number of smaller players facing pricing pressures at the moment due to a dip in demand that is typical in the monsoons. Prices are down by around Rs.20 per bag since April. Moreover limestone costs could go up by around Rs.75-80 per tonne after the new mining laws. Furthermore delayed execution and the slowdown imminent in real estate with high interest rates would have an obvious negative effect. Larger players can survive more easily on volumes and also push surplus to off trade markets. But regional players face a high probability of losses and often look to milk their assets to a suitable bidder. This year, the only major acquirer so far has been Ambuja Cement, which has bought an 85% majority stake in Nepal’s Dang cements for Rs.191.3 million. But in both steel & cement, the coming months should see a number of incremental value generating deals and the competitive battle lines getting redrawn.
Sugandh Singh           

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