ArcelorMittal is the largest steel producer in the world. In 2018, its total steel output was 92.5 million tonnes (mt), based on installed capacity of 112mt. It has a global market share of about 5% and it is the largest producer of steel in Europe, the Americas and Africa and is the fifth-largest steel producer in the Commonwealth of Independent States (CIS) region.

On Friday, the Supreme Court cleared the deck for ArcelorMittal to enter India by buying out a stressed steel mill with 10 mt of capacity. The Essar plant has cost them (ArcelorMittal has a 60:40 joint venture with Nippon Steel and Sumitomo Corp) ₹50,000 crore and a further ₹7469 crore to pay off the debt of stressed mills Uttam Galva and KSS Petron, in which LN Mittal held some equity. But more importantly, this acquisition has cost ArcelorMittal time. Almost 650 days have passed since ArcelorMittal showed interest in the Essar assets, and today, with the sale nearing conclusion, the steel cycle has turned and domestic demand for the metal has fallen.

Leading private sector steelmakers in India reported a 25-50% fall in operating profits in the September quarter. With global steel consumption flailing, too, ArcelorMittal reported a net loss of $539 million for the September quarter, hit by lower sales and sticky prices.

Credit ratings agencies expect the Essar acquisition to weigh down ArcelorMittal’s balance sheet with more debt. As of June 2019, ArcelorMittal reported net debt of $10.2 billion, which it has projected to reduce to $7 billion. However, the Essar acquisition will instead further increase debt by about $3 billion. Standard and Poor’s revised the outllook for ArcelorMittal to negative this October, citing a “a significant increase in ArcelorMittal’s leverage ratio by the end of 2019 owing to a combination of very weak steel markets, the anticipated acquisition of the Indian steelmaker Essar Steel, and the disappointing performance of the recently acquired loss-making Italian steelproducer Ilva.” Fitch Ratings also revised their outlook to negative citing a worsening global steel market, decreasing industrial production, weak automotive demand, trade tensions, and pressures from elevated raw material costs squeezing ArcelorMittal’s profit margins.

However, with a 10mt plant, ArcelorMittal will be a steelmaker to reckon with in India. Local analysts expect that a third steel producer, after Tata Steel Ltd and JSW Steel Ltd, with both financial heft and expertise will be good for the domestic market.

Essar steel has a 10 mt per annum mill in Hazira, Gujarat. The company is a fully-integrated flat steel manufacturer with ore beneficiation, pellet making, iron making, steel making, and downstream facilities, including cold rolling mill, galvanizing, pre-coated facility, steel processing facility, extra wide plate mill and a pipe mill. In its FY17 annual report, the firm had said that it was the only private steel mill in the country which was allowed to supply steel for warships, submarines, battle tanks and armoured vehicles.

In a past interaction, Atanu Mukherjee, president of global metals and energy consultant M.N. Dastur, had told Mint: “Traditionally, in a fragmented steel market like India, there are a lot of secondary producers. This is a problem because it doesn’t give you economies of scale or the pricing power, and doesn’t help cost structure. With concentration happening among 3-4 larger players and some niche players in the value-added segment supporting them, India will have a more mature steel market without creating monopolies. The steel concentration ratio is moving up faster here than in any other country, but that is good for India.”

Mittal had made several attempts to get his foot in the door in India, notably with projects planned in Odisha and Jharkhand, but neither took shape. Despite the current slowdown, India’s steel consumption growth is expected to be positive in the long-term.India currently has per-capita steel consumption of only 70kg a year, less than half the average of other developing nations.

The global steel market is going through a protectionist phase, with the US and Europe erecting trade barriers against cheap steel coming in from China and Asia. The global demand for steel is likely to increase by 0.5%-1% in 2019 and in 2020. However, this increase is not applicable to all regions. Demand will continue to be propelled by Asia (close to 2%), followed by the U.S., Brazil, and the Commonwealth of Independent States, while the slower European market weighs on global demand. It makes sense now, despite the cost, for ArcelorMittal to set up shop here.

Credits: www.livemint.com