Globally, steel cos are merging to survive

Our FIs and government choose to ignore merits in consolidation

Sucheta Dalal

Last week, the absurd experiment of the financial institutions of turning entrepreneurs and supervising, by remote control, the management of two beleaguered steel mills came a cropper. This paper reported that Malavika Steel and Bellary Steel — the two companies where FIs chose to demonstrate their new-found toughness — showed no signs of a turnaround. The professional managers had quit and the companies are as unviable as ever. And the FIs do not seem have any new ideas about what to do. The easy solution would be for them to sell the companies, but they are unlikely to find buyers. The world steel industry is struggling to survive and, India along with other nations including the US, is grappling to resolve the problem.

The difference is that the rest of the world is willing to be pragmatic. Also, the rest of the world probably has less trouble with the political clout of industrialists and more support from other stakeholders of loss-making or bankrupt companies. In India, the political influence of industrialists seems inversely proportional to the health of their companies. Our lending institutions, controlled by the government, can never get as tough as they ought to.

At the same time, every passing day threatens to financially ruin the lenders themselves. The worst cases pertain to the big four steel groups; or rather, the four biggest defaulting groups: Ispat, Essar, Lloyds Steel and the Sajjan Jindal group. Although the lending institutions usually admit to a combined outstanding position of a little over Rs 16,000 crore, a more realistic calculation would increase this number by a hefty Rs 10,000 crore or so. As of March 2001, the secured loans to the four groups alone were Rs 16,800 crore with Ispat topping the chart with Rs 6,200 crore followed by the Jindals at Rs 5,500 crore. The additional Rs 10,000 crore is through other means of financing such as unsecured loans (which are a huge Rs 1,600 crore in Essar’s case), current liabilities (Ispat is at Rs 1,100 crore while Essar and Jindal are over Rs 1,200 crore each with Lloyds at Rs 55 crore on a significantly smaller project size). Lease finance, bank guarantees, letters of credit and other costs, advances and interest comprise the rest.

Some months ago, Indian FIs — in a rare burst of frankness — admitted that several attempts at unit wise restructuring of the eight mega steel projects of these four groups had failed. In fact the companies remain defaulters and their liabilities continue to mount forcing the lenders to make repeated adjustments to prevent the loans from turning into non-performing assets. The meeting discussed a radical suggestion to merge all eight into one large professionally managed company comprising Jindal Vijaynagar Steel and Jindal Iron & Steel Company; Ispat Industries and Ispat Metallics; Essar Steel and Hy-Grade pellets (which was recently spun off from Essar Steel) and Lloyds Steel and Lloyd Metals. It even outlined a management structure, which would give board representation to the industrialists.
Together, these steel companies would be in a position to notch up a capacity of six million tonnes per annum of pellets, 3.15 million tonnes of sponge iron, 7.38 million tonnes of hot rolled coils, two million tonnes of pig iron etc. Apart from this, these companies have majority stakes in power plants with a combined capacity of over 1,000 MW. An important advantage is that the merger would effect large savings on transportation costs and improve price realisation by reducing competitive pressures. Not surprisingly, the industrialists would not hear of it. Also, their political clout ensured that the proposal did not even merit a detailed discussion. Many of the institutional chiefs also found the idea too fantastic to be taken seriously. But maybe they should take a good look at what is happening to steel projects around the world.

Mega mergers are being seen as the answer to the steel industry’s problems across the globe — from Britain to Europe, Asia, Australia and most recently in the US. After over two dozen US steel companies had been forced into bankruptcy causing 25,000 jobs to be lost, the five biggest US steel makers are exploring the possibility of merging into a single giant corporation. US Steel, Bethlehem Steel Corp and Wheeling-Pittsburgh Steel Corp are joining up with two other unidentified steel companies (which could include National Steel) to work out the mega merger. In fact, such a move is being endorsed by the credit rating agencies and capital market analysts in the US and the pathetic prices of these companies have rallied a little. The international press quotes Leo Larkin, a metals analyst for Standard & Poor’s saying “The industry needs consolidation in this country and throughout the world”.

In the US, the worry is about concessions and protection that will be needed from government and lenders, especially to protect employee pensions. The Bush administration is also actively working at negotiations with other nations to prevent steel dumping from Asian countries and Russia. Large scale steel mergers have been proposed elsewhere too. The merger of British Steel and Koninklijke Hoogovens is one example; In Europe, big steelmakers have already gone through a wave of mergers and continue to consolidate. Germany’s Krupp and Thyssen linked up two years ago. The proposed merger of three big companies — France’s Usinor, Luxembourg’s Arbed and Spain’s Aceralia — is another example. In Japan, its largest steel maker Nippon Steel Corp and the fifth largest producer Kobe Steel Ltd have announced plans for a comprehensive tie up for production and distribution.

In India, the situation is different. The share prices of all these companies are languishing at way below their par value for years and investors seem to have forgotten all about them. While lenders are fighting shy of tough action, government protects recalcitrant industrialists. Instead of encouraging the merger, the government only bestirs itself to force lenders to grant further concessions. But how long can this continue? If the steel problem is not tackled it will affect the FIs and they are already queuing up for more money from an empty exchequer. If the merged entity has to make sense and have a chance of becoming viable then time is of essence and the negotiations have to begin today.

Writer’s e-mail: suchetadalal@yahoo.com