In what could turn out to be one of the biggest deals in the domestic steel market, Japan?s second largest steel firm, JFE Steel, is close to acquiring around 10% stake in India?s second largest steel producer, the Sajjan Jindal-led JSW Steel.
The deal is seen as significant by analysts since the domestic steel market in Japan is shrinking, leading companies such as JFE to look at growing markets elsewhere like India.
For JSW, the deal would provide it with funds to execute its upcoming greenfield projects in West Bengal and Orissa.
Though the financial details of the deal is still being worked out, going by the closing share price of JSW at Rs 1,166 on the BSE on Thursday, a 10% stake, together with a marginal premium, would cost around Rs 2,700 crore for JFE. Sources said an announcement is expected shortly.
For JFE, looking to acquire stake in the Indian steel market, JSW is a natural choice since it already has a tie-up with JSW for making high quality automotive steel and operating an integrated steel plant in West Bengal.
In fact, while announcing the tie-up in November last year, JSW Steel vice-chairman and managing director Sajjan Jindal had said that an equity deal between the two companies may happen in future. But the hint then was that JFE might pick up a stake in JSW?s West Bengal project.
?We are discussing ways and means through which JSW and JFE can collaborate in our upcoming project in West Bengal. We are interested in partnering each other to take forward the proposed steel project at Salboni,? Jindal had said.
JFE Steel CEO Hajime Bada had said, ?We would like to secure a local production base in India with the co-operation of JSW Steel. Co-operation in the automotive segment is just the first step of our future collaboration.?
When contacted, JSW Steel?s CFO Sheshagiri Rao said, ?We are still in the discussion stage with the JFE Group and so far nothing has been formalised.?
For JFE, the benefit would be in sourcing raw materials since JSW has a Chilean mining venture from where JFE can source its raw materials. Currently, JFE buys 100% of its raw material as it has no captive base.
Also, while JSW is an integrated steel manufacturer, the expertise of JFE lies in manufacturing value-added flat steel products catering to the upper end of the market. For the Indian entity, partnering with JFE?s would also help it in bidding jointly for mining resources overseas to build a stronger captive raw material base.
JSW is ramping up its manufacturing capacity in the domestic market, taking its total capacity to 11 million tonne (mt) by March 2011 from 7.87 mt. By 2020, it plans to raise its capacity to around 32 mt. On the anvil are a 10 mt greenfield project in West Bengal, which would come up in two phases and a 3.5-4 mt project in Orissa.
The growth potential for steel in the Indian market is immense with the sector growing at 8.5% during April-February. It is expected that for the full fiscal year, the growth would be over 10%.