Insolvency auctions set to shake up stodgy domestic steel market

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It’s an interesting time to be a steel company, unless you are a defaulter. The redrawing of ownership of a large chunk of India’s steel capacity will change the current market structure, affecting how business has been done. New companies will be hungrier for market share and volume growth, spelling trouble for incumbents.

So far, Tata Steel Ltd’s share of steel capacity is expected to increase to 14% with the acquisition of Bhushan Steel Ltd, and if it gets Bhushan Power and Steel Ltd also, it will increase to 16%. JSW Steel Ltd’s share will rise to 14% with Monnet Ispat Energy Ltd’s acquisition, though with Aion. This is chiefly consolidation among incumbents.

This could change with Essar Steel Ltd. Vedanta group stayed out of the first round, but surprised by bidding in the second. JSW Steel joined the fray in the second round but as an investor in Numetal and Steel Pvt. Ltd.

ArcelorMittal is the main challenger to watch. It is the world’s largest steel producer with a capacity of 95.5 million tonnes as of 2016, according to World Steel Association. Getting Essar, which has a 7% share of domestic capacity, will be just what it needs to pry open the market. Essar also has access to iron ore deposits, and if it can buy out those assets separately that’s another line of business for it.

Apart from Numetal, which was always in the fray, Vedanta has turned up as a surprise competitor. Buying Essar is a headlong plunge into the steel business for Vedanta, with a sizeable financial commitment, as Essar’s debt as of 29 March was Rs49,213 crore.

Both Vedanta and ArcelorMittal have the financial ability to shake up the market. Essar’s capacity is not fully operational, but further investments can make that happen. This is true in other cases too. Working capital constraints are another reason why most distressed steel assets were not fully utilized.

Once investments are done and working capital funding is comfortable, steel supply will increase. Higher output could result in domestic prices feeling the heat and exports will increase too. A new competitor would be keen to increase share in the domestic market, which could upset the domestic price situation.

This scenario will play out in the coming years. The bigger companies will play for larger stakes but their fight can mean bad news for smaller firms. Already, smaller steel producers are ceding share to the bigger companies. Some of them are in the second list of cases referred for bankruptcy proceedings.

In FY18 till February, smaller steel producers’ share of production was 47%, down from 53.5% in FY15. That decline in share will continue, as the larger steel producers will not only hike output but also move to increase their share of the retail market for steel. In recent years, they have been increasing the contribution of branded products to their sales, to improve margins. A higher share of the retail market implies the unorganized sector is ceding share. Larger companies also got a structural advantage, which started during demonetisation and has continued after the goods and services tax was introduced.livemint