Last Updated : 21 November 2009 at 17:50 IST

JFE-JSW deal to spell boom for Indian steel sector

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KOLKATA (Commodity Online): This week India witnessed some major change sin the Steel sector with JFE Steel Corporation entering the country with a collaborative agreement with JSW Steel.

This move, according to major business dailies of India, could serve as a template for future deals, involving foreign steel companies in the sector.

It came barely a day after the government cleared ArcelorMittal’s Rs 500 crore FDI proposal to acquire a 35 per cent stake in Mumbai-based steelmaker Uttam Galva.

It is the first time that the two potential partners are discussing mutual shareholding. According to the Economic Times, the proposed JFE-JSW deal could prove to be a turning point for the domestic steel industry.

So far, all other acquisitions involving Indian steel companies have, by and large, been one-way acquisitions — be it Tata Steel’s Corus acquisition in 2007 or Essar Global acquiring Algoma Steel in Canada later that year, the paper said.

Apart from automotive and other high-value special steels, the two partners are also talking about working jointly towards securing raw material deals in India and overseas.

Formed out of the union of Kawaskai Steel and NKK Corporation in 2003, JFE Steel is part of JFE Holdings. It is the world’s sixth-largest steel company produced 33 million tonne of steel last year.

The Business Standard said the agreement with the Japanese steel maker will help JSW produce top grade steel for the automotive industry, and while there’s no question that demand for value-added steels can only increase, the benefits won’t flow in for a while.

The Japanese firm is understandably looking for a big market to expand and will probably partner JSW its 10 million tonne West Bengal venture, the paper added.

Before that happens JSW needs to sort out its own problems with the operations in the US which are doing badly but are expected to turn cash positive by March next year. That would be possible because the inventory write-downs are almost complete but the pipe and plate mills are running at less than a fourth of the capacity.

It must also try and deleverage the balance sheet with a consolidated debt of around Rs 16,000 crore. The company is believed to have explored raising funds to the tune of Rs 2,000-3,000 crore, through a placement to institutions, but is yet to go to the market, the Business Standard said.