JSW Steel Ltd and JFE Steel Corp., the second largest steel makers in India and Japan, signed a comprehensive deal that will begin with a collaboration to produce automotive steel and then expand to activities such as setting up new steel plants and the acquisition of iron ore and steel mines in and outside India.

The deal will allow JSW to move into the high-margin business of
producing steel for car makers while it offers JFE entry into the fast
growing Indian economy.

“We will supply automotive steel to India’s domestic companies like
Suzuki, Toyota, Honda and Hyundai,” Hajime Bada, chief executive
officer of JFE Steel said in Mumbai on Thursday. “Globally these are
customers of JFE Steel.”

The two steel companies will also collaborate to build JSW’s greenfield
steel project in West Bengal that will produce 10 million tonnes (mt)
of steel. It plans to set up another 10 mt steel plant in Jharkhand.
JFE has annual steel-making capacity four times larger than JSW’s
current 7.8 mt.

Also on the agenda: “mutual stock holding” which means both the companies could buy stakes in each other.

Japan’s Nikkei newspaper reported on Thursday that the Japanese partner
may pay as much as 50 billion yen (Rs2,600 crore) for a stake in the
Indian steel maker.

“Under the umbrella agreement we have created a task force with
representatives from both the companies to work out areas for
collaboration” Sajjan Jindal, vice-chairman and managing director of
JSW, said after announcing the agreement.“Everything is still at the
discussion stage. Mutual shareholding is a part of the discussions, but
what percentage, when and how will depend on the time. India is a big
market for high-quality steel as far as auto is concerned and we will
take advantage of (JFE’s) experience in producing high quality auto
steel.”

This is the third multinational steel company to enter India, after
Sumitomo Metal Industries Ltd tied up with Bhushan Steel Ltd to make
high grade steel, and in September world’s largest steel maker
ArcelorMittal announced its decision to acquire 35% stake in 800,000
tonnes Uttam Galva Steels Ltd.

Analysts said the deal looks beneficial to JSW at first glance,
especially since the company is weighed down by Rs16,600 crore of debt.

Bhavesh Umesh Chauhan, a research analyst with SMC Investment Solutions
and Services, said JSW cannot afford to take more debt despite its
ambitious expansion plans in the next two years. “They will need more
than Rs5,000 crore to increase production to 11 million tonnes per
annum (mtpa) by 2011, from 7.8 mtpa currently. Currently, they cannot
afford to take more debt so dilution of promoters’ equity seems to be
the better option.”

Another analyst from a European brokerage, who did not want to be named
because he is not authorized to speak to the media, said JSW will gain
from the technology inputs of the Japanese company, but added there is
a lot of interest about the potential stake sale by the Indian company.

“The Jindals own 45% of the company, which will come down to 42.5% when
the company’s FCCBs (foreign currency convertible bond) will be
converted in 2012. They have permission to raise $1 billion through
QIPs (qualified institutional placement). My feeling is that they will
probably prefer selling a stake to JFE rather than sell to different
investors,” he said. FCCBs are convertible bonds issued in foreign
currencies while QIPs are sales of new shares to institutional
investors.

JSW plans to set up a new 10 mtpa capacity in West Bengal at the cost
of Rs35,000 crore. However, that project is currently on hold after the
global economic downturn last year.

Sheshagiri Rao, joint managing director and group chief financial
officer of JSW, said the company has invested only Rs100 crore out of
the total cost of the West Bengal project and will review it only in
2010-11.

JSW officials said that they expect to make higher margins by selling
this auto grade steel in India, a market where sales are growing at a
15% annualised rate, at a time when developed markets like Europe are
in a decline.

Jayant Acharya, director, sales and marketing at JSW said auto
companies would prefer buying this special steel in India rather than
shipping them from abroad.

“So far we used to make equipment for the internal components of cars
but JFE will help us get into the high margin outer body parts of
vehicles which forms a critical mass for cars,” he said.

“Currently, companies like Toyota, Maruti, Ford and GM used to source
this steel from companies in Japan and Germany. They will prefer to
source it from the domestic market if it is available here,” Acharya
added.

Domestic car market leader, Maruti Suzuki India Ltd, which procures 10%
of its steel requirements from JFE, will be one of the key
beneficiaries.

S. Maitra, executive director and managing executive officer (supply
chain), at Maruti said, “the entry of JFE into India will help the
company cut transport costs, customs duties and the protection it has
to buy against foreign exchange volatility. Currently, Maruti procures
half of its steel requirement from domestic steel manufacturers such as
Tata Steel Ltd and Essar Steel Ltd,” Maitra said.

Jindal also told Dow Jones that JSW has no plans to sell its struggling US operations despite low demand for its products.

Source: LiveMint

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