Why the steel sector in India is going through an important churn
Two steel firms made news in the past week. The first was Tata Steel, which has completed the Rs 35,200 crore acquisition of bankrupt Bhushan Steel, and the other was Mukand Ltd, which formed a joint venture company with Japan’s Sumitomo Corporation, Mukand Sumi Special Steel Ltd, which would be a specialty steel supplier for automotive and engineering industries.
The Tata Steel-Bhushan deal was notable for two reasons — it was the first successful deal since the government set in motion an insolvency and bankruptcy process to sell firms that have been struggling to repay their huge loans taken from public sector banks.
With the deal, two-thirds of what Bhushan Steel has been owing banks have been recovered. In the process, banks have taken a haircut of 37 per cent on their loans that stood at Rs 56,079 crore.
Losing no time, the government termed the deal "historic", with Piyush Goyal, who stepped into the finance minister’s shoes as Arun Jaitley recovers from a surgery, saying banks will now be in a position to offer more and affordable credit to major sectors of the economy, especially the small-scale sector.
But he knows only too well that the deal offers just a small respite considering that over Rs 8 lakh crore of bad loans have piled up over the past several years at state-owned banks.
The steel sector is one of the largest contributors to the non-performing assets of banks. Last year, a report by SBI Research said that the top five steel firms under duress had an aggregate debt of nearly Rs 1.5 lakh crore. The top troubled steel firms are Essar Steel, Bhushan Steel, Monnet Ispat, Electrosteel Steel and JSPL.
According to the report, the key factors that led to stress in the steel sector have largely been ambitious overseas acquisitions, capacity expansions, and the subsequent fall in exports due to protection measures initiated by various countries primarily resulting in the capacity overhang. Since the sector is employment intensive, the socio-economic impact is wide and hence led to protectionist measures, it added.
Meanwhile, the Mukand-Sumitomo joint venture will be engaged in the business of rolling, finishing and marketing of alloy steel wire rods and bars made from blooms and billets procured exclusively from Mukand Ltd’s Hospet plant in Karnataka.
The JV has 100 acres of land adjoining Mukand’s existing plant at Hospet for the proposed construction and commissioning of new steel rolling facilities by mid-2020 at an approximate cost of Rs 600 crore. The company is betting on the steel sector for its business fortunes.
Mukand is already a major supplier of specialty steels to top global manufacturers. The automotive sector in India has grown rapidly in 2017-18 and is expected to continue to expand for several years. The auto component sector in India is a Rs 3 lakh crore industry, currently exporting of Rs 74,000 crore a year, and is a major success of the "Make in India" programme, Mukand said.
(Courtesy of Mail Today)