The Hindu Business Line : `Iron ore advantage will help Indian steel firms'

"Size is important. It is easier to increase in size through acquisitions/mergers rather than through building greenfield projects, which take considerable time to fructify." Arcelor, Mittal merger a boost for global steel industry: J.J. Irani

MR J.J. IRANI

Mumbai , July 4

The agreement between Arcelor and Mittal Steel is one of the biggest developments in the global steel industry, creating as it does the world's biggest steel company by a significant margin.

India is enmeshed in this deal in strange ways— Mr L.N. Mittal hails from the country, the giant company he will preside over aims to have an Indian presence, India along with China is among fast growing steel markets and Indian steel companies are small but backed by good quality iron ore deposits. Business Line e-mailed a few questions on the mega merger to Dr J.J. Irani, Director, Tata Sons. Long associated with the Indian steel industry, Dr Irani has emphasised that the replies are "my personal views and mine alone."

How do you view the creation of this new $72 billion steel company, which at 120 million tonnes-capacity would be three times the size of its nearest competitor? Is this what the consolidation process in the global steel industry was aiming for or has it added unexpected scale and pace to the process?

In my view, the mega merger between Arcelor and Mittal Steel is a boost for the steel industry worldwide. Traditionally, the steel industry has been fragmented— and has remained so— for the past century. Very often, the bargaining strength of the steel industry with regard to its suppliers and its customers has been eroded because of such fragmentation (the suppliers and customers being far more consolidated than the steel industry).

Isn't there still reason to wait and watch with reference to this deal, given the precedent of mega mergers like Daimler-Chrysler, for instance, having faced several hurdles to consolidation?

I am not aware what the problems were with the Daimler-Chrysler merger. Perhaps it was a clash of cultural diversities. Both Mittal and Arcelor have already exhibited in their respective operations that such a situation does not prevail in their geographies (Arcelor in Europe and Mittal on the North American / Eastern Europe geographies). It is my opinion that they would not have serious difficulties of the type, which faced Daimler-Chrysler.

Their consolidation process should be smooth, as both Arcelor and Mittal have faced consolidation processes earlier in their respective operations.

One of the arguments put forth for the Arcelor-Mittal Steel deal is its ability to leverage scale and reduce input costs. Do you see such benefit accruing to the whole industry or would it be restricted to the largest producer with other manufacturers who delay scaling up likely forced to bridge earnings deficit for raw material suppliers?

The Arcelor-Mittal merger will definitely help them to leverage their size to reduce input costs, and may be, have an impact on market prices of steel also. This should certainly be a pointer and an aid to other steel producers who will follow in its wake and get appropriate advantages in commercial negotiations. Once such advantages are clearly demonstrated, it would also encourage other steel corporations to seek mergers.

With the Arcelor-Mittal Steel combine set to happen, how do you see the forces of consolidation playing out hereon? Given the huge gap in capacity that has been opened up between the leader and the rest, will other steel manufacturers now show greater enterprise in aligning formally and informally for scale?

Size is important. It is easier to increase in size through acquisitions/mergers rather than through building greenfield projects, which take considerable time to fructify. This is particularly true for a heavily capital intensive industry, such as steel, where land acquisitions, setting up manufacturing facilities etc, take several years in new locations. Also, through the merger route, size is obtained without increasing the overall capacity of the industry.

So, there is a natural hedge against building over-capacity, which could, in a down-turn, severely damage the productivity and cost reduction ability of that unit.

Since the Arcelor-Mittal Steel agreement was the culmination of events set in motion some months back, had it already triggered discussions to similarly align or strike strategic alliances among other producers?

Though I am not aware of any specific merger talks, I am sure the steel industry worldwide does not have an ostrich-like attitude. There must be similar moves afoot.

Indian steel producers have traditionally benefited from their proximity to iron ore mines and the quality of domestic ore. This was also cited as protection against the impact of competition scaling up for lower cost. With this mega merger, does the Indian advantage still hold good or has the game entered a new dimension, one in which old arguments don't hold good any more or at the very least stand watered down?

The advantage of Indian iron ore will always hold good. India, Brazil, Australia and some African countries will always have the advantage of the God-given benefit of good quality iron ore.

Tata Steel's current and projected capacities are very modest compared to the scale set by the Arcelor-Mittal Steel combine. Is there now a case for aggressive scaling up by Tata Steel or would the formula of higher value added products and right product mix continue to work for the company in the new industry scenario?

Though Tata Steel's current capacity is a small fraction of the combined might of Arcelor-Mittal, its projected plans for the next five years should give it a very healthy size. Also, Tata Steel has certain unique advantages, such as its raw material base and its high value product-mix, which will always remain a great strength. I do not see Tata Steel's competitive strength being affected in any way by the Arcelor-Mittal merger.

Against the backdrop of the Arcelor-Mittal Steel combine and what it could mean for the steel industry globally— including domestic steel producers— are there any residual corrections to government policy or tariff levels that you would like to see happen?

In India, the tariff on steel is already at very low levels, and is non-existent in certain areas. The best thing that the government can do to support Indian steel producers is to have minimal regulations and allow market forces to operate.

The Indian steel industry is uniquely positioned to take on the might of the global steel industry.