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Amit Mitra

Mumbai, May 2 US-based Esmark, which the Essar Group is set to acquire with an enterprise value of $1.1 billion, is part of a well-planned strategy of the Indian steel maker to consolidate its presence in the controlled and well-protected North American steel market that is estimated to be over $100 million tonnes (mt).

Esmark will be Essar’s third acquisition in the North American and Canadian markets — it had acquired Algoma Steel for $1.6 billion and Minnesota Steel for an undisclosed amount in April last year.

With this acquisition, Essar will have a production capacity of 7 mt in the North American and Canadian market — 4 mt from Algoma and 3 mt from Esmark. Significantly, this is higher than that its current production capacity in India, which is at 4.6 mt.

Although Essar Steel has been exporting to the North American markets for some years now, it became clear to the company that to consolidate its presence in that market, it had to be physically present there. This was because the US steel market, which is one of the world’s largest, is known for its protective nature.

The three acquisitions are expected to bring about the synergy that Essar has been looking for. Algoma produces products like hot-rolled coils and cold-rolled coils using iron ore as raw material, while Esmark is strong on the distribution side, having 11 service centres across North America. Minnesota Steel on the other hand has control over a reserve of 1.4 billion tonnes of iron ore, with plans to set up a 2.5 mt steel plant.

Essar has already drawn up plans to set up a pellet plant at Minnesota within a period of about two years using the iron ore reserves. After this, it would become easy for the company to transport the pellets to the Algoma facility, which is located just on the other side of a Sault Ste lake, for steel production.

The missing link was Essar’s direct access to consumers. With Esmark’s distribution network, Essar can now take the Algoma products deeper into the market.

Further, Esmark produces a range of products, including galvanizing steel for high end consumers. Thus, Algoma steel can be shipped to the Esmark facility for galvanizing and pushed to the market through the latter’s distribution channel. What Essar is aiming at through these acquisitions is the capability to instantly scale up its production capacity in the controlled North American market.

Immediate on Essar’s drawing board is a greenfield gas-based 3-mt steel making facility in Trinidad at a cost of $1.6 billion. The idea is to reach a production capacity of 10 mt from the current 7 mt by 2010-11.

After Essar agreed on the acquisition, Esmark now plans to enter into definitive documentation upon expiration or waiver of the approximate 52-day ‘right to bid’ period set forth in the collective bargaining agreement with the United Steelworkers.

More Stories on : Mergers & Acquisitions | Steel | Overseas Investments

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