Steel companies struggle with overseas assets

Once prized possession of steel companies, their overseas assets are fast turning out to be a drain on them as the excess steel capacity in China still threatens the survival of global manufacturers.

Most Indian companies, including Tata Steel and JSW Steel, have already made huge provision on their assets abroad, while Essar Steel is trying to find an investor for its asset in Algoma, US.

JSW Steel recently took an impairment charge of Rs 2,122 crore on its overseas investments, including the iron ore mine in Chile, a plate and pipe mill and coking coal mines in the US. Under care and maintenance since last April, JSW’s iron ore mine in Chile incurred Ebitda loss of $0.32 million in the December quarter, while in US the Ebitda loss was at $4.9 million.

Goutam Chakraborty, Research Analyst, Emkay Global Financial Services, said the overseas assets of steel companies would continue to suffer in the near future with no signs of a substantial revival in both iron ore and coking coal prices given the persisting oversupply.

“The global assets of Indian companies would turn profitable only if iron ore prices rise above $80 a tonne from the current level of $54 a tonne, and coking coal goes up to $150 a tonne from $85 a tonne,” he said.

Interestingly, he added, all the overseas investments made in manufacturing by Indian companies have turned out to be a drag.

Fitch Ratings recently downgraded the credit rating of JSW Steel with negative outlook due to high leverage. It expects the consolidated funds from operations to total debt ratio to increase to 6.4 times in the fiscal ended March 2016 from 4.5 times in FY’15 due to weak profitability. However, the leverage may moderate to five times in this fiscal, it said. As of the December quarter, JSW had a net debt of Rs 39,480 crore.

Unlike Tata Steel, JSW Steel is not in a hurry to sell its overseas assets as it considers them to be long-term backward integration for the company.

Tata Steel European assets

In 2006 Tata Steel shook the global steel industry with its audacious bid of $12.7-billion for Corus Steel and pumped in another four billion pounds trying to turnaround the struggling UK assets.

Late last year, Tata Steel wrote off a major portion of its European assets, including that in the UK, with a provision of Rs 7,700 crore. The UK operations include Port Talbot with steel making capacity 4.9 million tonnes per annum, another 4.5 mtpa at Scunthorpe and 0.8 mtpa at Rotherham.

Since last December, the company has been in talks with Greybull Capital to sell the long product division at Scunthorpe.

Apart from Chinese dumping and slowing demand, the company is facing liabilities on its pension fund, British Steel Pension Scheme, and the trustees are in talks with the company to fund the deficit. The company had a total consolidated debt of Rs 75,000 crore as of December quarter.

With a loss of one million pounds a day at Port Talbot, expectations are that Tata Steel may soon mothball the plant if it does not find a buyer. The total long-term debt of its Europe business is about 3 billion euro.

It is not just Tata Steel that is struggling in the UK. Last October, Thailand's SSI closed down its Redcar works leading to 2,200 job losses. A part of Caparo Industries' steel operations went into administration putting 1,700 jobs potentially at risk.

Managing currency fluctuation is another major challenge the company faces in the UK. Tata Steel pays for raw material in dollar and realises lower value for finished products by selling in euro across Europe.

Finding a buyer for the UK plant is going to be a Herculean task for Tata Steel without the help of the Government, said a rival steel company official. With so much experience in steel making, if the Tatas cannot survive in that country, then how can a private equity investor stay afloat and make money, he added.

Meanwhile, Essar Steel has managed to find suitors for its Algoma unit, which was put on the block after the company filed for protection under the Canadian Companies' Creditors Arrangement Act. The restructuring process is set to be completed by the end of August. Founded in 1901 as Algoma Steel, the 4 million tonne plant was acquired in June 2007 by Essar Steel Holdings.

Incidentally, Essar Steel is also trying to offload stake in its assets in India to reduce its debt burden of Rs 40,000 crore. With the promoters willing to pump in Rs 1,500 crore, the group raised Rs 2,800 crore by selling two of its real estate assets recently.

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