Lakshmi Mittal faces a logistics challenge as he takes over Essar Steel

A key logistical challenge awaits steel magnate Lakshmi Niwas Mittal as he prepares to take over Essar Steel soon. This comes after the Supreme Court approved the resolution plan placed by ArcelorMittal - the world’s biggest steel-maker- at the end of an arduous legal battle for the bankrupt steel plant previously owned by the Ruia Brothers.

ArcelorMittal, in partnership with Japan's Nippon Steel, will pay Rs 42,000 crores to the financial and operational creditors of Essar Steel under India’s new bankruptcy law – the Insolvency and Bankruptcy Code (IBC) – to acquire the steel mill located at Hazira in Gujarat’s Surat district.

But, the pay cheque does not cover a 50-million tonne (mt) capacity, all-weather, deep draft dry bulk port located next to the steel plant that was used by the erstwhile owners mostly as a captive facility to bring raw materials and export finished goods.

Located in the Gulf of Khambat on the outskirts of Surat, Essar’s port can accommodate partially loaded Capesize vessels and fully loaded minicape vessels of 105,000 tons.

Till now, the steel plant and the captive port were run by different entities but being under the Essar Group, the steel mill enjoyed favourable terms including pricing advantages from the port operator. Essar Bulk Terminal Ltd located at Hazira is run by Essar Ports Ltd, the port operating unit of the Essar Group.

Essar Steel India limited also holds a minority stake in the port operating company.

The 10 mt steel plant requires 20 mt a year of raw materials such as coal and iron ore which have to be shipped through the port.

With the steel plant going out of the Group’s fold, it will no longer be a captive, anchor customer for the port thereby classifying the new owner of the plant as a third-party customer with whom the port operator will have to re-work the pricing terms for the services rendered by signing a new long-term contract for at least ten years, a port industry executive said.

The proximity to the steel plant and the mechanised handling facilities erected including a conveyor system to take the raw materials such as iron ore and coal directly into the mill and export finished steel and other dry bulk products makes it an ideal choice for ArcelorMittal to continue using the port, giving a better price negotiating power to Essar Ports, he said.

The port has a 550 metre-long long jetty, ship unloaders and storage facilities for finished products, a rail network, dredgers, tugs, and mooring boats.

Future of the steel mill

The steel mill will be handicapped without the captive port and ArcelorMittal’s choices are very limited.

The only alternative is a port run by the Adani Group located some 17 kilo metres away. But, in the absence of conveyor systems, carting the raw materials and finished goods to and from steel plant by trucks would add to the costs and erode the competitiveness of the steel maker.

“Essar will tell ArcelorMittal to pay market rate for using the port,” the industry executive said.

“I hope they understand the significance of the port to the steel plant and give us some good treatment and also some good pricing,” an Essar Ports executive said.

If the pricing terms are not favourable to ArcelorMittal, the only choice would be to acquire the port from Essar Group, the industry executive added.

ArcelorMittal could not be reached immediately for comment.

The Gujarat Maritime Board (GMB) which had awarded the rights to Essar Ports to build the captive facility on a long-term concession had allowed the port operator to handle third-party cargo also but this quantum was restricted to half of the total cargo handled by the port.

In September, the Gujarat government over-hauled the state’s port policy allowing captive facilities such as the one run by Essar to handle third party cargo without any restrictions. This will help captive ports to become full-fledged commercial ports besides granting them freedom to invest in expansion and modernisation.

In FY19, Essar’s Hazira port handled 24 mt of cargo. In the first six months of FY20, it handled 14.17 mt of cargo of which 11.88 mt was in-house cargo of the steel plant and 2.29 mt was third-party cargo (16.16% of the total cargo).

Essar Steel also owes Rs 703.21 crores to Essar Bulk Terminal Ltd and the port operator hopes to get about 20 per cent of this as part of the IBC resolution process.