Once the prized possessions of steel companies, overseas assets are fast becoming a drag on them as excess Chinese capacity continues to threaten the survival of global manufacturers.
Most Indian companies, including Tata Steel and JSW Steel, have already made huge provisions 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 ₹2,122 crore on its overseas investments, including an iron ore mine in Chile, and 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 an Ebitda loss of $0.32 million in the December quarter while in the US, the Ebitda loss was at $4.9 million.
“The global assets of Indian companies would turn profitable only if the iron ore prices rise above $80 a tonne from the current $54 and coking coal goes up to $150 a tonne from $85,” 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, from 4.5 times in FY’15, due to the weak profitability. However, the leverage may moderate to five times in this fiscal, it said. As of December quarter, JSW has a net debt of ₹39,480 crore.
Unlike Tata Steel, JSW Steel is not in a hurry to sell its overseas assets as it considers them as long-term backward integration for the company. In 2006, Tata Steel shook the global steel industry with its audacious bid of $12.7 billion for Corus Steel and pumped in another £4 billion trying to turnaround the struggling UK assets.
Late last year, Tata Steel wrote off a major portion of European assets including that in the UK, with a provision of ₹7,700 crore. The UK operations include Port Talbot with a steel-making capacity of 4.9 million tonnes per annum, another 4.5 mtpa at Scunthorpe and 0.8 mtpa at Rotherham. Since last December, the company is in talks with Greybull Capital to sell the long product division at Scunthorpe.
Apart from Chinese dumping and slowing demand, the company is facing liability on its pension fund, British Steel Pension Scheme, and the trustees are in talks with the company to fund the deficit. The company has a total consolidated debt of ₹75,000 crore as of December quarter.
With a loss of £1 million 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.
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 Tata Steel faces in the UK. The company pays for raw material in dollar and realises lower value for finished products by selling in euro across Europe.
Herculean task 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 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 debt, a burden of ₹40,000 crore. With the promoters willing to pump in ₹1,500 crore, the Group raised ₹2,800 crore by selling two of its real estate assets recently.