L.N. Mittal's Multibillion Dollar India gambit

Date: June 3. Location: The sprawling Palace Grounds in Bangalore, a venue that's played host to legendary rock acts like The Rolling Stones, Deep Purple and Iron Maiden. This event, though, has no screaming guitars and pounding drums. Yet, it doesn't lack high-decibel announcements and posterboy attendance-only, this time, the rock stars are the high priests of big business.

The event is a global investors' meet that's aimed at attracting more investments into Karnataka. Some 4,000 delegates turn up, including Azim Premji, Kumar Mangalam Birla, Shashi Ruia and Vijay Mallya. At the end of the two-day corporate carnival, 361 memoranda of understanding (MoUs) that propose an investment of Rs 4.73 lakh crore in 413 projects have been signed. Some 52 of these projects calling for Rs 2.73 lakh crore are in the steel sector. One of those MoUs in steel is for a proposed 6 million tonnes per annum (mtpa) plant in the iron ore-rich district of Bellary in Karnataka.

The man whose name graces this MoU seems the odd one out: Amidst the sea of excitement and optimism, he sits with a bemused look during the MoU-signing spree. Unable to control himself, he finds a moment to sidle up to Karnataka Chief Minister B.S. Yeddyurappa and gently ask him how many of these MoUs will translate into projects. The CM has no answer. The man who popped the multibillion dollar question: Lakshmi Niwas Mittal, Chairman of ArcelorMittal, the world's largest steel company by revenues ($65.1 billion in 2009), geographical spread (it has operations in 60 countries) and by capacity (109 mtpa).

Mittal's pithy query sums up his predicament and, perhaps, desperation, too. First, the predicament: Mittal has his initials on three MOUs across three Indian states, the first signed way back in October 2005, for a 12 mtpa plant in Jharkhand. Then, in December 2006, he signed another agreement with the Naveen Patnaik government in Orissa for a project of a similar capacity.

Current status: Both are non-starters, for various reasons that range from difficulties in acquiring land to lack of clarity on availability of the crucial raw material, iron ore. "ArcelorMittal believes in growing in India. The country needs more and more steel... But to make it happen, you need to have all the elements like ore, land, water, infrastructure. There cannot be a trade-off," said Mittal at the investors' meet.

The man who figures amongst the top five richest men in the world-and the richest in Europe-with a personal wealth of $28.7 billion, finds himself in a spot of sorts these days. Last year, ArcelorMittal plunged into the red, with an operating loss of $1.7 billion; that's in sharp contrast to $12.2 billion in operating income on revenues of $124.9 billion in 2008.

ArcelorMittal attributes the losses to lower prices and volumes due to a drop in demand. The company produced 73.2 million tonnes (mt) of crude steel last year, for a capacity utilisation of 68 per cent, as against 103.3 mt in 2008 at a capacity use of 94 per cent. ArcelorMittal's total steel shipments during 2009 dipped to 71.1 mt from 101.7 mt in 2008.

Mittal, who drove a path-breaking merger in 2006 of his Mittal Steel with Arcelor-then the world's second-largest steel maker behind Mittal Steel-isn't used to being under pressure. But there's little he can do when global markets for steel are falling. The United States led the fall in 2009, with a 36 per cent decline in demand, followed by Germany at 28 per cent and Japan at 26.3 per cent.

Against such a backdrop, two countries shone-China and India, where steel production grew at 13.5 per cent and 2.8 per cent, respectively. But whilst China has emerged as the world's largest steel producer (in 2009, it produced 567.8 mt), in India, it's a different story. And there lies the opportunity, not just for Mittal, but for every steelmaker worth his ore (see Mittal's India Investments So Far).

India Shining
Let's start with India's production figures: Just 56.6 mt last year. Consumption, too, is low at just 48 kg per person per year as against the world average of 200 kg. But that pattern is expected to change dramatically over the next 10 years. Says B. Muthuraman, Vice Chairman, Tata Steel: "India will need huge steel capacity and steel consumption on its way to becoming a developed nation. India, in due course, will grow as well and as much as China has done. (So) we need investments from everywhere."

According to Amber Dubey, Director, KPMG India, consumption is expected to treble, courtesy demand from high-growth industries like infrastructure & construction, automobiles, and consumer goods. Steel Minister Virbhadra Singh says India will become the world's second-largest steel producer by 2012 after China, more than doubling its capacity to 124 mt.

Yet, higher consumption may be just one trigger for Mittal's interest in manufacturing in India-ArcelorMittal exported 1.5 mt of specialty steel products to India in 2009-10. The other might be even more crucial: The abundance of iron ore reserves in Jharkhand, Orissa, Chhattisgarh, Andhra Pradesh and Karnataka. To be sure, securing raw material supply is high on Mittal's priority list. His ambition is to increase the group's self-sufficiency in iron ore from 64 per cent in 2009 to 75 per cent by 2015.

In other words, he wants to lay his hands on 100 mt of ore annually in five years, up from 60 mt currently. Says Manoj Mohta, Head, CRISIL Research: "Half of the 200 mt of iron ore India produces annually is exported. With expected addition in the mining capacity, there still lies immense opportunity to add value and use iron ore resources for domestic production."

Mittal is keen to have mines dedicated to his manufacturing capacities, or captive mines as they're known. That may explain his proposal to Steel Authority of India Ltd (SAIL) for a joint venture. The public sector behemoth has surplus land as well as copious ore reserves. "We are open to partnerships with global majors like ArcelorMittal. I am sure they will bring their own value proposition. But this particular proposal (with Mittal) is still at a very initial and conceptual stage," S.K. Roongta told BT before his retirement as SAIL Chairman on May 31.

SAIL has a capacity to produce 13 mtpa currently and Roongta says it is capable of adding another 30-35 mtpa. The state-owned steel maker has also applied for fresh mining leases in almost all the ore-rich states.

The Ore Edge
SAIL and Tata Steel are the only two steel makers in India with captive mines. All the other steel makers buy their raw material from the public sector NMDC and from private miners. Now that's a competitive disadvantage vis-a-vis SAIL and Tata Steel. In Bellary district, for instance, while the ex-mine cost works out to about Rs 400 per tonne, the open market rates are about Rs 3,680 per tonne. As S.K. Gupta, a steel sector veteran currently on the board of JSW Steel, a Sajjan Jindal company, puts it: "There is a difference between cost and price.

The steel makers with their own mines get their raw material at a cost, while those without mines pay a price. That adversely affects the margins." According to him, the government has awarded 300 mining leases in the last 18 years, but none of the newer steel plants has bagged them. States vet proposals for mining rights and recommend grant of a lease to the Government of India. Of late, leases are being recommended to companies that either have their own production units or those that will build plants. However, the award of mining rights has often kicked up dust.

At one point in the recent past, miningrelated cases made up 40 per cent of all cases in the Karnataka High Court, according to a sector observer. JSW Steel, for instance, has moved the Supreme Court demanding that Karnataka honour its commitment to award it iron ore blocks in return for investing in a steel plant in the Hospet region of Bellary district. "In 1995, we were promised mines with deposits of 110 mt for a plant with a capacity of 1.2 mtpa. Today, our capacity has reached 6.8 mtpa, but are producing steel without the raw material security," says Vinod Nowal, Director & CEO, JSW Steel.

With the likes of Mittal and South Korean steel major POSCO on the prowl, the apprehension amongst Indian steel makers is palpable: What if the global giants are allowed to jump the queue for mines? "My own sense is that in India, we must create a level playing field for all participants in the industry. Mineral resources are a national property, and they should be available to the steel industry equitably," says Malay Mukherjee, CEO, Essar Steel.

Mukherjee, recruited from SAIL way back in 1993 by Mittal, was the man who signed Mittal's MoUs in Jharkhand and Orissa as ArcelorMittal's India head. According to him, by 2015, India will need 170-180 mt of steel annually, up from the current 55-60 mtpa. "We are confident we will get mining leases. Without mining leases, we cannot move forward," Mittal declared on June 3, while heaping praise on the Karnataka government for "demonstrating progress" on the proposed project since he met the Chief Minister in Delhi in January.

"The proposal is moving faster in Karnataka than in other states," he said. Karnataka has promised Mittal a third of the raw material he needs for the project and a go-ahead to prospect for another one-third. The rest will have to be bought from the open market.

ArcelorMittal has obliged by depositing Rs 260 crore with the state; and land acquisition for the project is underway. But analysts point out that the state government will have its task cut out if it doles out mining leases to Mittal, ahead of the likes of JSW Steel. They add that ArcelorMittal may have to clear a few significant roadblocks, including courts, before it proceeds to start anything on ground.

Those hurdles may have been on Mittal's mind at the investors' conference. To a question on when the work on the project was likely to start, Mittal said: "We don't know how many hurdles are still there." But he also added that it would take 36 months once the foundation is laid for the project to come on stream.

So, what happens to the MoUs Mittal signed in Jharkhand and Orissa? A view prevailing in the Indian industry is that Mittal is, in fact, more keen on these two states than on Karnakata. "The signing of an MoU with Karnataka was more to put pressure on the Jharkhand and Orissa governments," suspects a senior executive with a steel company.

It is not known whether there is any ground for this hypothesis, but the files have definitely started moving in Orissa. "We have issued preliminary notifications to acquire land for ArcelorMittal. The question of mining leases will be handled separately. We are confident Mittal is not going to pull out of Orissa.

The new plant will come up smoothly and peacefully and the government will extend due importance to it," says Raghunath Mohanty, Minister for Industries, Orissa. In Jharkhand, Arcelor-Mittal is working on one project and examining another; both are in Bokaro district where the government thinks the climate for industrialisation is conducive.

"The company is negotiating with farmers to buy their land. It appears serious and will stick to the Jharkhand project. Jharkhand offers them a big advantage in that both iron ore and coal are available to feed their steel and power plants, respectively," says A.P. Singh, Secretary, Industries Department, Jharkhand.

Analysts point out that land acquisition is the single biggest challenge as big, integrated steel plants require over 4,000 acres. Another challenge is that most of the steel producing states are ruled by non-Congress governments: Karnataka has the BJP, Orissa the Biju Janata Dal or BJD, and Jharkhand is in a political crisis.

Mega-projects require close coordination between the Centre and states-something that becomes difficult when the party ruling at the state is not the same as the one at the Centre. What's more, the key steel and mining states in India are facing Naxalite unrest. Many of the mines are alleged to be operated either by the mining mafia or Naxalites-directly or through their fronts.

New Ground
For Mittal, his Indian adventures mark a crucial departure from the tradition of buying out mostly sick plants-this is the first time he is attempting to build fresh steel capacities. The three MoUs he has signed for a combined capacity of 30 mt will call for some $30 billion in investment-just a wee bit lower than the value of the Mittal-Arcelor merger (which was a $34 billion transaction).

Of course, Mittal isn't the only one with new projects on his drawing board. Essar Steel hopes to expand its capacity from the present 4.5 mtpa to 10 mtpa over the next 12-14 months. "As a group, we have an excellent track record of honouring all our commitments in terms of investment through the MoU route," said Shashi Ruia, Chairman, Essar Group, at the investors meet. The JSW Group is adding 3 mtpa to its 7.8 mtpa capacity and has proposed another 6 mtpa expansion at its Bellary plant.

Mittal did begin his Indian sojourn in steel with an acquisition in September 2009-he owns 34 per cent in Uttam Galva Steels, a Mumbai-based maker of specialty steel products. "We have worked with ArcelorMittal for the last eight months and it is evident that the company is here to stay and grow in the Indian market," says Ankit Miglani, Director (Commercial), Uttam Galva Steels, son of founder Rajinder Miglani.

The senior Miglani and Mittal's father go back a long way. Interestingly, Ankit is married to the daughter of Sanjay Singhal, promoter of Bhushan Steel, in which Mittal is reportedly keen to acquire a stake. Mittal's game plan for India currently appears a mix of big-bang steel projects coupled with smaller acquisitions. Curiously, he's also entered into a joint venture with Hindustan Petroleum for a refinery; and group companies have stakes in various arms of the Indiabulls group, including power. A section of analysts speculates Indiabulls could be his launching pad in India, for non-steel businesses.

Mittal, for his part, says he isn't looking beyond steel, not yet. "We are investing in steel, not in other areas. When we do (invest in other areas), we will announce," he told BT at the Bangalore investors conference. Power appears one business that Mittal would love to sink his teeth into. Reports say he has already created a power division in India and hired former Petronet LNG CEO Prosad Dasgupta as its CEO (a query to ArcelorMittal on this by BT got no response).

Says energy sector veteran V. Raghuraman: "No big group investing in energy-intensive sectors in India would want to keep out of power sector. They can not only meet their captive needs but also tap merchant power opportunities. For a group like ArcelorMittal, the power sector is only a logical step forward." Raghuraman, an independent Director with Suzlon, was also Principal Advisor (Energy) to the Confederation of Indian Industry. Mittal may be taking his time in India, but the way the global scenario is panning out, he will have to play his India cards pretty soon-and currently it appears he has a fair number of cards up his sleeve.