ArcelorMittal and Uttam Galva Joint Venture to Build Greenfield Steel Plant in Maharashtra

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Researched by Industrial Info Resources (Sugar Land, Texas)--ArcelorMittal (NYSE:MT) (Luxembourg), the world's largest steel producer, and India's Uttam Galva Steels Limited (BSE:513216) (Mumbai) will construct a greenfield steel facility in Maharashtra's Sindhudurg region. The 1.5 million-ton-per-year first phase of the project is estimated to cost about $1.28 billion. The joint venture has secured 2,500 acres of land in coastal Sindhudurg. Reports indicate that Uttam Galva also has approached financial institutions and banks to secure $643.5 million in funds for this project.

The greenfield steel plant will manufacture hot-rolled coils that will be used at Uttam Galva's Khopoli production facility. This plant is a secondary steel producer in the country. The Miglani family, who are the co-promoters of Uttam Galva, own land on the seacoast in Sindhudurg. The location of the steel plant on the coast is expected to provide cost efficiency in procuring raw materials, and to facilitate easier exports of finished steel products.

In 2009, ArcelorMittal announced that it would buy a 50% stake in Uttam Galva in a three-phase procedure. The first phase entailed acquiring a 5% stake for $14.9 million, followed by an open offer to purchase a 30% stake in the company. In the event of poor investor response, the Miglani family agreed to sell their stake to adjust the difference. The estimated cost of the open offer was $89 million. In February 2010, ArcelorMittal increased its stake in Uttam Galva by completing the open offer procedure and acquiring a 29% stake in the company. ArcelorMittal reportedly plans to purchase another 5.6% from the Miglani family.

In a related development, media reports suggest that ArcelorMittal may become the first among 53 steel companies to receive a mining license for developing captive iron-ore mines in Karnataka. The company is likely to receive a mining license for 521 acres in the Ramanadurga region in Bellary district. This move follows ArcelorMittal signing a memorandum of understanding with the Karnataka government to set up $6.43 billion, 6 million-ton-per-year steel plant at Kuditini, in the Bellary district. The memorandum of understanding was signed at the recently concluded Global Investors Meet in Bangalore, Karnataka. About 52 other steel companies signed memoranda of understanding to set up steel manufacturing facilities in Karnataka. In November last year, top ArcelorMittal representatives held discussions related to the steel project with Karnataka government officials. In January, the delegation visited several sites and finalized Kuditini as the location for the proposed steel plant.

In its effort to fast track this project, the Karnataka government is likely to award the license to ArcelorMittal ahead of other existing applicants, including NMDC Limited (BSE:526371) (Hyderabad, Andhra Pradesh), Tata Metaliks (BSE:513434) (Kolkata, West Bengal) and Jindal Steel Limited (BSE:532286) (New Delhi). Jindal Steel Limited, which operates a 7-million-ton-per-year steel plant at Torandal in the Bellary district, is proposing capacity augmentation to 16 million tons per year. Allocation of a captive iron-ore mine is critical for the expansion, and the company has been waiting for the captive mine linkage for nearly 10 years. Murugesh R. Nirani, Karnataka's Industries Minister, has confirmed this report and said that the Chief Minister's Office has sent a written recommendation to the federal government to assign captive iron-ore mines to ArcelorMittal. Posco Iron and Steel Limited (NYSE:PKX) (Pohang, South Korea) is also exploring the possibility of investing $6.43 billion on a steel facility in Karnataka. Company officials have identified sites in Bijapur, Bellary, Bagalkot and Gadag.

Commenting on the steel companies' focus on Karnataka, V.P. Baligar, Principal Secretary of Industry and Commerce, indicated that the Karnataka government is likely to allot only 30% to 50% of the captive iron-ore mines requirement. The remainder will have to be procured by steel companies from mining companies. Priority will be given to large players, as they are likely to offer higher value additions. Karnataka's latest industrial policy encourages the system of granting mining licenses to increase the state's current mining exports of 90% to 95%.

In the backdrop of renewed focus on steel production and new steel production capacity in India, Hemant Nerurkar, the managing director of Tata Steel (BSE:500470) (Mumbai), said that the demand for steel in Asia is on the path of strong recovery, spurred by strong demand and sustained economic growth. Economies in the region are growing at an average rate of 4% to 6%, and an increase of at least 9% in steel demand can be expected. In May this year, India's consumption of steel products grew by 12%. The growth is attributed to strong demand from infrastructure, automotive and consumer durables sectors. According to data published by the steel ministry, while consumption in May was 5.4 million tons, domestic production was about 5.1 million tons. The deficit was bridged with imports from Japan and China. According to Navin Vohra, a partner at Ernst & Young (London, England), domestic steel production is forecast to increase 10% to 12% in 2010-11. As of March 31, India's steel consumption grew 8% to 56.3 million tons.

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