India's Essar Steel Consolidates Presence in U.K. by Acquiring Servosteel

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Researched by Industrial Info Resources (Sugar Land, Texas)--Global steel makers are focusing on international and organic acquisitions to consolidate their geographical presences. The latest on the list is India's private-sector steel producer, Essar Steel Limited (Hazira, Gujarat), which has acquired the U.K.-based Servosteel (Oakside Solutions Limited) (Birmingham, England). The acquisition, which is Essar Steel's first in the U.K., was completed through subsidiary Essar Steel International B.V. While the value of the transaction has not been divulged, industry experts have pegged it at about $100 million.

Essar Steel's announcement follows the recent decision by ArcelorMittal (NYSE:MT) (Luxembourg) to enter the Indian market as a joint venture with Uttam Galva Steels Limited (BSE:513216) (Mumbai). The joint venture proposes to build a greenfield steel mill at Sindhudurg in Maharashtra. On commissioning, the Sindhudurg mill will be ArcelorMittal's first operational steel mill in India. ArcelorMittal's plans for a 12 million-ton-per-year steel mill and blast furnace at Keonhargarh in Orissa were stalled in 2009, as difficulties arose in acquiring land for the plant site. For a related news item, see July 7, 2010, article - ArcelorMittal and Uttam Galva Joint Venture to Build Greenfield Steel Plant in Maharashtra.

A spokesperson for Essar Steel has hailed Servosteel's acquisition as crucial to the company's larger steel-distribution strategy. Servosteel, which has a steel processing capability of 500,000 tons per year, is considered to be the U.K.'s biggest independent steel-processing company. The company's product portfolio includes hot- and cold-rolled coils, hot-rolled picked items, galvanized steel, and color-coated steel products. Servosteel also operates a state-of-the-art service center at Dudley, which provides end-to-end services in pickling, Smooth Clean Surface (SCS), decoiling and slitting technologies. The processing facility includes two lines for wide decoiling, with a total processing capacity of 100,000 tons per year; a coil and coil-picking facility; an SCS cleaning unit with a capacity of 200,000 tons per year each; and two lines for wide slitting with a capacity of 120,000 tons per year. The facility includes a 20,000-ton-per-year unit for narrow slitting. Ajay Parmar, the head of Institutional Equities at Emkay Global Financial Services (Mumbai), has indicated that although steel demand in Europe is low, Servosteel's acquisition will strengthen Essar Steel's presence in the U.K. The low demand in European markets is temporary and is expected to recover in the future.

Essar Steel is part of the Essar Group (Mumbai), which has business interests spanning communications, oil and gas, power, steel, logistics, shipping and construction. The $15 billion Essar Group, which has a presence in 20 countries, employs 60,000 people globally. By 2012, Essar Steel, which has a combined steel production capacity of 8.6 million tons, is targeting capacity expansion to 14 million tons per year. There are plans to augment capacity to 25 million tons in the future. The company also operates service centers in Canada, Indonesia and India.

In a related development, there are reports of Essar Steel holding talks to acquire Kandil Steel (Cairo, Egypt), and the company is likely to submit a formal report shortly. Kandil manufactures hot, cold and galvanized coils, sheets and pipes, which are used extensively in the automotive, marine and industrial sectors. Kandil, which is targeting a production of 1 million tons per year in 2010-11, caters to customers in Europe, the Middle East and North Africa. Essar Steel is also investing $1.6 billion to develop a 4.1 million-ton-per-year pellatization plant in Minnesota. The facility will be spread across 20,000 acres of land, close to the Mesabi iron-ore mine. The mine has estimated reserves of about 1.4 billion tons.

In January, Essar Steel announced plans to build a 250,000-ton-per-year steel processing and servicing facility at the Jebel Ali Free Zone in Dubai. The facility will supply steel products and services to customers in construction, engineering, consumer durables and ship building. Commenting on this project, B. Sivakumar, the director of Essar Steel's Middle East business, said that the Jebel Ali project would allow the company to stay in touch with customers in the region. Essar Steel has been serving customers in the Middle East for a decade, and the facility at Jebel Ali, which is one of the oldest trading and industrial hubs, will help Essar Steel consolidate its position in the region.

Several Indian steel companies are exploring opportunities to establish steel manufacturing facilities in North Africa and the Middle East. Presently, this region is facing a steel supply shortfall of nearly 15 million tons. This fiscal year, combined steel consumption in the United Arab Emirates, Qatar and Saudi Arabia is forecast to grow to 8.45 million tons per year. According to the World Steel Association (Brussels, Belgium), the Middle East and North African markets recorded positive growth in 2009, with consumption reaching 57.5 million tons. In 2010 and 2011, consumption is expected to increase 9.5% and 8.4%, respectively.

Earlier this month, Essar Steel completed the merger of its domestic steel-manufacturing operations after receiving approvals from the High Courts of Ahmedabad and Mumbai. The debts of its steel entities, Essar Steel Orissa Limited (Paradip, Orissa), Hazira Plate Limited (Hazira, Gujarat), Essar Steel Hazira Limited (Hazira) and Hazira Pipe Mills Limited (Hazira), were merged with Essar Steel Limited. Mahadev Iyer, the chief financial officer of Essar Steel, confirmed that the consolidation exercise has been completed, with retrospective effect from April 2009. Iyer also said that the consolidation of borrowings was part of a larger strategy to reduce borrowing costs and improve profit margins. The move will allow Essar Steel to raise funds for organic and inorganic expansions and asset acquisitions.

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