Vedanta Resources Seeks Partners for Foray into Indian Steel Manufacturing

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Researched by Industrial Info Resources (Sugar Land, Texas--Vedanta Resources plc (LSE:VED) (London, United Kingdom) has announced plans to enter the steel manufacturing sector in India by forming a joint venture. The company is reportedly in talks with European and Japanese steel manufacturers to explore the possibility of establishing a joint venture. While details of the proposed investment, timeline, and location have not been disclosed, Vedanta has stated that since its core competency is iron ore production, its role in the partnership would be that of an iron ore supplier. The other partner would bring in the technological expertise, operational excellence and management in the area of steel production. Iron ore for the proposed steel making unit is likely to be sourced from Sesa Goa Limited (Panaji, Goa), a subsidiary of Vedanta.

In April 2007, in what was hailed as the biggest merger and acquisition deal at the time, Vedanta acquired a stake of 51% in Sesa Goa for $958.7 million from Mitsui & Company (TYO:8031) (Tokyo, Japan). In June this year, there were reports of Vedanta increasing its stake in Sesa Goa to 55% through the purchase of preferential shares. Sesa Goa has iron ore reserves of about 180.5 million tons. The company has the capability of producing 50 million tons per year of iron ore, which can be used to set up a 10 million-ton-per-year steel mill.

Last month, Vedanta invested $367.6 million, through Sesa Goa, to purchase iron ore assets of 70 million tons from Dempo Group (Panaji). This acquisition is expected to give Sesa Goa access to Dempo Group's 21 iron ore mines in the country. Dempo exports to Nippon Steel Corporation (TYO:5401) (Tokyo), Qingdao Steel (Qingdao, China) and Jinan Iron and Steel Company (SHA:600022) (Shangdong, China). Sesa Goa is the biggest exporter of iron ore to China. The recent acquisitions and Vedanta's three-decade stronghold in the Indian mining and metals sector are expected to work in favor of the company's forthcoming steel production strategy.

Steel manufacturing in India has been on Vedanta's radar for sometime now. As early as 2004, the company signed an agreement with the state government of Orissa to invest $4.32 billion to build a 5 million-ton-per-year steel plant along with a 1,215-megawatt (MW) power plant. Although little progress has been made on the steel production facility, the first phase of the power plant is reported to be under way. The second phase is expected to start operations by 2010. Vedanta stated that it was slowing down its steel manufacturing plans in India in order to consolidate and strengthen its metals business globally.

Industry analysts are skeptical about Vedanta's timing to enter the steel production industry, as steel producers worldwide are reeling under the impact of the economic slowdown. Many steel manufacturing companies are operating below capacity and have resorted to production cutbacks. However, Anil Agarwal, Chairman of Vedanta Group, is optimistic about the future of this market. Agarwal is confident that with demand for steel in China picking up steadily and with demand in India also on the rise, the company's strategy will pay off. In June this year, Tata Steel Limited (BSE:500470) (Mumbai), one of India's largest steel makers, reported a growth of 12% in flat products and an increase of 30% in demand of long products from June 2008. Agarwal indicated that he expects the markets to recover within 24-30 months.

In a related development, Vedanta announced the intention to invest more than $2 billion in purchasing iron ore and copper assets in Central America and Africa. The group, through its subsidiary Sterlite Industries India Limited (NYSE:SLT) (Tuticorin, Tamil Nadu), India's biggest copper producer, raised $1.5 billion through American Depository Shares to fund its contribution in the power sector. The company is developing two 1,980-MW power projects in Orissa and Punjab. Electricity from the Orissa plant will be used for the operations of Vedanta Aluminium Limited (Bhubaneswar, Orissa) in the state. Vedanta, which hopes to increase its power generating capacity to 11,000 MW by 2012, plans to sell about 50% of the plant's output in the electricity market.

Vedanta Resources, which was listed in the London Stock Exchange (LSE) in 2003, has the distinction of being the first Indian company to be listed in the LSE. Although headquartered in London, the group's primary mining interests are India-centric, with some assets in Australia and Zambia. The group, which made an offer $1.87 billion in May last year to buy bankrupt American Smelting and Refining Company LLC (ARASCO) (Tucson, Arizona), refused to increase the offer stating that it was allocating funds to strengthen its interests in India. ARASCO, which operates a 5 million-ton-per-year plant, is America's third largest producer of copper. Vedanta owns stakes of 64.9% and 51% in Hindustan Zinc Limited (BSE:500188) (Udaipur, Rajasthan) and Bharat Aluminium Company Limited (New Delhi), respectively, and is currently exploring the option of buying out the government's stake in these companies. In the past fiscal year, 2008-09, Hindustan Zinc held 79.7% of the market share of India's zinc sector. The buyout is critical for Vedanta's corporate restructuring strategy.

The group plans to invest about $7.8 billion by 2012 in order to augment its aluminum smelting capacity in India to 2.6 million tons per year. This expansion program is expected to place Vedanta among the top five integrated steel manufacturers in the world. Vedanta has focused on developing the mining sector in India for more than three decades. India has an estimated 2.3 billion tons of proven bauxite reserves, making it the sixth largest bauxite resource in the world. Vedanta has a very strong presence in the eastern state of Orissa, which alone accounts for 1.4 billion tons of bauxite reserves in the country.

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