Neither has mines that meet all of their requirements for iron ore and coal
Soon after the Supreme Court cleared the way in the Essar Steel insolvency saga on November 15, Aditya Mittal got on the phone with Parth Jindal.
Mittal is the CFO of ArcelorMittal and son of founder Lakshmi Niwas Mittal. Parth joined his father Sajjan Jindal's JSW Group three years ago and heads the cement and paints businesses.
Accepting Parth's wishes on the takeover of Essar Steel, Aditya said that despite ArcelorMittal's numero uno status in the world steel industry, when it comes to India, it is JSW Steel that has set the benchmark.
The bonhomie between the two scions though can barely keep the wraps on the intense competition between the two leading companies.
A glimpse came in the first week of December when the Odisha government delayed a mine auction after a ArcelorMittal's complaint that indirectly pointed the finger at JSW Steel.
The competition, industry experts said, will now play out more as the same auction takes off, and many more mines come on the block before the March 31, 2020 deadline.
Overall, about 300 mining leases are set to expire in March next year. These mines are at present mostly owned by merchant miners and will now be auctioned in what will be windfall for the government.
The auction in Odisha saw more than 50 companies participating, with the competition being intense. But when it comes to steel companies, none other than ArcelorMittal and JSW Steel will be more than keen to get their hands on iron ore reserves.The need for minesThough JSW Steel is the largest steelmaker in India, it still lags Tata Steel when it comes to margins. Parth accepted as much in an interaction with mediapersons in November. On EBITDA per tonne, he acknowledged that Tata Steel fares better.
That is thanks to the considerable deposits of iron ore that Tata Steel has in its captive mines. These mines in Odisha and Jharkhand meet all the iron ore requirements of Tata Steel and about 30 percent of its coal needs.
Iron ore and coal are used as raw materials in steel making.
JSW Steel, on the other hand, has historically depended on the market for its raw material supplies. It has had small victories in recent times, having won rights to mines in Karnataka. But these are small -- with reserves of 93 million tonne and annual production of about 7.5 MT -- meeting about 35 percent of its needs.
The mines in Odisha, on the other hand, will have reserves of nearly 600 MT.
Having own mines makes sense especially during an economic slowdown, like the present one. And this year's slowdown was marked by low steel prices, but high rates of iron ore and coal, a situation that harms margins even more.
"Mines are like a lifeline for the bottomline. To become the market leader, mines are the only way," a senior industry executive said.
This is the same reason that is driving ArcelorMittal and why it hopes to close the Essar Steel acquisition by 2019-end.
Essar Steel, which has its manufacturing facility in Gujarat's Hazira, doesn't have a mine. But it does have access to Odisha Slurry Pipeline Infrastructure (OSPL), which supplies iron ore to Essar Steel's pellet plant in Odisha. The pellets are then taken to Hazira to be used in Essar Steel's plants.
While ArcelorMittal has emerged as the highest bidder for OSPL, it will want more mines under its kitty, to bring down the manufacturing cost at Essar Steel. Globally, it has a large mining operations with annual production of nearly 60 MT of iron ore and about 5 MT of coking coal.
For sure, ArcelorMittal will want to bring all that prowess on the table, as it vies for the mines. JSW Steel, on the other hand, would want to maintain an upper hand in the Indian market.
The first glimpse of the competition came not in India, but in Italy, where both ArcelorMittal and JSW Steel were interested in Ilva, the country's largest steelmaker. While ArcelorMittal eventually took control of the company, JSW Steel bought Aferpi, another Italian steel mill.
Earlier this year, the two again found themselves across the table, this time for Essar Steel. With bids of both ArcelorMittal and Numetal under the regulator's eye (both had to clear Clause 29A of IBC that barred defaulting promoters from bidding for stressed assets), JSW Steel evinced its interest in Essar Steel.
This was despite not having put in an Express of Interest when the insolvency process started off. The expression of interest is needed to submit a bid. Eventually, JSW Steel pulled itself out of the Essar Steel race.With ArcelorMittal finally getting a foothold in India, with the Essar Steel acquisition, its competition with JSW Steel will now see more chapters. First off, it would be for the mines.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.