ArcelorMittal best partner for Essar Steel, says Malay Mukherjee

Malay Mukherjee  had a nearly two-decade stint at ArcelorMittal, where he was often called Lakshmi Mittal's right-hand man. Later,  the steel industry veteran served as the CEO of Essar Steel for two years.

Malay Mukherjee1

Now a global consultant, Mukherjee says that the Indian steel industry has suffered because many promoters think only about themselves. That is why, adds Mukherjee in an interview with Moneycontrol, the sale of stressed assets is a great opportunity to strike a balance and ensure that the Indian steel industry fulfills its promise.

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With an insider's knowledge of Essar Steel, Mukherjee has no doubt who is the best fit to buy the stressed steel company, and that is ArcelorMittal. Excerpts...

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The Indian steel industry at present is engrossed in the sale of stressed assets, some of which have got global attention. How do you see this phase? 

I certainly believe that it is a good thing for the Indian steel industry. We are far from exploiting the total potential of the industry, especially if we have to cater to the increasing demand. Even now our per capita consumption of steel is about 80 kg, way below the world average, or China's.

To reach these targets we must have a balanced steel manufacturing industry.

Unfortunately, what has happened is that some promoters have not applied financials controls, were over-leveraged and created a pretty unfavourable judgement of the Indian steel industry, vis-à-vis the global market. Many of the promoters think only about themselves.

This step is in the right direction, to increase transparency and finding the right investor who has professional and technical expertise in running the companies, in keeping view interests of all the stakeholders.

You mentioned that we need to have a balanced steel manufacturing industry. What does that mean?

For balance in the steel industry, we need a level playing field – in access to infrastructure, raw materials. And this should be done in a manner where we don』t promote one company, and create inefficiency in another. For instance, there can't be a structure where someone who didn』t have capital to buy a mine, is now barred from buying iron ore for ever.

Talking about promoters, many of them blame the steel cycle for the distress. 

But the steel business is such that you have to contend with the business cycle. You can』t really blame the cycle when others have been able to manage.

I went to a few of the stressed assets being auctioned. If the total capital is USD 100, promoters have spent USD 95 in assets and just USD 5 in building the infrastructure to support the assets. That is a wrong way to allocate capital.

In one of the plants, the promoter wanted to bring the raw material by road. Now instead of spending money on building roads, he could have built a rail network.

In another plant, there was no proper infrastructure to handle raw materials, which is 65 percent of the total costs.

Basically, many of these promoters thought steel is a money making machine. They had no expertise.

Some of the stressed assets have seen intense competition. Tata Steel's bid for Bhushan Steel is deemed high. What is your observation?

Tata Steel’s bid for Bhushan Steel may look like a over-bid at the first glance. But then the Tatas have certain basic advantage over other companies. They have access to captive mines, and in Odisha – where they already have a facility – they can create a major hub. (Bhushan Steel also has facilities in Odisha).

So the capital spend will be compensated by lower operating costs. Tata Steel has the bandwidth to tune the operations and make marketing more structured.

If it was any other company that has bid so high, then the analysis would have been different.

Do you think JSW Steel could have been more aggressive (Mukherjee is an independent director at the company)?

In JSW Steel’s case, they have always been building assets. They are very good in building world class assets at lower costs. So they are not going to pay extra to buy an asset. It is a choice.

Coming to Essar Steel's auction, ArcelorMittal, which is one of the bidders, has highlighted its global experience in turning around operations. Given your experience at the company, could you give an insight into this?

From a historical point of view, ArcelorMittal took over plant facilities that were owned by Governments, and turned them around. This was the model in Trinidad, Mexico, Kazakhstan, and even in developed markets like Germany.

The turnaround was operational – increase capacity and bring down costs.

Later on, ArcelorMittal’s strategy was to make the best product in steel, in addition to turning around operations. This was the case in the US.

Overall, ArcelorMittal’s turnaround strategy has been about operations, financial discipline and products. It also helps that they have the world’s largest R&D facility for a steel company.

If you have all this, then it’s a no-brainer that the best partner for Essar  Steel is ArcelorMittal.

You were Essar Steel CEO. How do you assess the asset?

Essar Steel is a wonderful asset. There is the dependence on gas, but with another blast furnace that can decrease.