Essar Steel Monetization
In the 1980s, India had secondary steel makers who used imported scrap to produce steel. Scrap prices were volatile and had to be purchased with precious foreign exchange. Moreover, the quality of scrap was also not always up to the mark. The only alternative to scrap was sponge iron, but there were no sponge iron manufacturers on the west coast of India despite a large number of users. This prompted Essar to start manufacturing sponge iron. Again, breaking the tradition of locating manufacturing facilities close to the mines, the Company chose to build the plant at Hazira, a port on the west coast of India. Hazira was also the land fall point for gas from the Bassein gas field in Bombay High.
The sponge iron plant, which was initially set up with a capacity of 0.88 million tonne per annum (MTPA) and later expanded to 1.32 MTPA, became a hugely successful venture. Essar followed up this success, by setting up a 4 MTPA pellet plant in Visakhapatnam as part of its backward integration strategy. This was not sufficient for the business to achieve and sustain long-term growth. So Essar set up 2 MPTA steel manufacturing facility at Hazira with the objective of gaining value addition. When commercial production began in 1996, Essar Steel became a producer of flat steel and joined the select group of Indian companies that produced this commodity.
Due to sanctions post India’s testing of Nuclear bombs in Pokhran, Essar ran into financing issues. However, it did not succumb to the pressure restructured its balance sheet through a three-pronged strategy to address the issue: Increase capacity, move to value-added segments and bring down finance costs. The steel generation capacity at the Hazira plant was raised from 2 MTPA to 2.4 MTPA through de-bottlenecking. Work also started on expanding capacity from 2.4 MTPA to 4.6 MTPA through brownfield expansion, which requires far less capital than similar greenfield projects. Sponge iron generation capacity was also increased to 5.5 MTPA. The Research & Development team developed high-end products for specialized applications, like interstitial free steel for auto and auto components, high-end API grade steel for the petroleum industry, steel conforming to the ABS standard for ship building industry and so on. In this way, the share of value-added products increased from 35 percent to 70 percent of total production.
Essar also negotiated with the FRN holders for a one-time settlement and refinanced its entire rupee debt at a lower cost. In order to improve the efficiency, Essar Steel bought Stemcor’s 51 percent stake in HyGrade Pellets Limited, the pellet making venture of Essar. It also bought Stemcor’s 100 percent stake in Steel Corporation of Gujarat (SCGL) which had set up a 1.2 MTPA cold-rolling complex at Hazira. Subsequent to the HyGrade takeover, the pellet making capacity was enhanced to 8 MTPA. At the same time, the 8 MTPA iron ore beneficiation plant at Bailadila and the 267-km slurry pipeline were completed. This improved the quality of ore and reduced the transportation cost. The takeover of SCGL enabled Essar to widen its product base and cater to a larger segment of industries. All these measures made Essar Steel the largest integrated steel producer on India’s west coast and one of the largest producers of flat steel in the country. In 2008, Essar Steel also commissioned a Pipe Mill at its integrated steel facility in Hazira, which was closely followed by the commissioning of the Plate Mill in 2010. Between that time, the company ventured into the production of colour coated steel by acquiring a facility in Pune.
The growth chart of Essar Steel continued with the Hazira Steel complex increasing its capacity to 10 MPTA in 2011, making it one among India’s largest integrated steel facility located on the west coast. By 2015 Essar Steel’s Pune facility, which manufactured colour-coated steel, was delivering improved numbers owing to the turnaround it witnessed post acquisition by Essar. With the markets looking up and matching production levels at Essar Steel’s production facility at Hazira, the company recorded the highest ever monthly flat steel production in 2016, with its output jumping up by 62%. Its operations included mining, pellet-making (20 MTPA), steel-making, downstream and retail, and it manufactured over 300 specialised grades of steel for various end-user industries.
However, in the late 2010s, evolving global and domestic economic scenario and regulatory obstacles impacted Essar’s steel and power businesses. Committed gas supply contracts for the Essar Steel Complex were withdrawn in 2012 and allotted coal mines for power plants were cancelled in 2014, leading to partial closure of some of their prime operating assets. More so, repeated damage by insurgents were being done to the Vizag slurry pipeline that carried iron ore fines to the ESIL plant. These events had a massive impact on the company’s operations and operational expenses.
While Essar still remained resolute and committed to its investments, the challenges led to a massive build-up of debt for Essar. To fund the losses on account of the above, Essar promoters infused an additional corpus of approximately Rs 8,000 crore (~US$ 1.15 billion) over and above the contributed equity of Rs11,000 crore (~US$ 1.6 billion). Even while under financial stress, Essar Steel honoured its interest obligations of Rs 12,000 crore (~US$ 1.7 billion) mainly by the aforesaid fund infusion by the promoters.
Essar Steel successfully mitigated the aforesaid challenges and thereafter a restructuring plan was agreed with the lenders in December 2016. Despite this, the company was referred to the IBC by RBI in 2017, an action that Essar strongly contested. In fact, the Board and shareholders of Essar Steel also offered to make payment aggregating Rs 54,389 crore (over US$ 7.5 billion) to creditors of all classes under Section 12A of IBC to withdraw Company from corporate insolvency resolution process. However, the lenders did not accept the offer despite the efforts taken. In 2019, the insolvency resolution process was completed with Essar Steel bid being won by the offer by Arcelor Mittal and Nippon Steel (AM/NS) for Rs 42,000 crore (US $6 billion).
However, the interest shown and value offered by all global steel majors was a testament to the value and quality of the asset built by Essar.