JSW Steel still to recover US investments

Five years ago, when JSW Steel bought three plants in the US for $ 940 million (Rs 3,854 crore), CMD, Sajjan Jindal had said he expected to recover the entire investment in four years. Industry analysts agreed. With the demand for pipes rising in the US, the country’s second-largest steelmaker was expected to gain, as it would be able to reduce the cost of manufacturing by sending slabs from its steel plant in India. However, the story took a different turn. In March, JSW Steel’s revenues from foreign operations stood at just Rs 2,571 crore.

Till date, the company’s plate and pipe mills in Texas, US, have only managed earnings before interest, tax, depreciation and amortisation (Ebitda) profits. Between April 1, 2008 and September 30, 2008, it reported Ebitda of $74.63 million (Rs 410.4 crore), before oil prices crashed to $40 a barrel. In March 2009, JSW Steel USA’s Ebitda was $12.23 million (Rs 67.2 crore). For the quarter ended September, the losses rose to $3.4 million (Rs 73.7 crore), compared with $7.6 million (Rs 41.8 crore) in the corresponding period last year.

Capacity utilisation, too, has been dismal. JSW Steel’s US plate and pipe mills are running at 31% and 21% capacities, respectively. Production from the plate and pipe mills in the quarter ended September stood at a mere 0.08 million tonnes (mt) and 0.03 mt, respectively. The installed capacity at the plate and pipe mills at JSW Steel’s plant in Texas is 1.5 mt and 0.5 mt, respectively. Competitor Welspun, which has a plant in the US, was, however, running at full capacity (plant booked till August 2013) till the first quarter. In the second quarter, the plant was shut, owing to a fire.

So, where did JSW go wrong?

While an email sent to the company remained unanswered, analysts said the problem for the subsidiary, bought in 2007 from Jindal Saw (a company controlled by Sajjan Jindal’s elder brother Prithviraj Jindal), was outdated machinery. An industry veteran says buying old and clunky machinery can’t take one far. “There is a difference between an F1 car and a sedan from the 80s,” he says. These mills, acquired in 2007, had recorded losses of $42 million (Rs 231 crore) in 2006. Within a year of the acquisition, the company had projected revenues of $800 million (Rs 4,400 crore).

At the announcement of the company’s results for the quarter ended September, company officials admitted the subsidiary might have a longer gestation period than originally envisaged. “The company has concluded the decline is temporary and no provision against the carrying amounts of the investment and loans of Rs 2,726.13 crore is currently necessary,” they had said. However, the future may not be bleak. Pipe mills in the US are building order books for other firms and demand is unlikely to fall. With many oil companies concentrating on shale gas, the demand for ERW/SAW pipes is promising. In a recent report, Hatch Consulting had said drilling for shale gas would raise steel demand from 2.3 mt in 2011 to 2.7 mt by 2016. Last year, in an interview, JMD and group CFO Sheshagiri Rao had said the facility had an interest outgo of $25 million a year and depreciation of $30 million. “That means this company, in order to break even at the profit-before tax level, should have Ebitda of at least $55 million. This means capacity utilisation at the pipe factory should be 33%,” he had said.

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