MUMBAI: JSW Steel, India’s third-largest steel maker, has begun talks to purchase smaller rival Welspun Maxsteel for about 1,000 crore, two people familiar with the development said, a move aimed at sourcing cheaper raw material, cutting production costs and strengthening presence in the northern and western market.

“Yes, both companies are talking to each other for a deal,” one of the people quoted above said. “It could be in the range of roughly 1,000 crore,” the second person said. However, Welspun chairman BK Goenka denied that talks were currently on. “We have been talking to them in the past.”

JSW Steel spokesperson did not respond to an emailed questionnaire.

JSW Ispat, which owns a 3 million tonne steel plant at Dolvi in Raigad district of Maharashtra, buys sponge iron, a raw material to make high grade steel, from nearby Welspun Maxsteel plant. The acquisition will help JSW steel, owned by billionaire Sajjan Jindal, secure continuous supply of cheaper raw material as it plans to expand its Dolvi capacity to 5 million tonne.

“It is an advantage and makes sense to source raw material for both plants in Dolvi and Karnataka by using the port owned by Welspun Maxwel,” said a global consultant. “The port-based plant is a strategic fit.” He cannot be quoted as he is not authorised to speak on specific companies.

Welspun Maxsteel, owned by billionaire BK Goenka, purchased the Vikram Ispat plant in May 2009 for 1,030 crore from Aditya Birla Group and renamed it Welspun Maxsteel as part of integrating it with his Welspun Pipes, a pipe maker for oil and gas industry. It later raised the plant’s capacity to 1 million tonne.

JSW Steel production at its 10 million tonne mother plant at Vijayanagar in Karnataka has been hit by the shortage of key raw material, iron ore, after a series of mining bans. The group has been expanding its capacity at Dolvi to supply in the western and northern markets. The company has also invested heavily to complete its pellet, coke oven and captive power plants to cut down production costs.

Some consultants say the steel demand will rise in the next few years driven by the investments in the infrastructure, expectation of a lower interest rates and opening up of mines.

“There are three reasons for steel demand to pick up,” said Anjani Agarwal, leader (metals) at global consultant EY. “One, acceleration in infrastructure spending, second, lower interest rates to trigger demand for automobiles and consumer durables, and third, opening of mines to drive up sales of heavy equipments. Going forward, we expect steel demand to rise between 4% and 5% in the next decade,” added Agarwal, who led the EY team that released the global steel report on April 10.

Source – Economictimes