JSW Steel Ltd. (JSTL), India’s third-biggest steelmaker, will consider selling its U.S. mill complex to help reduce debt and boost earnings as a revival in the world’s biggest economy spurs demand.
The company will start looking for buyers once the plant has turned around, Joint Managing Director Seshagiri Rao said in a phone interview. JSW Steel, 15 percent owned by Japanese steelmaker JFE Holdings Inc. (5411), had 216.9 billion rupees ($3.4 billion) of debt as of March 31, according to data compiled by Bloomberg.
A sale will help Chairman Sajjan Jindal lower liabilities and boost earnings margins, which have narrowed for 12 straight quarters as interest costs surged. The boom in shale gas production and a consequent revival in economic growth has improved the prospects for the Texas-based maker of plates and pipes, which JSW acquired in 2007, according to Rao.
“It will be a relief to investors if the company is able to sell the U.S. mills at a good price,” said Abhisar Jain, an analyst at Centrum Broking Pvt. “The purchase was a bit of unrelated diversification and is proving a drag on the earnings.”
JSW Steel paid $900 million for a 90 percent stake in the unit in 2007 to tap demand from the oil and gas industry. The global recession caused prices for steel hot rolled coils, a benchmark product, to slump 40 percent from a peak of $1,095 a metric ton in July 2008.
At the time it bought the unit, JSW Steel planned to ship steel slabs from its India plant to make plates and pipes in the U.S. The slump in demand forced a change in strategy that left JSW Steel USA utilizing less than half its capacity, Rao said.
Shares of JSW Steel rose 9.8 percent to 545.90 rupees at the close in Mumbai, paring this year’s decline to 33 percent. The benchmark S&P BSE Sensex ended a four-day losing streak and advanced 2.3 percent, trimming its loss in 2013 to 5.7 percent.
The U.S. unit is currently operating at 40 percent of capacity and is forecast to begin using 50 percent this year on orders from energy and construction industries, Rao said.
“Orders from the energy sector are improving, but we are yet to see any major orders from the construction sector,” Rao said. “Big orders are all that the plant needs for revival.”
U.S. consumers are the least pessimistic in more than five years, homebuilders are the most upbeat since 2005 and purchasing managers say their factories are churning out goods at the fastest pace in almost a decade.
The improving economic outlook is also visible in company earnings. Of the 471 companies in the S&P 500 that have reported results this period, 72 percent have posted earnings that surpassed analysts’ estimates.
A possible increase in levies against pipe and tube imports from nine countries will also help JSW Steel USA’s business, Rao said.
A group of oil-pipe makers led by United States Steel Corp. (X) filed a trade complaint in July, alleging goods from countries, including Korea, India, Saudi Arabia and Thailand were sold in the U.S. market below cost and, in some cases, benefited from government subsidies.
A favorable verdict could provide the U.S. steel industry a “Chinese wall of defense” against imports, Chicago-based Steel Market Intelligence said in a report last month.
Still, finding a buyer may not be all that easy for JSW Steel, said Rahul Jain, an analyst at CIMB Securities India Pvt. in Mumbai.
“Pipes and tubes is a very cyclical industry and demand revival will take a while,” he said.
JSW Steel has 14.3 million tons of steel making capacity in India. Its biggest plant in the southern state of Karnataka has struggled to get raw materials since August 2011 when the nation’s Supreme Court imposed a ban on iron ore mining in the province. The ban was eased last year.
Steel demand in India grew at the slowest pace in five years as a slowing economy impeded construction projects and high interest rates kept people from building houses and purchasing cars. A decline in the rupee to record lows has raised the cost of importing coking coal, a key raw material, and narrowed margins at mills.
India’s rupee plunged to a record low of 64.55 against the dollar yesterday on concern the U.S. will pare stimulus as early as next month. The plunge contributed to a 13 percent decline over the past year.
Companies including JSW Steel, Essar Steel Ltd. and Jindal Steel & Power Ltd. (JSP) are increasing exports to boost sales and counter the rupee’s fall.
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