| BOTH commodity producers
and traders say their industry has hit a sweet spot. An increasing demand
for commodities — be it crude, food grains, ores or minerals —
is chasing a stagnant or at best slow-growing supply. This puts companies
with access to captive sources of raw materials at a competitive advantage
over those who are forced to buy inputs from the open market.
A foreign sojourn becomes even more critical for domestic companies as
India is a net importer of industrial commodities, including fuel, coal,
steel and non-ferrous ores. Not surprisingly, securing cheaper or superior
sources of raw materials has become a motivating factor for overseas acquisitions
by ET500 companies. Several global deals by companies in sectors as diverse
as steel, oil & gas, power, non-ferrous metals and paper, have been
inspired by the need for raw materials.
Power, steel and cement companies are at the forefront in acquiring coal
assets from Australia, South Africa, Mozambique, Zimbabwe and Indonesia.
The power sector accounts for nearly 75% of India’s total coal
consumption and has been importing 20 million tonnes (mt) annually. Coastal
power plants find it logistically cheaper to source coal from other countries
and ship it by sea. As new thermal power capacities get commissioned,
coal imports are slated to jump five-fold in seven years. Given the rising
need to import coal, SAIL, Coal India, Rashtriya Ispat Nigam, NMDC and
NTPC have come together to float International Coal Ventures (ICVL), which
will scout for overseas coal assets. In May 2008, Reliance Power acquired
three coal concessions in Indonesia with estimated coal reserves of 2
billion tonnes.
Power Trading Corp is also acquiring coal mines overseas. Tata Power
bought 30% in an Indonesian company for $1.1 billion in 2007. It will
procure 10.1 mt of coal p.a. from this company for an initial period up
to 2021.
Apart from the power sector, cement and steel manufacturers are also
looking to tie up their coal supplies from overseas. Binani Cement plans
to buy lignite mines in Indonesia for $60 million. UltraTech Cement, which
imports 1 mt of coal annually, is scouting for mines in South Africa and
Indonesia. Last year, Tata Steel picked up 35% in a coking coal project
in Mozambique. Surana Inds, which is setting up an integrated steel plant
in Karnataka, has picked up 49% in Agate Group, which has mining leases
in Indonesia.
The hunt for crude oil and natural gas has also forced Indian companies
to head overseas. The most recent examples are the $2.58-billion bid by
ONGC’s overseas subsidiary ONGC Videsh (OVL) to buy UK-listed Imperial
Energy, which holds oil blocks in Russia; and the $165-million acquisition
of Brazilian oil exploration firm Encana by a JV of Videocon and BPCL.
However, it’s customary in the petroleum industry to pick up stakes
in oilfields, rather than outright corporate acquisitions. Almost every
petroleum company in India — and some non-petroleum ones too —
has invested in overseas oil exploration blocks. The largest among these
is OVL, which was set up to invest in overseas oil blocks. Today, it holds
stakes in 37 blocks across 18 countries. RIL holds stakes in eight blocks
in six countries outside India. IndianOil, BPCL and HPCL are also investing
in exploration blocks to diversify their revenue portfolio, as their oil
retailing business is incurring heavy losses. Similarly, Gail has invested
in gas blocks in Myanmar and Oman.
Among private players, apart from RIL, Essar Oil and Videocon are actively
buying stakes in overseas oil blocks. Essar Oil holds stakes in six blocks
in Madagascar, Nigeria and Myanmar, while Videocon has invested in four
projects, besides its recent acquisition in Brazil.
The steel industry also requires inputs of coal and iron ore, prices
of which have risen during the commodity cycle boom. Given India’s
rising economic growth, steel consumption is set to grow. This is why
many steel companies have announced huge expansion plans. To ensure smooth
operations, they are eyeing overseas raw material assets, which will protect
them from price volatility and ensure consistent supply.
After the Corus acquisition, Tata Steel’s steel-making capacity
jumped five-fold. Though its Indian unit is self-sufficient in raw materials,
the overseas facility is not. So, Tata Steel has acquired mining assets
in Mozambique (coking coal), Ivory Coast (coking coal) and Oman (limestone)
through local partnerships.
JSW Steel and Ispat Inds have acquired iron ore and coking coal assets
in Chile and Mozambique, respectively. Even smaller players like Gremach
and Gujarat NRE Coke have acquired coking coal assets in Mozambique and
Australia, in that order.
While the list of ferrous companies acquiring assets overseas is long,
their counterparts in the non-ferrous segment are not far behind. But
their main concern is supply of ore, rather than coal. Sterlite Inds has
acquired copper mines in Zambia and Australia. Hindalco has floated and
listed a separate Australian subsidiary to utilise the copper mines available
there.
All these examples prove that long-term assured and low-cost supply of
raw materials and energy sources have become a crucial factor for domestic
companies. Lack of sufficient mining and exploration activities in the
country has boosted India Inc’s appetite for overseas assets. These
expeditions have de-risked the business model of Indian companies and
will ensure their sustained growth in the long run.
(Inputs by Santanu Mishra and Ashish Agrawal)
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