Essar Steel’s Purchase of U.S. Steel Canada’s Operations In Limbo

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Cold-rolled steel

Was India’s Essar Steel Holdings’ serious in purchasing steel plants in Canada belonging to U.S. Steel?

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Essar, which had purchased Algoma Steel in Sault Ste.Marie, Ontario way back in 2007, was said to be interested in U.S. Steel’s Canadian (USSC) operations in Hamilton and Nanticoke.

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Will Essar Steel revive operations at U.S. Steel’s Canada plants?

According to news reports, Essar was likely to bid for the two plants, though analysts have injected a note of caution since the company has yet to place a formal bid.

Previous Purchases

Essar Steel Holdings had purchased Algoma Steel for $1.85 billion, and later announced a $240 million expansion and modernization plan for it. Reports quoted unnamed sources saying Essar was vying for control of plants of USSC, now under creditor protection, and the former planned to bring the Hamilton plant back into production.

As expected, the news, however initial, seemed to have ignited enthusiasm in the steel community in Hamilton. Councillor Sam Merulla, vice-chair of the city’s steel issues subcommittee said the Essar bid included a commitment to revive steelmaking at the Hamilton plant and would “be a dream outcome.”

Local Enthusiasm

Mayor Fred Eisenberger also went on record, saying any such bid to revive the steel plant was welcome since it meant the creation of new job opportunities in Hamilton. The same reports also claimed the other bidder in the race was parent company U.S. Steel.

But no concrete message has emerged from either Essar or those involved with the sale process. USSC had slid into creditor protection in September 2014. Talks of selling off its Hamilton and Lake Erie plants started way back in January this year.

No Bids For Idled Mills

In June, a court-appointed monitor of the restructuring process said 102 companies were given the opportunity to buy the distressed mills, of which 39 submitted expressions of interest. Firm bids were submitted July 24 and were being reviewed by USSC’s monitor, chief restructuring officer and financial adviser in order to draw up a shortlist, which would then be submitted to the court.

Essar’s reported interest, analysts say, makes sense since the company wants to add further value to its North American operations after the acquisition of Algoma.

Late last month, Essar Steel Algoma Inc. reported CDN $5.6 million ($4.2 million in US dollars, not loonies), as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the first quarter of fiscal year 2016 ending June 30, 2015, verses CDN $12.4 million ($9.3 million) in the same period year prior.

The company said it had maintained “strong production” throughout the quarter and reported to be operating at 90% capacity utilization. While this translated into higher shipments, it was not enough to counter the sustained low price environment, which had resulted in a $21.8 million operating loss for the quarter.

Other Business Pressures

In a written statement, Essar Steel Algoma President and CEO Kalyan Ghosh said in the past year, dumped imports “had wreaked havoc on North American markets,” displacing domestic market share and placing downward pressure on price. The CEO forecast that with some price recovery and with the prudent application of trade remedies, the company’s operations would return to a level playing field.

But reports coming in from other quarters, of late, have cast doubts on the seriousness of Essar in bidding for USSC’s two plants. One report claimed the “rumor” was floated by the steelworkers’ union itself. Another wondered whether Essar, the parent company, would ever match the millions given to Essar Steel Algoma Inc. by the Canadian government for operations upgrades.

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About a year after emerging from a restructuring exercise with help from its parent company, and after two previous bankruptcies, the levels at which Algoma’s debt was trading could mean the company would need to repeat the restructuring process.

Any such effort at a second round of restructuring would depend on how much more support India’s billionaire brothers, Shashikant and Ravikant Ruia, were willing to give the Canadian business. Essar Group is already under massive pressure in its other operations in the oil, gas and iron ore.

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