ArcelorMittal Faces Hurdles With India Expansion

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Arcelor Mittal

ArcelorMittal’s (NYSE:MT) Indian expansion plans may not see the light of the day very soon due to red tape bureaucracy in the country that is stalling projects. The world’s largest producer of steel has been grappling with a slowdown in European market and obviously knows how important it is to gain a strong foothold in Asia to retain its top position. However, the company still struggles to enter into this rapidly growing economy and is looking at other markets. Its one of the major competitor POSCO (NYSE:PKX) is also facing troubles operating in India with whereas other competitor Tata Steel has significant presence in the country.

Our current price estimate for ArcelorMittal stands at $21.50, implying a premium of about 40% to the current market price.

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ArcelorMittal’s Ambitions In India…

Many of the steel companies are keen on making inroads in Asia as it provides them with two important components: a rapidly growing market for steel due to economic growth and low-cost labor to reduce its overall production costs. ArcelorMittal is already present in China through its subsidiary, Lugang, and also through a joint venture with the China Oriental group. The company is planning to add 30 million tons of capacity in India, almost a third of last year’s total 92 million tons steel production of the company. [1]

…..Have Been Held up Until Now

The company has earmarked about $24 billions to build steel plants in Jharkhand and Orissa states of India each with capacities of more than 12 mtpa (million tons per annum). However both plants in have been held up as the company has waited to receive land by the respective state governments amidst protests from local residents. Tiresome environmental clearances are also adding to the list of worries for the company.

However, the company has seen some progress in the Indian state of Karnataka, where it plans to build 6 mtpa plant. The plant could cost the company about $6 billion to construct.

Asia, Africa and CIS division currently constitutes about 10% of the company’s value with shipments being about 12.5 mtpa in 2011. We expect this to grow steadily to around 14.8 mpta by the end of our forecast period. However, any significant developments towards these projects could add substantial value to the company.

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ArcelorMittal sees India plans stalled for years

Notes:
  1. ArcelorMittal sees India plans stalled for years, Reuters, May 8 []