***MB SPECIAL REPORT: SSI & TCP — a good combination?

The British press like a cause to get behind. Corus’ planned sale of Teesside Cast products (TCP) to Sahaviriya Steel Industries (SSI) has provided a good rallying point.

The British press like a cause to get behind.

Corus’ planned sale of Teesside Cast products (TCP) to Sahaviriya Steel Industries (SSI) has provided a good rallying point.

SSI has signed a Memorandum of Understanding (MoU) to take over the steelmaking facilities at the Redcar plant.

The assets included are the Redcar and South Bank coke ovens, TCP’s power generation facilities and sinter plant, the Redcar blast furnace at the Lackenby steelmaking facilities.

If the deal goes through to completion, SSI will restart steelmaking at the plant, maintaining 700 jobs and create 1,000 new ones. This is something the local community and political interests in Britain are very keen to see happen.

“The proposed sale of Teesside Cast Products to Thai steel company SSI is long overdue and great news for Teesside,” said the National Trade Union Steel Coordinating Committee.

“SSI have a well-earned reputation that should reassure the community that steelmaking is at the top of their agenda,” said Community Union.

A completed sale will help Corus out of hot water. Perhaps unfairly, the company has found itself lampooned for its decision to mothball the plant earlier this year. The political pressure for the company to either restart or sell the facility has been severe.

But, while the reaction to the MoU was overwhelmingly positive, SSI is still a long way from being able to sign a final sale purchase agreement for TCP.

The industrial logic of the combination is clear.

SSI, a 4 million tpy capacity reroller, has promoted the benefits flowing from backward integration.

At the moment, SSI has to buy slab for its rolling mills from all over the wotrld. Post-acquisition, this slab could all be supplied from Teesside, which is able to produce 3.5 million tpy of crude steel.

Take last year — SSI purchased around 2.4 million tonnes of slab, mostly from Russia and Ukraine, according to Phornsri Laysanitsarekul, a Bangkok-based analyst from Seamico Securities.

The company puts its purchases at around 9% of the merchant market, at least according to a presentation SSI delivered to analysts on Monday.

In that presentation, the company compared expected costs at Teesside with those slab plants being built by Vale in Brazil.

“Average cost per project in relation to plant capacity [in Brazil] is $1.28 billion per million tonne, significantly higher than the implied cost / capacity in relation to the proposed acquisition of TCP of $0.14 per million tonne,” it said.

There are definitely costs benefits to producing slab in house.

Metal Bulletin Research (MBR) puts the average cost of production at TCP between 2007 and 2010 at around $400 per tonne.

Compare that to average spot market prices for slab being shipped out the Black Sea in the same period — somewhere in the region of $590 per tonne on a fob basis, according to MB data.

It’s not difficult maths.

And there are other benefits as well, SSI continues.

“In addition, SSI would face environmental issues if it were to build a similar plant in Thailand, further enhancing the acquisition rationale,” the company said.
SSI has 4 million tpy of hot rolling capacity, of which 1.2 million tpy can also be cold rolled.

The Corus deal would cut its typical production cycle, from sales and purchase contract to hot rolled cooling, by 80 days to around 120 days, the company said. This would reduce risks and working capital costs, it believes.

Acquiring TCP also allows SSI to target the high-grade steel market. SSI is currently Thailand’s largest hot rolled coil producer, with total production capacity of 4 million tpy.

“In the past one to two years, SSI has gained almost 50% of market share, since other Thai HRC producers G Steel and GJC are having financial difficulties,” said Laysanitsarekul.

“With its own slab plant [it] can now maintain a more stable quality of slab and SSI can now go for bigger contracts of high-grade steel production,” said Prasit Rattanakijkamol, an analyst with Asia Plus Securities, also based in Bangkok.

And Thailand is great place to be building a steel business.

SSI’s deal will be “very good” for the Thai steel industry, said Wikrom Vajragupta, president of the Iron and Steel Institute of Thailand.

Thailand’s hot rolled coil consumption is expected to grow 20% to 7 million tpy this year thanks to high demand from the automobile industry, he said.

“If they can complete the deal, rather than sourcing from the open market, SSI can now have its own raw material supply,” said Vajragupta. “This will definitely improve the steel supply system in Thailand.”

But, as the company is keen to impress, SSI’s proposal to take over TCP is “not a done deal yet”. Far from it.

The company has not yet arranged financing for its $500 million bid, a spokesman confirmed last week.

“I think they’re in discussion with banks at the moment,” he told MB.

And, since signing the deal, SSI has faced scepticism from the financial community in Thailand. It’s still not clear how the reroller plans to raise the funds.

And at a meeting with analysts earlier this week, the company reportedly faced tough questioning.

“The deal may be beneficial in the long term, but in the short term we are very concerned with the impact of the deal [on] shareholders’ interests,” Laysanitsarekul told MB.

The indicative transaction value of $500 million — with an additional $100 million a year needed as working capital for plant maintenance — is on the high side, said Rattanakijkamol.

“SSI still needs to pay salaries of more than 1,000 employees, [as well as] interest payments on loans,” he explained. “Amortisation and depreciation of assets and other items may also occur.”

“As a result, the deal will dilute SSI’s profits in [the year of purchase], and [the company] may not break even in the next two years,” he added.

The Thai company’s sketchiness when it comes to how it plans to fund the deal has industry observers like these concerned.

“We are also very confused,” said Laysanitsarekul. “Sahaviriya never gave details on how it will [finance] the deal.”

With registered capital of only $1.31 billion and net gearing at 0.98 times, SSI may have no choice but to issue new shares, Rattanakijkamol believes.

“We asked the management during the meeting [whether they are prepared to issue new shares], but we [were] not given straight answers,” he said.

If completed, the integration of TCP will have SSI vying with Malaysia’s Lion Group to be the biggest steel producer in Southeast Asia.

But, if the company is intent on getting to this level by taking over TCP, it’s going to need some straight talking about how it plans to fund the deal.