Numetal buys key pipeline provider, gains edge in race for Essar Steel

9 February 2018

Numetal Mauritius, a consortium believed to be spearheading the Ruia family's bid to retain Essar Steel, is buying a majority stake in Orissa Slurry Pipeline India that provides for about 50% of raw material supply of Essar Steel's Hazira plant.

Numetal Mauritius, which has Russia's VTB Bank as the largest shareholder, has signed a binding agreement with India Growth Opportunities Fund floated by Srei Infrastructure to buy 70% equity in Orissa Slurry Pipeline India (OSPIL), in a deal that gives it an edge in the race for Essar Steel, put up for sale under Insolvency and Bankruptcy Code (IBC). OSPIL owns a 253 km slurry pipeline, which is a lifeline for Essar Steel, carrying iron ore from mines to its pellets plant in Paradip.

"It will be difficult for any new player to operate the Essar Steel plant at Hazira without access to the pipeline," a metals sector analyst told ET on condition of anonymity. "Alternative transport routes like rail or road transport will raise the cost of operations substantially," the person said.

The race for Essar Steel — which faces claims of Rs 54,851 crore from financial creditors and Rs 22,914 crore from operational ones — has attracted top steel players including the likes of ArcelorMittal with Nippon Steel, Tata Steel and Vedanta Resources. All these firms are believed to have completed the due diligence. The deadline to submit bids is February 12, having extended from January 29 after potential bidders sought time to finalise structure and funding of their proposals.

OSPIL deal would give Numetal an edge in the race. "We are working towards submitting a resolution plan for Essar Steel," a Numetal spokesperson said. "It was important for us to purchase the slurry pipeline so that we can offer an unconditional proposal to the lenders of Essar Steel as part of the IBC process." The person said VTB Capital is a lead investor in Numetal while Rewant Ruia, son of Essar Group founder Ravi Ruia, is a minority shareholder. ET was the first to report on January 16, 2018 that Numetal is a bidder for Essar Steel. Essar Steel owns 30% equity in OSPIL whose slurry pipeline connects iron ore mines in Dabuna, Odisha, where Essar Steel buys its raw material from, and its pellet plant at Paradip.

While transportation of iron ore from mines to the plant at Paradip can be done through rail and road as well, they work out to be much more expensive and cumbersome than pipeline. While cost of transportation through the pipeline is around Rs 75 per tonne of iron ore, estimated cost of rail transportation is around Rs 1,300/tonne and that through road around Rs 2000 /tonne. That means, in absence of the pipeline, it would cost Essar Steel an additional Rs 1,300-2,000 crore to transport some 10 million tonne of raw material to its plant annually. Hemant Kanoria, chairman of Srei Infrastructure, said he was not in a position to comment immediately.

Essar Steel had in May 2015 monetised its slurry pipeline. OSPIL, part owned by Srei Infrastructure, purchased it for a consideration of Rs 4,000 crore, and the funds were used to service dues of lenders to Essar Steel. The latter had in turn agreed to purchase 10 million tonne capacity on the pipeline for a payment of Rs 720 crore per annum. Essar Steel and OSPIL had subsequently entered into a pact to cancel the sale, which was subject to obtaining consents of shareholders and lenders, which never materialised.