JSW Steel, India and Swiss Duferco in talks on landmark steel pre-payment deal

Indian conglomerate JSW Steel and global trading firm Duferco are in advanced talks on a five-year cash-for-steel prepayment deal, sources familiar with the matter revealed to Reuters.

JSW, India’s biggest steelmaker, and Duferco had a prepayment deal in 2006 for $150 million in upfront cash that would be repaid over seven years with steel cargoes, but the scale of the proposed new deal is much larger.

According to a Reuters report, the deal, expected to be signed this quarter, would be worth about $600 million. Switzerland-based Duferco, backed by banks, would provide the cash to be repaid with physical steel. A $600 million dollar deal would equate to about 1 million tonnes of steel supply.

Duferco, one of the world’s largest steel trading firms, declined to comment. JSW did not confirm the value of the deal, but said it has a longstanding relationship with Duferco that involves financing arrangements.

JSW has been looking for alternate sources of funding. For Duferco, the deal would lock in future sales of steel with its clients.

Steel derivatives, which allow buyers and sellers to lock in future prices, are still in their infancy, making trade houses wary of pre-paying for large tonnages and risk prices moving against them in the future. Such deals are frequent in commodities such as oil, with liquid derivatives markets that allow for hedging future sales.

In 2013, as banks increasingly withdrew from Europe’s steel sector, Duferco moved to offer its clients trade financing, though these deals typically involved it acting as a bank, not taking delivery of steel.

JSW plans to expand steelmaking capacity by 2030 to between 44 million tonnes and 45 million tonnes from 19 million tonnes currently. In 2017 it earmarked $1 billion for acquisitions and expansion but had to proceed more cautiously this year as steel prices have fallen to their lowest in nearly a year and there are growing concerns of its future.

Duferco, controlled by state-owned Hebei Iron and Steel Group (Hesteel), China’s largest steelmaker, has activities in more than 120 countries and sales of about 20 million tonnes of steel and raw materials a year.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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