Japan's JFE in tie-up with JSW Steel; may buy stakes

A labourer works inside a steel factory on the outskirts of Agartala, capital of Tripura, in this September 2009 file photo.

TOKYO/MUMBAI (Reuters) - JFE Steel, the world's sixth-largest steelmaker, and JSW Steel agreed a production tie-up and may take stakes in each other, giving the Japanese firm a foothold in India's growing market.

JFE, a unit of JFE Holdings, and JSW, India's third-biggest steelmaker, said they would make auto-grade steel in India and work towards jointly sourcing raw materials and producing other grades of steel.

JFE may also invest in JSW's mill in West Bengal that had been put on hold due to funding problems.

"Many Japanese firms have no choice but to seek partnerships with companies in India and China to survive, due in part to currency problems," said Tomomi Yamashita, fund manager at Shinkin Asset Management in Tokyo. "The pact is good for JFE, though there will be no immediate impact on earnings."

JFE said the deal would make it easier and cheaper to supply locally-based car makers, such as Suzuki Motor Corp, which owns a majority of India's leading car maker, Maruti Suzuki.

Toyota Motor Corp and Nissan Motor Co have also set up manufacturing bases in Asia's third-largest economy, which has been one of the few bright spots for the global auto market, with October car sales up 34 percent.

"Our customers, especially the automakers ... are expanding their business across borders. So serving the local demand of the cars for, say Suzuki, by export is not a good idea," JFE Steel President and Chief Executive Hajime Bada said in Mumbai.

"We want to have a local base to serve the customers," he said via a translator.

Shares in JSW Steel, which had risen as much as 7.6 percent to a 17-month high on reports that a stake purchase would be announced, ended down 0.65 percent in a Mumbai market that fell 1.25 percent. JSW has a market value of $3.9 billion.

Shares in JFE, valued at $20.4 billion, ended down 2.9 percent in a Tokyo market that fell 1.3 percent. The tie-up was announced after the market had closed.

JSW Steel Managing Director Sajjan Jindal said the details of the stake sales had to be worked out, but gave no timeframe.

KEEN ON PLANT

JSW Steel's stalled project to build a 10 million tonne per year steel mill in West Bengal at a cost of 110 billion rupees ($2.4 billion) is among the areas of possible cooperation between the firms.

The firms did not elaborate, but Jindal said JFE was "very keen" on joining hands to build and run the plant.

"JSW had kept the West Bengal project on hold because of the liquidity crunch, so maybe they are looking for some investment from JFE," said Pawan Burde, senior steel analyst at Angel Broking. "That is what they have indicated."

The tie-up comes as the Japan Iron and Steel Federation said the country's crude steel output fell 12.9 percent in October from last year, to 8.79 million tonnes, its 13th consecutive monthly drop.

Steel production in India is expected to rise more than 6 percent to 60 million tonnes in the year to March, the steel minister said last week.

($1=46.6 rupees)

(Additional reporting by Siddesh Mayenkar in MUMBAI and Yumiko Nishitani in TOKYO; Writing by C.J. Kuncheria; Editing by John Mair and Ian Geoghegan)

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