India and China: Two Appoaches to Metals Capacity

This morning, I'd like to welcome Aptium Global's Stuart Burns to Spend Matters. In this post from the UK, Stuart shares a comparative view on the "make" vs. "buy" macro-economic decisions that China and India are making these days in the metals markets..

I find it curious that in the West, we very often place India and China in the same camp when passing comment or making judgments about their approaches to creating production capacity. But in actual fact, the two countries have adopted distinctly different philosophies to their industrial development. As an example, let's take the metals industry. China's approach has predominantly focused internally; driven by strong domestic demand and cheap credit they have invested vast sums in new production capacity over the last 10 years. Comparatively little of this is finding its way on the international market in comparison to domestic sales.

Whilst India has made domestic internal investments, they have been much more active on the international scene with an approach more akin to a west European or North American producer. Hampered by greater domestic bureaucracy, poor infrastructure and a more slowly developing middle class, Indian companies have looked abroad. Hot on the heals of Mittal Steels $32bn takeover of Luxembourg Arcelor last year Tata is about to takeover Angle Dutch steelmaker Corus for $12bn. Their rational? 19 million tons of additional production capacity at half the price of building it from scratch. It is true, one might argue, that Mittal are now a multinational, not an Indian company. But you can’t make the same argument with Tata.

Even more impressive is that the market is rife with rumors that Hindalco Aluminum's parent Aditya Vikram Birla Group is in discussions about buying Novellis, Alcan’s recently spun off downstream aluminium continuous casting and rolling division for between $5 and 6bn -- reputedly making Hindalco the largest downstream Aluminium producer in the world.

Whilst China is building the largest metals manufacturing capacity in the world, India is busy buying up everyone else's! As the Indians say, it's much cheaper than starting a green field plant. And it gives them a strong brand name from the get go in global markets. Long-term, we'll see if this strategy pays off relative to the Chinese who have shown their cards to be on the "make" versus "buy" side of the metals equation.

Stuart can be reached by email at sburns @ aptiumglobal (dot) com.

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