Acquisition of thyssenkrupp Electrical Steel India by Jsquare

COMPETITION COMMISSION OF INDIA Combination Registration No. C-2024/10/1202

10th December 2024

Notice under Section 6(2) of the Competition Act, 2002 given by Jsquare Electrical Steel Nashik Private Limited

CORAM:

Ms. Ravneet Kaur Chairperson

Mr. Anil Agrawal Member

Ms. Sweta Kakkad Member

Mr. Deepak Anurag Member

Order under Section 31(1) of the Competition Act, 2002

1. On 29th October 2024, the Competition Commission of India (Commission) received a notice (Notice), under sub-section (2) of Section 6 of the Competition Act, 2002 (Act), given by Jsquare Electrical Steel Nashik Private Limited (Jsquare). The Notice has been given pursuant to execution of the Share Purchase Agreement between the Jsquare, thyssenkrupp Electrical Steel GmbH (Seller 1/tkES), and thyssenkrupp Electrical Steel UGO S.A.S. (Seller 2) on 18th October 2024.

2. Jsquare, vide communications dated 11th November 2024 and 25th November 2024 issued under Regulation 14 of the Competition Commission of India (Combinations) Regulations, 2024 (Combination Regulations), was required to remove defects from the Notice and furnish certain information relevant for the purpose of assessment of the combination. Jsquare made its submissions dated 18th November 2024, 28th November 2024, and 4th December 2024.

3. The Proposed Combination envisages an acquisition of 100% of the share capital of thyssenkrupp Electrical Steel India Private Limited (Target) on a fully diluted basis by Jsquare from Seller 1 and Seller 2. Further, certain associated agreements are being entered into amongst two or more of the Target, some of the entities belonging to the seller group, and JSW Steel Limited (JSW Steel). These agreements inter alia provide for supply of substrate to the Target for certain period, and assignment/licencing of intangible properties related to manufacturing of Grain-Oriented Electrical Steel (GOES) to JSW Steel. Further, JSW Steel and some of the entities belonging to the seller group may enter into certain supply agreements, if considered necessary.

4. Jsquare is a newly incorporated company with 100% shareholding held by JSW JFE Electrical Steel Private Limited (J2ES). J2ES is a 50:50 joint venture between JSW Steel and JFE Steel Corporation (JFE Steel). J2ES currently does not have any commercial operations. In August 2023, JFE Steel and JSW Steel formed a joint venture viz., J2ES, for the production of GOES, with the aim of establishing an integrated manufacturing system in India. The manufacturing site of this newly formed joint venture is proposed to be constructed at Bellary in Karnataka, India. J2ES’s plant is in the initial stages of equipment planning and is expected to commence operationalisation by 2027. The Proposed Combination enables JSW Steel’s entry into GOES segment, sooner than J2ES’ expected operationalisation. The Proposed Combination will promptly establish an integrated system from manufacturing to sales of GOES in India to meet the growing demand for GOES in the future.

5. It has been submitted that the Target is an indirect wholly-owned subsidiary (WoS) of thyssenkrupp AG's (tkAG), a German Stock corporation (Aktiengesellschaft). tkAG is the ultimate parent company of the thyssenkrupp group (thyssenkrupp). As a diversified industrial group, thyssenkrupp is primarily active in the production and trading of materials, industrial and capital goods, and engineer services and solutions for industrial processes and sustainable technological change.

6. The Target is engaged in the business of manufacturing of GOES, a type of electrical steel, in India at its plant located in Nashik, Maharashtra. The installed capacity of the Target for manufacturing GOES is 50,000 tonnes per annum. The Target has plans for expanding the capacity by adding certain additional capacity, which is dependent on certain factors.

7. It has been submitted that the Electrical steel, also known as electrical grade steel or silicon steel, is a specialized type of steel used primarily in the electrical industry due to its unique magnetic properties. It is crucial for the efficient operation of electrical devices like transformers, motors, and generators. GOES and the Non-Grain Oriented Electrical Steel (NGOES) are two types of Electrical steel. The GOES is a material primarily employed in the core of transformers to enhance their magnetic properties. By carefully incorporating silicon into iron through specific manufacturing techniques, the magnetic and electrical characteristics of iron can be greatly improved, resulting in a robust magnetic core for transformers and other electrical devices. GOES is often regarded as the most energy-efficient type of steel and is extensively employed as the core material in various types of transformers. These components are integral to electrical systems, where energy loss can be substantial. By using GOES, manufacturers can reduce hysteresis and eddy current losses, which leads to improved overall efficiency. Even minor imperfections such as stresses, burrs, edge cambers, or bends in the GOES sheet can escalate core losses and magnetize current substantially. Compared to other steels which are used in general applications (such as mild steel), GOES is highly technical and difficult to produce, and it is used exclusively for transformer cores. It is much costlier and produced by very limited number of steel mills across the world.

8. The NGOES is used in the manufacturing of electrical components, particularly in motors, generators, UPS, and inverters. Unlike GOES, it possesses uniform magnetic properties in all directions and is much cheaper (but costlier than general applications mild steel), making it ideal for applications where directional magnetism is not necessary. It is available in various thicknesses and conforms to industry standards to ensure quality and reliability in electrical applications.

9. It has been submitted that currently India relies significantly on imports to fulfil its demand for GOES. Share of imports in size of the market for GOES in India was more than 80% during calendar years 2021 and 2022, which has reduced to more than 60% during calendar year 2023.

10. It has been submitted that NLMK Group and the Target are the only two GOES manufacturers in India. Further, the primary input material (substrate) for GOES is currently not produced in India. As a result of the Proposed Combination, JSW Steel would acquire the ability to manufacture the substrate in India. This would help establish an integrated domestic production process to manufacture GOES. Further, the Target would not need to import the raw materials for the manufacture of GOES, thereby boosting its efficiency and competitiveness and also enabling it to meet the diverse price and performance demands of Indian customers.

11. It has been submitted that the Target is engaged in the business of manufacturing and sale of GOES in India. Jsquare, J2ES and JSW Steel, currently do not manufacture GOES and do not have any sales of GOES in India. J2ES is set to commence manufacturing and sale of GOES in India from 2027. Further, JFE Steel is engaged in sale of GOES in India, which is imported. Therefore, the activities/planned activities of the parties exhibit horizontal overlap.

12. It has been submitted that the Target is broadly engaged in the Electrical Steel segment in India (by way of manufacturing of GOES). Electrical steel, also known as silicon steel, is a type of special steel that differs from other types of steel (such as carbon steel) as the main additive element in electrical steel is silicon (instead of carbon), which inter alia gives it distinguishable magnetic and other properties which are useful, particularly in end uses such as manufacturing of motors and transformers. It is submitted that the relevant product market may be defined as the market for the sale of GOES, due to the following reasons:

• (i) Technical characteristics: GOES is a sophisticated and high-tech material, which is significantly more energy efficient than other forms of steel. Additionally, GOES has properties such as sharp crystallographic texture and strong electro-magnetic properties (conductivity and electrical resistance), differentiating it from other types of steel including NGOES. Further, the grain structure of GOES aligns in one direction which gives it higher magnetic permeability and lower core losses than other electrical steel types. Whereas, NGOES lack a preferred grain orientation and has higher core losses than GOES which is ideal for applications where manufacturability and cost are more important than efficiency.
• (ii) Intended uses: GOES is an important material generally used in static devices and equipment, in the production of energy-efficient transformers and large, high-performance generators.[^1] NGOES is generally used in rotating devices and equipment, like electric motors, generators, and high frequency converters.
• (iii) Price levels: The price of GOES is significantly higher than other kinds of steel such as NGOES and carbon steel. The cost involved in the manufacture of GOES is different as compared to other categories of steel due to (i) the complexities in the manufacturing process, and (ii) market related factors. Setting up a production line for manufacturing GOES is highly capital-intensive. Production of GOES requires processing and use of technology, which is costly and complex, thereby making the end product more costly as compared to NGOES. For instance, during the annealing process, the rolled steel is annealed at a very high temperature, requiring costly infrastructure. In addition to high production costs, other factors such as (a) quality parameters/thickness of GOES products, (b) supply chain disruptions, (c) increased demand with restricted production volume, (d) fluctuations in the price of raw materials, and (e) increased import costs further impact the production costs and the end price.

13. In this regard, it is observed that the combined market share of the Target and JFE Steel for GOES for financial year 2023-24 in terms of value and volume are 20-25% and 15-20%, respectively with incremental market share being 0-5%. The market is characterized by the presence of other players such as Nippon Steel and NLMK Group that have similar or greater market share than the combined market share of the Target and JFE Steel. Further, Baowu also has a market share of 10-15%. The notifying parties have also submitted that JFE Steel will continue to operate in the market as is and will continue to separately supply GOES in India even post the Proposed Combination. It has been submitted that the Proposed Combination will have no impact on the expected operationalisation of J2ES.

14. JSW Group is engaged in manufacturing iron and steel. With regard to vertical interface between JSW Steel and the Target, it has been submitted that the primary raw material for manufacturing GOES is the substrate. Manufacturing the substrate for GOES requires the use of high-purity materials, specialised, complex and advanced technology (which is currently patented) and infrastructure, that is distinct from the raw material required for other kinds of steel and/or electrical steel. Thus, the availability of steel, by itself, cannot lead to the development of the primary raw material required to manufacture GOES. While JSW Steel is engaged in the manufacture of iron and steel, the semi-finished or finished steel products manufactured by JSW Steel cannot be used as a direct input by the Target for manufacturing GOES. Any finished or semi-finished steel product has to undergo multiple stages of refinement and processing (in terms of technology as well as steps), a distinct profile of chemical composition, to obtain the substrate, which is the primary input for manufacturing GOES. At present, JSW Steel does not, and cannot (due to absence of required technology and infrastructure), produce the primary input required to manufacture GOES. Further, the Target, by itself, does not have the capability or infrastructure to process semi-finished or finished steel products to manufacture the substrate and therefore, does not procure semifinished or finished steel from any steel manufacturer. Therefore, as of date, there is no vertical or complementary linkage between JSW Steel and the Target.

15. With regard to JSW Steel acquiring the capability to produce the substrate, it has been submitted that any potential or hypothetical vertical linkages that arise in the future on account of JSW Steel acquiring the capability to produce the substrate, will lead to pro-competitive vertical integration, and does not lead to any change in the competitive conditions currently prevalent in the market, except that they enable domestic production of the substrate. It has been further submitted that without prejudice to the submissions made above, to the extent semi-finished or finished steel is seen as an input in the production chain for GOES, the linkage does not raise any anti-competitive concerns.

16. With regard to vertical interface between JSW Steel and the Target, because of JSW Steel acquiring capability to produce the substrate, it is observed that the Target’s capacity as a percentage of the finished steel produced by JSW Steel for the financial year 2023-24 is less than 1% of finished steel produced by JSW Steel. Therefore, foreclosure concerns are not likely to arise.

17. Considering the material on record, including the details provided in the notice and the assessment of the Proposed Combination based on the factors stated in Section 20(4) of the Act, the Commission is of the opinion that the Proposed Combination is not likely to have appreciable adverse effect on competition in India. Therefore, the Commission approves the Proposed Combination under Section 31(1) of the Act.

18. This order may stand revoked if, at any time, the information provided by Jsquare is found to be incorrect.

19. The information provided by Jsquare shall be treated as confidential in terms of and subject to provisions of Section 57 of the Act.

20. The Secretary is directed to communicate this order to Jsquare.