International Tie ups – An interesting case

MMTC keeps Exports to S Korea intact through Novel Tie ups: MMTC Ltd. has managed to salvage its iron ore exports to currency crisis hit South Korea through a $6 million revolving line of credit from Indian Overseas Bank (IOB) in favor of Pohang Iron & Steel Company (Posco), the second largest steel producer in the world. Similar facility from an international bank has also been worked out while MMTC is negotiating a credit arrangement from a Japanese trading company in a bid to assist Posco.

While Posco, which is all set to overtake global leader Nippon in a few years, the financing arrangements would also ensure that MMTC’s exports to South Korea, valued at more $30 million, is not hit. The first shipment under the revolving line of credit extended by IOB was cleared on April 1, 1998. Another shipment is expected left on April 20. The two shipments together account for 2.80 lakh tons, valued at around $6 million. Since IOB has provided a revolving credit facility valid for 90 days, Posco could buy iron ore worth at least $18 million from MMTC If three cycles are completed within a year.

MMTC has a five-year agreement with South Korea to sell 2.3 million tons of iron ore per annum. The public sector trading company sold from iron ore worth $32 million to South Korea in 1997-98 despite the currency crisis which led to steep devaluation of the Won, affecting Posco, which is the sole buyer from that country. Since Posco is a strong company, MMTC was advised to support it at the time of difficulty. Following the Asian currency crisis, the South Korean major had expressed its inability to pay on time for the iron ore and sought supplies from MMTC without an L/C (Letter of credit).

When MMTC approached Export Credit Guarantee Corporation (ECGC) for insurance cover, the plea was turned down. After persuasion from the Government, ECGC agreed it provide cover to shipment destined for South Korea whose rating has gone down after devaluation of the Won. However, ECGC is seeking a 3.86 per cent premium and the insurance payable would be only 60 per cent of the value of shipment. The payment would be made only after a period of nine months. In other cases, the premium is lower while the payment works out to 90 per cent of the shipment value and ECGC pays the amount after three to four months.

Since the ECGC option was not considered viable, MMTC worked out a credit arrangement with an international bank based in the US. After the shipments were made, the bank made the payments to MMTC and recovered it from Posco after 90 days. Now, MMTC is having talks with a Japanese trading major for a different sort of arrangement following successful pact clinched by a private exporter. Trade sources said S Salgaonkar, a Goa-based exporter, has struck a deal with Itochu of Japan for supplies to Posco. According to this arrangement, Itochu would pay the exporter once the shipments are cleared. Payments from the South Korean company will be recollected after 90 days or Itochu would buy steel against the credit.

It is understood that MMTC also had talks with another Japanese trading company and had even considered the option of buying steel from Posco through this arrangement. However, the Steel ministry has not cleared the proposal since domestic producers like Steel Authority of India (SAIL) are already facing poor off take. Therefore the current arrangements would be to ensure that MMTC gets paid on delivery of iron ore shipments while the Japanese trading company squares off the deal with Posco later through cash payment or steel supplies.