Posco Said to Consider Lower Capacity at Planned India Plant

Jan. 27 (Bloomberg) — Posco may build a smaller steel mill than planned in India after failing to secure enough land for what would be the biggest overseas investment in the south Asian nation, two people familiar with the plans said.

The world’s third-biggest steelmaker is looking to reduce the amount of land for the mill and iron ore mine project, said the people who declined to be identified because they aren’t authorized to speak publicly. The plant size may be cut to 8 million metric tons from 12 million, one of the people said.

Taking less land may help Posco clear the way to begin construction in the eastern state of Odisha after more than six years of delay as farmers refused to vacate the state-owned land they have occupied for generations. Pohang, South Korea-based Posco has kept pushing for the project through the delays, attracted by India’s average 10 percent growth in annual steel consumption over the past six years.

“The land issue is getting worse by the day and the state and central governments have no idea how to fix it,” said Niraj Shah, an analyst with Fortune Equity Brokers India in Mumbai. “Such news will certainly send a wrong signal to overseas investors and malign India’s image as an investment destination.”

Posco gained 1.7 percent to close at 423,500 won in Seoul trading, compared with a 0.4 percent increase in the local benchmark Kospi index. The stock has declined 9.5 percent in the past year, underperforming a 7 percent drop in the Kospi.

Less Land

Posco may need only 2,800 acres, about 25 percent less than the 3,719 acres currently being sought, to build a factory of lesser capacity, the person said. The state, which has acquired more than 2,100 acres of land, halted a purchase in the Jagatsinghpur district in December after protests by the local population.

“The state is doing its best to acquire land for the Posco project,” Raghunath Mohanty, Odisha’s industries minister, said in a phone interview. “It is not feasible to set a deadline but I hope the process would soon get over.”

Posco isn’t considering lowering the planned capacity at the Indian plant, Seoul-based spokesman Choi Doo Jin said today by phone. Vikas Sharan, a spokesman at Posco India, declined to comment.

Iron Ore

Posco has also agreed to remove a clause in its original approval that allowed it to export 30 percent of the iron ore produced at the mine, one of the people said. The clause in the mining agreement with the Odisha state government was being renegotiated last year after it expired. Odisha was known as Orissa until its name changed in November.

“We’ve tentatively agreed with the government to remove the clause that allowed us to export part of the iron ore produced at the mine and instead to allow us to sell domestically in India,” Choi said.

The delays since 2005 mean Posco has already missed out on a 60 percent jump in India’s steel consumption since then. Construction costs are also unlikely to come down from the 520 billion rupees ($10 billion) forecast in 2005 as costs have surged, one person said.

“Land availability is the biggest challenge in setting up new mills in India,” C.S. Verma, chairman of Steel Authority of India Ltd., the nation’s second-largest producer, said today at an industry conference in New Delhi. “Future mills in India must be more compact that will need less land.”

Steel Demand

India’s steel ministry in November estimated the country’s demand for steel may grow at 9 percent per annum over the next five years. Posco and rivals including ArcelorMittal, the world’s top producer, are looking to build steel factories in India on expectations the steel consumption there will outpace global demand.

ArcelorMittal has $20 billion of planned projects in the states of Odisha and Jharkhand and has also waited more than six years because of delays in securing approvals and land. The two companies have also planned investments in a proposed factory in the southern state of Karnataka.

ArcelorMittal may secure all the land for its $6.3 billion plant in the southern state of Karnataka by March, state Industries Commissioner Maheshwar Rao said on Sept. 20.

–With assistance from Sungwoo Park in Seoul. Editors: Indranil Ghosh, Rebecca Keenan

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net.

[Source – Businessweek]

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