MUMBAI: South Korean steel major Posco has sounded out unlisted Essar Steel for an alliance to build the planned $12 billion (12 million tonnes) steel plant in Orissa, which has run into repeated hurdles since the world’s fifth largest steel maker signed the construction agreement with the state government in 2005.
“They (Posco) have approached us (Essar Steel) through a third party to revive the Orissa steel plant,” a person with direct knowledge of the development, but doesn’t want to identified, told FE. “We are yet to respond to Posco’s proposal,” the person added.
Posco did not respond to a questionnaire sent by FE.
Posco’s move coincides with the suspension of the environmental clearance for the project by the National Green Tribunal on March 30. Analysts also see it as a sign of realisation on the part of the Korean company that the joint venture route, preferred by Japanese steel makers for their Indian plants, could be a more pragmatic approach in the Indian context.
Posco’s is by far the largest FDI proposal for India, but protests from local people over land acquisition, issues of environmental clearances and sundry regulatory probes into alleged illegalities at a related mining concession have delayed the project.
Essar Steel owned by billionaire brothers Shashi and younger Ravi Ruia, owns plants with a combined capacity of 10 million tonne inIndiaand has another 5 million tonnes capacity overseas.
Many multinational steel companies including the largest London-based ArcelorMittal owned by India born billionaire Lakshmi Mittal and Posco had been trying to build steel plants in India for many years but are caught in the regulatory quagmire. But Japanese steel makers have chosen to partner with Indian steel makers for their India entry strategy rather than building on its own.
In 2010, Japan’s JFE Steel, the world’s seventh largest steel maker by capacity, picked up a 14.9% stake in JSW Steel in 2010 for R4,800 crore and Nippon Steel announced a joint venture with Tata Steel to build a six million tonne a year. Last week, Kobe Steel, which has been talking to India’s largest steel maker government owned Steel Authority of India or SAIL, purchased a 3.81% stake in pipe-maker Man Industries in March.
“Japanese steel makers have been smart in going in for joint ventures or buying into Indian companies as it is the quickest way to enter India,” a former ArcelorMittal executive said.
“But, if you notice, most of the partnerships with Japanese companies have been for flat steel products because they already have a relationship with Japanese car makers present in India.”
Posco is also building smaller plants to make specialised grades of steel. It has plans to build one special grade steel in Maharashtra and another inGujarateven as its proposal to build the large plant is stuck for seven years after it signed a memorandum of understanding in 2005.
The investment was expected to be the biggest foreign direct investment inIndia.
Posco got forest clearance for the project in 2009. However, after strong opposition from the local residents and civil society groups, the environment ministry suspended the forest clearance and ordered an enquiry led by former environment secretary Meena Gupta.
After the enquiry, Posco got the forest clearance for the project again in 2011 and the process of land acquisition began, which was expected to be completed in 2012. But on March 30, 2012, the National Green Tribunal suspended the forest clearance, once again leaving the project in limbo.
The South Korean steel-maker tried a different strategy in 2010, when it started talks with state-owned steel maker Steel Authority of India to start a joint venture. But the talks did not make much headway as the two were unable to agree on a shareholding structure for the joint venture. The company, however, has been granted clearance for building a cold rolled steel plant in Maharashtra with a 1.8 million tonnes per annum.
The rush to build steel plants in India is of two reasons. One, a slowing economy at home hitting revenues and unutilised plants; two, future rising demand in India as it builds more bridges, power plants, ports and factories. India plans to spend roughly $1 trillion to build roads, ports, power plants in the next five years.
“India is one of the only thriving steel consuming markets in the world,” the same executive said. “Demand is growing more or less at twice the pace as compared to the rest of the world.”
“Rising demand from sectors like agriculture, consumer durables, capital goods, oil and gas and water are the key growth driver behind this upward spiraling steel demand,” DS Rawat, secretary general, The Associated Chambers of Commerce and industry of India, a trade body said earlier to the media.