SAIL and POSCO Form Joint Venture to Build $3.36 Billion Steel Plant in Jharkhand

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading Indian public sector steel enterprise Steel Authority of India Limited (BSE:500113) (SAIL) (New Delhi) and integrated steel company POSCO (NYSE:PKX) (Pohang, South Korea) have signed a joint venture agreement to construct a $3.36 billion, 1.5 million-ton-per-year steel mill at Bokaro in Jharkhand.

The steel project will use POSCO's FINEX technology for steel production. A.S. Mathur, executive director of SAIL's corporate arm, Research and Development of Iron and Steel, indicated that the proposal has been approved by a subcommittee. Feasibility studies have been completed, and production is likely to begin in 2012-13. SAIL operates a 4.5 million-ton-per-year steel mill at the site. The company announced plans to spend $152.7 billion on augmentation and modernization programs. As part of the program, SAIL has proposed to expand the capacity of its Bokaro facility to 7.5 million tons per year.

The FINEX technology is emerging as a popular technology for steel manufacturing, as it reduces the cost of production in comparison to traditional methods. The technology's cost-effectiveness is achieved by eliminating the process of converting coal to coke. The process uses fines of iron ore and non-coking coal to produce iron. The iron is then used to manufacture specialty and high-grade steel. The raw material is also easily available. The environmentally friendly FINEX plant requires only 60% of the space occupied by a conventional steel facility. Conventional processes use coke, which is converted from coal and iron lumps in a blast furnace to produce iron. The cost of converting coke from coal substantially increases the cost of steel production.

SAIL ranks among India's top 10 public sector enterprises. The company, with a turnover of about $109.3 billion, operates three specialty steel plants, five integrated steel production facilities, and nine joint ventures. In 2007, SAIL and POSCO signed an agreement for strategic cooperation in marketing, commercial areas, manpower exchange, technology training and procurement of raw materials. The SAIL-POSCO joint venture at Bokaro is part of this agreement. In collaboration with SAIL, POSCO has also proposed to build a 5 million-ton-per-year steel plant in Jharkhand. Earlier, POSCO had announced the decision to construct a $12 billion integrated steel project at Jagatsinhpur in Orissa. However, land acquisition issues, and delays in regulatory approvals and mining leases forced POSCO to look at other opportunities. POSCO is also exploring the possibilities of setting up integrated steel plants in Karnataka, West Bengal and Maharashtra. There are media reports that POSCO is also holding discussions with SAIL to set up a 1.5 million-ton-per-year steel plant at Kulti in West Bengal. SAIL's existing Kulti facility produces bronze sleeper pads, castings and other steel products.

Recently, SAIL announced plans to divest 10% of the government's stake and also raise fresh equity of 10% to fund its expansion program. The divestment procedure, which will be completed this fiscal year, is likely to raise $3.59 billion to $3.81 billion. After the divestment, the government's stake in SAIL will decline to 69% from 85.82%

In a related development, India's Steel Secretary Atul Trivedi indicated that by 2011-12, India's steel manufacturing capability would reach 115 million tons per year, compared to a target of 124 million tons per year. The gap has been attributed to delays in projects developed by Essar Steel Limited (Mumbai) and Tata Steel Limited (BSE:500470) (Mumbai) in Orissa. Both companies have proposed 12-million-ton-per-year projects in two phases. Land acquisition issues and regulatory approval hurdles have delayed these projects. Projects proposed by global steel giant ArcelorMittal (NYSE:MT) (Luxembourg) and POSCO in Orissa are also facing similar problems.

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