Sluggish market may delay Posco decision on investing in India steel plant

Finished steel consumption in the country rose 6.7% increase in the June quarter
A weak steel market could delay a Posco decision on investing in a steel plant in India.

The Korean major had renewed its interest in investing in an upstream project in the sector, after India asked if it would consider a joint investment with state-owned Rashtriya Ispat Nigam. Its past experience in India had made it cautious; now, demand worries in the steel market is another reason to put off a decision in the near term.

“The Indian steel market is very weak and is most likely to face oversupply in the near future. So, we are not sure whether we will be able to make money if we invest in an upstream project. This is not the right time,” said G H Bang, managing director of all Posco units in India.

He said that additional annual capacity of 5 million tonnes (mt) by JSW Steel was being added and that Tata Steel was constructing for the second phase of expansion at its Kalinganagar (Odisha) complex. 

“We need to study the demand-supply scenario before we decide to invest,” said Bang. Posco has looked at locations for a steel plant but has yet to start a feasibility study.

India will be adding 20 mt of annual capacity in the next five years. Most of this would be via expansion of existing units, which has a cost advantage over a new project. Typically, the cost involved in such a new plant is about $1 billion for a million tonnes.

Posco had signed a memorandum of understanding in 2005 to set up a 12-mt plant near Paradip in Odisha with an investment of Rs 52,000 crore in what was pegged to be India’s largest foreign direct investment (FDI). The project did not take off, largely due to a struggle against land acquisition, as also uncertainty over captive iron ore mines. Posco has invested Rs 8,000 crore in a downstream unit in Maharashtra. 

“An upstream project requires huge investment and so we have to be very cautious,” said Bang. Posco needs to be reassured that investment would pay off. It is likely to wait till the market improves. 

Bang said profitability of major steel companies had taken a beating. “Every month, the operating profit of companies is reducing and that's not just in India.” 

The recent measures announced by the Union finance minister to boost the economy would not suffice to boost steel demand, he added. “The automobile sector is under a lot of pressure. The goods and services tax (GST) rate at 28 per cent is too high. It is not possible for a common man to purchase a car.” 

Automobile makers have been asking that the GST rate be cut to 18 per cent to boost demand. Vehicle sales have been in a slow lane for a while, a major drag on steel consumption. That apart, almost all user industries have been sluggish. 

High inventory, lower consumption, and prices had largely been the underlying theme in the latest quarterly numbers reported by steel companies. The ongoing quarter could be worse, with the full impact of price reductions in May and June taking effect, say analysts.

Finished steel consumption in the country rose 6.7 per cent increase in the June quarter over the same period a year before but dropped three per cent from the earlier quarter. Closing stock was 14.8 mt at the end of the June quarter, compared to 12.8 mt at the end of the March quarter and 10.2 mt in the year-ago period.

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