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India proposes equal JV between SAIL and Posco

By : Guest on 03 November 2011 E-mail Print Report Abuse

India has proposed an equal joint venture between state-owned Steel Authority of India Ltd (SAIL) and South Korea’s Posco for a steel plant in the hope of breaking their deadlocked negotiations.


“Our talks have been on and only a few points remain to be agreed to,” steel minister Beni Prasad Verma told reporters on the sidelines of a press conference. “We have proposed that stakeholding can be 50:50.”


Verma, scheduled to leave for South Korea on Friday, said he hopes to sign a joint venture (JV) agreement on 8 November in that country if Posco accepts the arrangement. “If they (Posco) do not agree, I will cancel my visit,” he said.


SAIL and Posco proposed to build a 3 million tonne (mt) steel plant in SAIL’s complex at Bokaro in Jharkhand last year, furthering a 2007 memorandum of understanding for greater cooperation in steelmaking. But Posco wants a majority stake being the technology leader.


A senior Posco official in India and a SAIL spokesman declined to comment.


The proposed plant, although small, could mean a win-win for both the companies and translate into higher revenues. Producing steel in India will give Posco access to an attractive market where demand for steel is rising fast as infrastructure needs grow.


For SAIL, a joint venture with Posco will give it access to a new technology that will save costs, be more environmentally friendly and help it meet some of the demand for cutting-edge steel products such as high tensile steel demanded by auto companies.


Both companies are looking to expand in India—the world’s second fastest growing major economy, but also one of the most difficult regions for setting up new mills because of regulatory, environmental and social hurdles.


An analyst lauded the government’s move. “This is at least some move forward,” said Rakesh Arora, managing director and head of research, India, at Macquarie Capital Securities (India) Pvt. Ltd. “For Posco, it might not be a very lucrative deal but it will get an entry point in India.”


Posco’s flagship plan for India, a 12 mt steel plant in mineral-rich Orissa, has not got off the ground owing to various regulatory, environmental and social hurdles.


The Orissa project, potentially India’s largest foreign direct investment at $12 billion, is a test case for how the country can handle its commitment to a foreign company while meeting the expectations of the people it would displace to set up the plant.


Compared with that challenge, a joint venture with SAIL is seen as easier to execute as land for the project is already in SAIL’s control.


An equal partnership, though, could pose challenges for two culturally different companies when they have to operate together.


Macquarie’s Arora said a 50:50 deal may be fair for both. “SAIL is bringing in land and raw material and Posco is bringing in technology,” he said. “There is also a discount on the iron ore in return for the technology.”


Verma said the Indian government has agreed to give the proposed joint venture iron ore at a 10% discount, which Posco has agreed to, as against the 20% discount that was sought.


Arora said the shares of the two companies will react only mildly to a formalization of the deal owing to the small size of the steel project.


On the Bombay Stock Exchange, shares of SAIL gained 1.6%, ending trading on Wednesday at Rs112.65, on a day when the benchmark Sensex remained almost flat at 17,464.85 points. Posco’s shares dropped 0.92% on the Korea Stock Exchange.

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