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By Stuart Burns

POSCO (NYSE:PKX) and ArcelorMittal’s (NYSE:MT) decisions, announced within days of each other, to withdraw from major steel mill projects in India, shouldn’t be seen as a lack of faith in the Indian steel market.

Both companies have been running multiple potential projects simultaneously and only in the heady days of 2007 would anyone have really believed they were all going to reach production.

The regulatory and environmental landscape in India has long been fraught with so many hurdles, delays and widespread opposition to greenfield development that there was little or no chance they would all see the light of day. So ArcelorMittal’s decision to cancel a new 12-million-ton steel plant at Keonjhar in Odisha and South Korean POSCO’s decision to withdraw from a proposed 6-million-ton steel plant at Halligudi in the Gadag district of Karnataka may in time be seen as positive, as it will encourage them to focus on bringing their more promising projects to fruition sooner.

ArcelorMittal has two other projects in Jarkhand and Karnataka, and POSCO has 1,600 hectares of land in Orissa for which it has slowly been acquiring the necessary approvals to proceed. Although POSCO has said construction could start in six to 12 months, most observers think it will be a lot longer.

There are even questions about POSCO’s ability to finance both projects if they had come to fruition: “I don’t think Posco has the room financially to invest in both projects at the same time, when the company’s earnings have halved from its past peak,” Choi Moon-sun, an analyst at Korea Investment & Securities is quoted in the FT as saying.

Hong Jin-joo, at Shinhan Investment, says the outlook for even the remaining Orissa project remains uncertain. “It will take about a year before Posco starts exploring the iron ore mine in Orissa. And the project’s commercial sense is weakening as India is expected to become a net steel exporter soon,” she said.

No More Steel Capacity

In the short term, the case for more steel capacity is certainly weakening.

India’s economic growth fell to a decade-low of 5% during the last financial year, with industrial expansion slowing even more sharply. Construction projects are down, while struggling industries such as autos have also been consuming much less steel, a separate FT article notes. But in the long run, Asia’s third-largest steel producer still holds out considerable potential.

India is especially unusual for its low per-capita level of steel use, the FT notes, saying it is still barely a 10th of that consumed in China. “India is going to be a big opportunity for global steel players for many years to come,” Anjani Agrawal, head of mining at Ernst & Young in India, said. “Demand will grow very strongly in the long run, even if it isn’t at the moment. I don’t think anyone disputes this.”

Taken in the round, the two firms’ decisions to focus on the more promising projects make sound financial and strategic sense. Although the Indian press will be wringing its hands at the “loss of FDI”…the reality is, both firms were going to drop one or more projects at some stage, making this recent decision overdue.

Source: ArcelorMittal, POSCO's Steel Project Cancellation No Loss to India