4 January 2007

India infrastructure hampers steel manufacturing

Steelmakers are betting that fast-growing India, with its low production costs and rich raw-material reserves, will be the next hot spot for making and selling their products.

Dow Jones Newswires reported many in the business, however, are discovering that poor infrastructure and bureaucracy stand in the way of significant expansion.

South Korean steelmaker Posco has been unable to reach parts of the construction site of a planned $12 billion steel plant in the Indian state of Orissa because locals who are opposed to development by outsiders had blocked entrances.

Meanwhile, Rotterdam-based steel giant Mittal Steel Co., controlled by the family of India-born Lakshmi Mittal, is reconsidering plans to build a plant in the state of Jharkand because of quibbling over iron-ore leases.

Last month, it unveiled an agreement to construct a $9 billion project instead in Orissa. The situation has set back Mittal’s plans to start steel production in India.

The troubles underscore India’s fundamental difference from China, the growth engine that has helped the steel industry reach a third year of strong profits after a period of red ink and overcapacity.

The world’s steelmakers do not want to miss the next big surge from a massive developing country, but they are discovering India can be a tougher place for businesses than centralized, development-minded China.

India consumed 41 million metric tons of steel last year, compared with China’s 350 million metric tons, according to the International Iron and Steel Institute in Brussels.

However, India has huge reserves of iron ore, a key steelmaking ingredient, and the nation’s half-dozen major domestic steel companies are expanding production.

Infrastructure is another issue. Ispat Industries, led by Lakshmi Mittal’s younger brothers Primod Mittal and Vinod Mittal, said it costs $50 to ship a metric ton of steel by land from Mumbai to New Delhi, which is roughly the same to ship it from Mumbai to New York or Europe.

Meanwhile, Mittal Steel’s move to buy Mexico’s Sicartsa, making it the largest steel producer in Mexico, signals a company strategy to dominate each market it serves and snap up precious raw materials.

The Wall Street Journal reported Mittal steel, which is in the process of finalizing its purchase of Luxembourg’s Arcelor SA, agreed to pay $900 million in cash for Sicartsa, which can produce up to 2.7 million tons of steel a year from its plants in Mexico and Texas, from Grupo Villacero.

Sicartsa has 176 million tons of iron-ore reserves, enough to keep its mills operating for 30 years at current rates, it said. Mittal will assume $540 million in debt. This is Mittal steel’s first acquisition since the summer takeover battle for Arcelor, which had been its main competitor.

The deal represents an incremental addition to the company’s existing capacity, which stands at about 143 million tons a year. Mexico made about 17.8 million tons of steel in 2005.

The operations Mittal is buying, combined with its existing operations in Mexico, will have about 6.7 million tons of steelmaking capacity, close to half of the production capabilities in Mexico.