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Business News/ Companies / Is Posco really planning to quit Odisha over land problems?
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Is Posco really planning to quit Odisha over land problems?

If Posco does scrap its plant in Odisha, it will be for several reasons, and not just because it hasn't managed to get all the land that it was promised

Posco announced a drastic restructuring of its business—it has 48 subsidiaries—and said it would cut the number of its domestic-market businesses by half and jettison 30% of its overseas operations. Photo: AP Premium
Posco announced a drastic restructuring of its business—it has 48 subsidiaries—and said it would cut the number of its domestic-market businesses by half and jettison 30% of its overseas operations. Photo: AP

New Delhi: One piece of news making waves this morning is that South Korean steel giant Posco may scrap plans for its $12 billion steel plant in Odisha. Reason: the land acquisition process is too onerous and farmer protests have stalled the project for a decade.

To be fair to the company, 10 years is a long time, especially with not much to show on the ground. The company’s 12 million tonne (mt) integrated steel plant was announced in June 2005 with much fanfare as it was India’s largest foreign direct investment at the time, and the hope was that it would attract more such investments. However, since then the company has struggled with social, political, environmental and regulatory hurdles at every step of the way. In the process it reduced its plans for the plant to 8 mt, which would need half the 4,004 acres promised earlier. And during the struggle of these 10 long years, the company has not once said that it’s ready to quit this project. Until yesterday.

In an interview to Bloomberg, chief executive officer Kwon Oh Joon said the project in Odisha has been “tentatively postponed." Until Indian Prime Minister Narendra Modi “offers better deals, we won’t resume," Bloomberg reported.

So what changed all of a sudden?

Poor results. The company this week reported a 76% drop in consolidated net profit in the April-June period on year to 11,740 crore won ($104 million) due to a global slump and losses among its subsidiaries. Operating profit shrank 18.2% on year to 686.3 billion won and sales fell 9.1% to 15.2 trillion won. Posco announced a drastic restructuring of its business—it has 48 subsidiaries—and said it would cut the number of its domestic-market businesses by half and jettison 30% of its overseas operations.

So before the pro land bill lobby jumps all over this development to push through its demands on the 2013 land acquisition Act, it needs to keep in mind that Posco has been struggling with plunging steel prices and tough competition from Chinese steel makers.

According to data from CARE Ratings, while global steel production capacity stands at 2.15 billion tonnes, the market has been over supplied for the past 10 years and steel companies are producing roughly 77% of that capacity.

Land acquisition travails and plunging demand and prices apart, it will also become more expensive for Posco to produce steel in India since a new mining law was passed in March. Under that Posco is required to bid for a mining lease in an auction, along with everyone else. Originally, the Odisha government had promised to help the company obtain the lease for free.

It should also be kept in mind that this isn’t the first time that Posco has made an exit in the face of poor revenues—and blamed it on tough working conditions. In 2013 it announced that it was dropping plans for a $5.3 billion project to build a 6-million tonne-a-year plant in Karnataka. The ostensible problem then, too, was delays in land acquisition, amongst other issues. The reality—its net income for 2013 Q1 was down by 54% from a year earlier and overall demand had dropped because of a glut in the steel industry. Sound familiar?

So yes, if Posco does scrap its plant in Odisha, it will be for several reasons, and not just because it hasn’t managed to get all the land that it was promised.

With inputs from Ruchira Singh

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Published: 17 Jul 2015, 01:24 PM IST
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