Mumbai: ArcelorMittal Netherlands BV, through which Lakshmi Mittal controls the world’s largest steel maker ArcelorMittal, and which is buying a 29.4% stake in Uttam Galva Steels Ltd (UGSL), will also build a 1-million-tonne (mt) steel plant at Satarda in Maharashtra through a joint venture (JV) with the Indian company, according to two bankers familiar with the development.

India plans: ArcelorMittal chairman Lakshmi Mittal. PTI

ArcelorMittal Netherlands, which in October bought a 5.6% stake from the Miglani family that has promoted UGSL, has made an open offer to raise its stake to 35% at Rs120 a share. The open offer closed on Thursday.

A spokesperson for ArcelorMittal and UGSL’s managing director Ankit Miglani described news of the JV steel plant as “market speculation".

UGSL has approached banks with a proposal to set up the 1mt plant at a cost of Rs3,600 crore, and sought a loan of Rs2,100 crore, according to the bankers familiar with the development. State Bank of India, the country’s largest bank by assets, is the lead syndicator of loans to the project along with Punjab National Bank, Canara Bank and IDBI Bank Ltd.

“We have sanctioned nearly Rs2,100 crore as loans to the first phase of the project and remaining...will be contribution from both promoters as equity," said one of the two bankers, who did not want to be identified. In the second phase of the project, the JV firm will seek to add 1mt of additional capacity.

UGSL owns nearly 2,100 acres in Satarda and has invested money in building roads and railway lines to ferry coal and iron ore to the proposed plant, said a third person who is aware of the proposal, but who didn’t want to be identified.

Interestingly, the Miglanis have wanted to build a plant in Satarda for some time. UGSL planned to build a steel plant in Satarda and had mandated MN Dastur and Co. Pvt. Ltd, a business and technology consultant, in 2007 to conduct a feasibility study for a 1.2 mt integrated steel plant in the area. Shree Uttam Galva Steel and Power Ltd was to build the project.

UGSL will contribute land and take care of its development as its share of equity for the project, and Mittal will put in the hard cash, the second person added.

Satarda is well located; a plant based there can access iron ore from mines of Sesa Goa Ltd, now owned by Vedanta Resources Plc. The site is also close to the Goa port to which coal can be shipped, said the second banker, who has reviewed UGSL’s proposal.

The first banker said that once all funds for the project are tied up, it will be hived off into a separate company with both partners having an equal stake. The day-to-day operations of UGSL will be managed by the Miglanis, with strategic inputs from ArcelorMittal; the new plant will be managed by ArcelorMittal.

A JV such as the one with UGSL, which makes galvanized and cold rolled steel, is a sensible strategy for ArcelorMittal because it caters to demand from makers of automobiles and home appliances, said Peter Sish, managing director of London-based MEPS (International) Ltd, a global steel consulting and research firm.

Demand for galvanized and cold rolled steel will come from these sectors for the next 15-20 years, he said in a phone interview from London.

Navin Vohra, partner at audit and consulting firm Ernst and Young, said the deal would give Mittal an easy entry into the Indian market.

“Mittal has been trying to start projects in Jharkhand, Chhattisgarh and Orissa for the last two to three years, but the projects still remain on paper due to delays in land acquisition and the allocation of mines," said Paresh Jain, an analyst at Mumbai-based Angel Broking Ltd. Jain added that similar issues plague other steel projects as well.

ArcelorMittal has been in talks with several state governments in India to build steel plants, but these discussions have primarily resulted in agreements that remain on paper.

On Thursday, PTI reported that Mittal had proposed building an integrated steel plant at a cost of Rs30,000 crore in Karnataka during a meeting with chief minister B.S. Yeddyurappa. Mittal also told reporters in Delhi that his company could build a plant in Chhattisgarh and that he is “not satisfied" with the progress in Jharkhand and Orissa where ArcelorMittal plans to invest $20-25 billion (Rs91,800 crore-Rs1.15 trillion) in two plants that will together produce 24 mt of steel a year.

Analysts say Mittal has no option, but to pursue projects in India.

The growth in the country’s demand for steel cannot be satisfied by imports and the supply of steel has to be produced in the domestic market, said Sish.

“In 2010, the Indian market will grow a minimum of 6-7% compared to negligible or even negative growth in markets like the US and Europe. Only China with 10% (growth) is better, so naturally India is important," said an analyst at a Mumbai brokerage, who did not want to be identified.

On Thursday, Korea’s Posco, the world’s fourth largest steel maker, said it will set up a 6 mt a year steel plant in south India, in addition to its planned project in Orissa.

Bloomberg, Reuters and PTI also contributed to this story.