In 2006, as he announced ArcelorMittal’s plans to invest Rs 40,000 crore to set up a plant in Odisha, steel magnate L.N. Mittal highlighted two things.
He said the Indian economy was demonstrating excellent growth because of which steel consumption would increase considerably, and that Odisha was the ideal location for such a greenfield venture.
Six years later, Mittal was proved wrong. After waiting to get 8,000 acres of land for the plant in Keonjhar, Odisha, Arcelor Mittal last week decided to pull out of the project. The move was not unexpected. The steel baron had been warning of a possible pullout since 2009, blaming the state Government for going slow on clearances.
ArcelorMittal is not the only one. Last week, two other foreign companies, Posco and Monnet Ispat, said they were quitting projects worth billions of dollars in Karnataka and Jharkhand, respectively.
The timing of these announcements has irked Government officials.
The pullouts came just days after a high-level committee on manufacturing led by the Prime Minister set an output target of 300 million tonnes for the sector and proposed a model to deal with land issues. It also comes at a time when the Government is relaxing the foreign direct investment regime. “We couldn’t acquire the requisite land for the steel plant, nor could we ensure captive iron ore security, which was a necessary requirement for the project. Therefore, taking into account the current economic climate, we concluded that this project was no longer viable,” said a spokesperson for Arcelor Mittal, explaining the company’s decision.
Odisha Government officials say the company was never really interested in building a steel plant.
Weak market
Apart from delays in getting Government clearances, the weakening economy seems to have been a factor in the companies’ decisions. Korean company Posco said there are a number of other reasons behind it closing the Karnataka project. “The current recession in the global steel market, political instability in the State, and mining scams have added to the standstill of the project,” said a company source.
Outlook tough
Currently, overall steel production (including value-added products) in the country is at around 77.6 million tonnes while consumption is around 73.3 million tonnes.
A report on steel by Bank of America Merrill Lynch Research says that the outlook for the steel sector is bleak. It said that demand was flat in the current year (April-May period) and that it was weak across most segments, including the auto, construction and infrastructure sectors.
“We believe a meaningful recovery in FY14 is unlikely as a weaker rupee would delay rate cuts. Utilisations are at 10-year lows (83 per cent in 2012-13; 81 per cent in May, 2013) as output growth has lagged capacity additions,” the report stated. It pointed out that around 11 million tonnes in additional capacity was due to be commissioned or completed this financial year.
States to blame?
Government officials say they are worried about the exits but cannot do much as State Governments have to deal with any issues that result in delays. “Remember, MoUs for these projects were signed between 2008-2010, when prices were rising and there was a very, very bright future for the steel industry,” an official said.
Market watchers pin the blame for the exits on the State Governments . They say that although the current market is weak, most big investors have a 10-15-year outlook. Anjani Agarwal, Partner, Metals and Mining, EY (formerly Ernest & Young), said: “Demand will go up and in the mid to long term. India will need to add capacity to meet demand.”
The issue, therefore, boils down to the issue of land acquisition. Recently, FICCI President Naina Lal Kidwai had said: “It’s getting too messy (to secure land for large manufacturing projects). It’s clearly a pity. Projects of this size (Posco and Arcelor Mittal) should not suffer because of land problems. One cannot keep them waiting for so many years.”