Tata Steel Vs Posco - A Tale Of Two Mous

Tata Steel vs POSCO - A tale of two MoUs

Hindu Businessline

August 19 2005

THE Orissa Government has offered the South Korean steel major POSCO superior terms to persuade the latter to set up a steel plant in the State than the ones on which it got the Tatas to do the same, documents available with Business Line indicates.

The State Government has offered POSCO a disproportionate quantum of iron ore and land relative to what it has recognised as the requirement of the Tatas for its project. It has also permitted the company flexibility in the choice as between domestic and imported ore. It is even willing to allot iron ore and coal blocks out of what is currently available with its own undertaking. But most important of all, it has promised to 'interface' with the Centre to secure additional quantities of iron ore for use by its plants in South Korea.

On the relevant clause on iron ore entitlement, the MoU concedes that the company would require 600 million tonnes (mt) of iron ore for its 12 mt of annual steel making capacity. In contrast, the Tata project envisages a requirement of only 250 mt for its six million capacity plant. On a pro-rata basis that works out to only 500 mt. Either the POSCO project would be entitled to a higher usage of iron ore per tonne of steel making capacity or the commitment to make iron ore available runs into a longer period of time or both.

If for the Tata project, the State Government would merely 'consider' their request for making available adequate iron ore reserves, the POSCO project would have the comfort of the 'assistance' of the State Government in making firm arrangements with the Orissa Mining Corporation if required by the company!

On the request to source additional iron ore for use in its plants in South Korea, the MoU says that the Orissa Government "will assist POSCO in establishing suitable contacts and interfaces with the Government of India for this purpose."

There is some doubt as to whether there is enough iron ore available within Orissa if one takes into account, the iron ore requirements of projects already sanctioned prior to the POSCO deal and what is being promised to the company.

Sources in the industry say that capacities to the tune of 34 mt per annum are expected to come up along side that of the POSCO plant. Of this, the major players such as Tatas, Jindals, Essar and so on alone would need 1.1 billion tonnes (bt) of iron ore during the life of the project. If one throws in the requirement of smaller sponge iron manufacturers, the total requirement comes to 1.5 bt, according to industry experts. The available uncommitted iron ore reserves are only 2 bt. The POSCO deal could upset the demand-supply balance.

That export of iron ore for use in its domestic plants is an integral part of the larger plan that POSCO has for the Orissa steel project is clear from the project cost itself. The Korean project for a 12-mt capacity plant envisages an investment of the order of Rs 51,000 crore. The Tata's steel project for six mt requires no more than Rs 15,400 crore. Even after allowances for differences in capacity and product mix, steel industry sources claim that the investment envisaged is substantially higher than what is dictated by the scope of the steel segment of the project. The MoU talks of a steel project and 'mining' and 'transportation' projects: a clear indication of the stand-alone character of the mining project and the infrastructure needed to sustain it.

It has agreed to recommend to the Centre the company's case for the grant of the status of 'Special Economic Zone' for tax purposes. The MoU with the Tatas is silent on this aspect.

The deal involving the Tatas and that of POSCO are separated by only seven months with the Tatas signing their understanding with the Orissa Government in November 2004, while the South Koreans followed suit in June 2005; hardly an interval of time for any one to think that the investment climate of Orissa has undergone a dramatic change as to force the State Government to come up with better terms.