MAC: Mines and Communities

Posco Deal: Uneven Playing Field?

Published by MAC on 2005-08-19
Source: The Hindu ()

POSCO deal: uneven playing field?

Source: Special Correspondent, The Hindu

August 19 2005

Orissa's memorandum with Korean steel major POSCO raises disturbing questions.

Iron mining Orissa ore inAlready by 1999 large parts of Orissa's protected
forests had been blighted by iron ore mining. This
photo depicts an area of 900 square kilometres.

Overall concessions to the tune of Rs.120,000 crores Exports of 400 million tonnes envisaged run counter to national policy POSCO offered far greater concessions than in Orissa's MoUs with Indian producers Iron ore commitments may overshoot availability.

The memorandum of understanding that the Government of Orissa has signed with the Korean steel company, POSCO, envisages major departures from the national policy on mining and exports of iron ore and offers terms and concessions not extended to any of the domestic companies that have proposed to set up steel plants in the State.

The memorandum available with The Hindu outlines the nature of the project that will be the single largest foreign direct investment in the country to date. It envisages a 12 million tonne steel plant coming up in Paradeep in two phases with an overall investment of $ 12 billion (Rs.51,000 crores); iron ore prospecting and mining concessions and possible exports; land acquisition and allotment and facilitation in getting clearances. In addition to the steel plant and mining facilities, POSCO would also develop road, rail and port infrastructure including a rail link to Paradeep, an integrated township and water supply infrastructure.

All States vie to secure investments of this type and offer substantial concessions. Yet a reading of the MoU with POSCO reveals that the concessions in this case go beyond all such deals. According to one industry analyst, the virtual subsidy under the MoU would amount in all to Rs.120,000 crores over a 30 year period, raising the question whether the costs would far outrun the benefits, Dabhol-style.

The iron ore mining concession alone would save POSCO Rs. 54,000 crores during the period, being the difference between the mining costs and the market price of iron ore. It would also enjoy substantial tax concessions as, in an unusual gesture, the project area is to be declared a Special Economic Zone. Besides, an investment of Rs. 51,000 crores for a 12 million tonne plant is thought to be on the higher side ; one industry analyst estimates the requirement at no more than Rs. 40,000 crores; even accounting for the costs of developing the port and the rail links.

Secondly, and quite apart from the scale of the concessions, the project envisages a substantial departure from the national policy on mining and iron ore export. POSCO has sought 400 million tonnes of iron ore to be exported for the use of its steel plants in South Korea which runs contrary to the current policy. The Government of Orissa has said it "will assist POSCO in establishing suitable contacts and interfaces with the Government of India for this purpose."

Iron ore exports have risen substantially in the last two years, a trend that is worrying steel industry analysts. Countries such as Australia and Brazil that have substantial iron reserves and relatively low populations are major iron ore exporters. On the other hand, China which has substantial reserves but is a large steel user as well has banned iron ore exports and in fact actively encourages its steel producers to secure and develop iron ore deposits outside. Indian iron ore reserves are estimated at 18 billion tonnes, and if India were to move up from its present per capita consumption level of 30 kg. to 300 to 400 kg. as in the developed countries, the reserves would last just 30 to 50 years.

The third disturbing aspect is that the MoU provides significantly larger concessions to POSCO than to the Indian steel producers with whom the Government of Orissa has signed similar MoUs. For instance, in the case of the MoU with the Tata Iron and Steel Company signed seven months before the POSCO deal, the company is to be provided with iron ore requirements for 25 years for its 6 million tonnes plant. On the other hand, for POSCO, the Government of Orissa has guaranteed 30 years' requirements. Similarly, the Tata Steel MoU is valid for a period of three years and the POSCO MoU for five years, and POSCO is allowed a more liberal time frame for its project. Again, the Government of Orissa is more emphatic and forthcoming in promising administrative support and land and all help to get environmental and forest clearances in the case of POSCO than in the case of the other steel producers.

In envisaging the commitment of 600 million tonnes of iron ore for POSCO's steel plant at Paradeep and another 400 million tonnes for export, the question arises if Orissa has not overextended itself. Before POSCO, it had signed MoUs with 36 Indian steel producers involving a total steel production of 34 million tonnes. Of Orissa's 4.8 billion tonnes of iron ore reserves, 2.8 billion tonnes have been allotted to existing producers including the Steel Authority of India and the Orissa Mining Corporation.

The MoUs signed with Indian producers will need an allotment of 1.8 billion tonnes, and at the time of the POSCO deal just 0.2 billion tonnes remained uncommitted. It remains unclear if the 1 billion tonnes for POSCO is to come from the commitments to any of the other players.

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