The Hindu Business Line : Has Posco hit pay-dirt?

But this should not surprise anyone. For, it was Orissa that had wooed the South Korean steel major to set up a 12 million tonne (mt) plant, and superior terms were probably only to be expected.

Bringing in Rs 51,000 crore — billed as the biggest foreign direct investment — Posco bargained from a position of strength in this deal, signed in end-June. This is evident from some distinct elements in the Government-PoscoMoU.

It includes such terms as `Special Economic Zone' status, assistance from the State Government for iron ore reserves, better interface with the agencies for land and other infrastructure and longer validity of the MoU. These are missing in the MoU with the Tatas signed nine months ago.

Though it is nearly two months since the mega deal with Posco was signed, the hullabaloo surrounding it refuses to die down.

Why does this deal continue to rankle some sections of the political spectrum and the domestic steel industry?

It all seems to boil down to one element in the deal: Iron ore. From the terms of the deal, three issues concerning iron ore suggest benefits to Posco.

Higher allocation of ore

The Posco deal projects a requirement of 600 mt of iron ore for captive use, to manufacture 12 million tonnes of steel. Outside the purview of the MoU, the Orissa Government also plans to co-ordinate with the Centre for an additional 400 mt of export supplies at open market rates.

This committed requirement of 600 mt for Posco is 100 mt more than Tata Steel's demand of 250 mt for its 6 mt capacity. Is this on account of technology or any other factor? It is significant to note that in the initial negotiations earlier this year, Posco wanted to export the unused iron ore left over from the 600 mt. It would appear that Posco has built in some cushion in its projection of iron ore requirements.

Since the latest MoU specifically states that no export of iron ore will be allowed from the captive mine except by way of import of equal quantity of high-grade ore, what Posco may do with the additional quantity is not known.

If the Union Government frowns on mobile operators hoarding spectrum (a scarce resource) or oil companies capturing oil blocks, then a higher allocation of ore should also be curtailed.

The second question that intrigues is the technology that will be used by Posco for steel manufacture.

In the initial negotiations, Posco had proposed that a significant proportion of the 12 mt production will use Finex (an innovative iron manufacturing technology) which uses `fine' grade of iron ore for steel manufacture.

The remaining `lumps' produced by this process were to be exported. But going by the final MoU, Posco will use Finex/BF (blast furnace)route, without specifying the proportion.

Altered demand-supply equation

Will the terms of the Posco deal disturb the delicate demand-supply equation of iron ore availability in Orissa? Indeed, this is possibile. Uncommitted iron ore reserves of 2 billion tonnes are estimated to be available in Orissa.

The 36 MoUs said to have been signed with the Orissa Government account for 34 million tonnes of new steel capacity.

If all these capacities come up, they will use up 1.7 billion tonnes over 30 years, leaving only 300 million tonnes for the Posco project.

If a supply of 600 mt is committed for Posco, it will probably deny ore availability to the others who have already signed up.

However, assuming only 19 mt of new steel capacity comes up from large integrated players such as Tatas, Essars and Jindals, it will add up to 1 billion tonnes, leaving just enough reserves for the Posco project.

Strategic long-term interests

In signing this deal, has the country sacrificed its strategic long-term interests in steel production?

This question becomes relevant as the Orissa Government proposes to co-ordinate with the Centre to make an additional 400 mt of iron ore available to Posco for exports. This will be done through a long-term commercial supply arrangement in the open market.

For Posco, this represents a derisking strategy for its requirements of iron ore. As it already had long-term contracts with ore suppliers in Brazil and Australia, the deal with India only strengthens its long-term supplies.

From the Indian perspective, two factors assume importance. One, the Posco MoU will set a precedent for all FDI in metals linked to iron ore exports. This can become a disconcerting trend.

Two, it may also compromise the strategic long-term interests of the country in the mining arena. After all, India is just beginning to catch up with China, which already produces over 300 mt of steel.

Perhaps over the next 40 years, these two populous nations are likely to drive the metal's consumption.

If the per capita consumption of steel in India were to rise from 30 kg to 200-250 kg, based on current GDP growth estimates, the country may be staring at a shortfall in iron ore to meet domestic steel requirement.

As India has had a poor record in steel capacity building so far and has not drafted a long-term integrated mining and metals policy, this expected shortfall has not become apparent.

Moreover, if India is so concerned with energy security and its long-term impact, does this not apply in equal measure to iron ore, a critical resource for steel production? As the National Mineral Policy, 1993 says: "Mineral wealth (including iron ore) is finite and non-renewable."

Given the substantial recoverable iron ore reserves of 13 billion tonnes (outside of Orissa) in areas such as Chattisgarh and the southern parts of India, evolving a long-term policy is something that the steel sector cannot put off for long.

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