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November 1, 2008

BEATING PLOWSHARES INTO INGOTS

POSCO's struggles to build a major new steel plant in rural India demonstrate just how difficult global expansion can be, especially in the anti-industrial cultures of the rural Raj. Yet with India's iron ore beckoning, you can't blame the South Koreans for trying.

Sitting in a pink plastic chair and dressed suitably for the hot, humid weather in a white singlet and cotton pants, Abhaya Sahu, a local official of the Communist Party of India (CPI) in Orissa on the country’s eastern coast who heads the POSCO Pratirodh Sangram Samiti (protest and resistance committee), makes a prediction. “We will never let POSCO build here,” he says. “If POSCO or the police come, they will be gheraod [surrounded] and kept inside the village.”

In June 2005, the South Korean steel giant Pohang Iron & Steel Co. (POSCO), viewed the mineral-rich Indian state of Orissa as an ideal candidate in which to build and operate a $12 billion integrated steelworks and iron ore project. POSCO’s merger with the state of Orissa would be the biggest foreign direct investment in India and would ideally solidify its position as the fourth largest steelmaker in the world. Since June, however, POSCO has learned quickly the difficulties of expanding its empire to the impoverished state. Looking optimistically into its first integrated project outside of South Korea, POSCO soon found itself knee deep in bureaucratic delays stemming from political conflicts, corruption and discontent among local villagers.

Instead, it found itself mired in interminable bureaucratic delays as officialdom and political interests maneuvered within India’s complex and corrupt democracy. Then, more recently, it has faced increasingly hostile demonstrations in and around the land it thought it would obtain for the plant. Staff members twice have been briefly kidnapped, and one protester was killed during a violent set-to in June. POSCO is now 18 months behind schedule on the 12 million tons per annum project. It still waits to gain access to most of the site and to the mining area. Some progress was made this summer, but construction is unlikely to start until early 2009 at the earliest, and production has been pushed back from 2010 to 2012.

“We have a vision, a dream, of being a worldwide steel company,” says Gee-Woong Sung, POSCO-India’s project director. “No company anywhere in the world has ever built a greenfield integrated steelworks in another country, and we want to show we can do it.”

TROUBLES ALL AROUND

POSCO’s troubles, of keen interest to the metals industry, are only a few of the many noisy and sometimes violent situations that blunt the potential for industrial development in India. Two years ago, 12 protesters were killed at a proposed Tata Steel plant, also in Orissa. Last year, at least 14 were killed demonstrating against a Special Economic Zone (SEZ) for chemicals companies in neighboring West Bengal. This September, Tata Motors announced that, only a month shy of rolling the first tiny Nano automobile off its Singur assembly plant, it has been forced to move to another location because of intractable and threatening local opposition. Also in September, ArcelorMittal announced that its two plants in Orissa and Jharkhand were 12 to 18 months behind schedule, given the difficulties of obtaining mining rights and land.

If protests were limited to POSCO, they could be chalked up to chauvinism. If they were limited to one issue—human rights, as in the SEZ protest in West Bengal—they could be laid at the feet of ethnic tensions or environmental concerns. If they were limited to one industry, they might be attributable to past experience, such as the 1984 Bhopal disaster. The fact that they are becoming more frequent and more dangerous—not to mention more expensive for the companies involved— points to the difficult moment at which India and potential investors in India find themselves.

It also points to the difficult moment at which the global metals industry, especially steelmakers, finds itself. The commercial melee among metals producers seeking a dependable, affordable source of raw materials has intensified. Steel industry giant ArcelorMittal has announced its intention to control the vast majority of its own commodity needs; Japanese and Chinese companies—and POSCO—tired of paying immense annual price increases for Australian and Brazilian iron ore, are almost desperately seeking alternatives. In October, a group of Japanese steel companies led by Nippon Steel Corp. purchased a 40% stake in Nacional Minerios SA, an iron mining subsidiary of Brazilian steelmaker Companhia Siderurgica Nacional (CSN).

“The desire to control the supply chain has to do with the uncertainty and risk,” says David F. Pyke, dean of the School of Business Administration at the University of San Diego and a supply chain specialist. “For instance, in an era of big changes in oil prices and availability, DuPont, which used oil as a feedstock for many of its products, chose to buy an oil company, Conoco.” If there are few suppliers—as is the case with iron ore mining companies—buying capacity ensures a consistent supply and possibly a consistent price, Pyke says, as well as protection against supply chain disruptions.

And, finally, companies such as POSCO feel the pressure to globalize to serve better their multinational customers, make metal in less-costly environments and diversify risk with new production alternatives. India, says POSCO Chairman Ku-Taek Lee, has the potential to “enhance our competitiveness by stabilizing its source of raw materials and to penetrate a market with high potentials for growth.” The project, he says, is the cornerstone of POSCO’s future growth.

PAST MEETS FUTURE

“It is the conflict between agricultural India and industrial India,” says Shashi Tharoor, chairman of Dubaibased Afras Ventures and former under-secretary general of the United Nations. “Some 67% of India’s population depends on the land. That’s too high— only 1% of the U.S. population claim farming as an occupation. Indian farmers produce only one-sixth of what the less than 1 million American farmers produce. They live in horrible, grinding conditions, but it’s all they’ve ever known. It’s their land. There is also the emotional, almost mystical connection to the land shared by farmers all over the world. You put all of that up against large, faceless industries, and you have layer No. 1.

“The second layer is politics. The central government in Delhi would like to see these things happen, but India has a federal system.”

Industrialization projects have been successfully implemented in other states, Gujarat and Maharashtra, for instance, by both foreign and domestic companies. In West Bengal, where Tata’s Nano plant was to be, the Communist Party of India (CPI) has governed for 30 years. The party tamed its own unions once in power and has courted companies to locate there actively.

The West Bengal opposition, All India Trinamool Congress party, elected firebrand Mamata Banerjee as its leader, however. She has seized every opportunity to embarrass the CPI in anticipation of upcoming elections. “They are not just agitating for a better deal but questioning the entire acquisition,” Tharoor says. “This demonstrates the desperate short-termism of Indian politics.”

In fact, the CPI talks out of both sides of its mouth on the issue of industrialization. In West Bengal, the party acquired land and attracted Tata Motors’s Nano plant with heavy incentives. In neighboring Orissa, governed by the Biju Janata Dal party, one of the main secular parties of the National Democratic Alliance, the CPI has led the opposition to POSCO. The issue is political advantage; there are more short-term votes available in Orissa from small, displaced scrub farmers than from industrialists.

With foreign and domestic companies looking to exploit India’s fast-growing economic potential, and local and regional governments looking to attract investment and create jobs, authorities use eminent domain to acquire land for potential development. On the one hand, Tharoor says, “there is no market, so who can say what’s fair?” In many cases, establishing ownership of the land is almost impossible. On the other hand, governments sometimes acquire more land than they might need—at a lower price than it can command as soon as development is announced—and in the notoriously corrupt Indian political environment, not all the money may go from buyer to seller. Sometimes the land stands empty for years while governments court investors. In the case of the 4,000 acres for the proposed POSCO plant, the Orissa government held the land for so long that squatters moved back in, planted crops and re-established subsistence livelihoods.

There is also the fact that the people to be displaced are woefully unprepared for the jobs that industrial companies promise as compensation. Unskilled and often illiterate, neither the farmers nor their children see any benefit to being catapulted into the 21st century. It will take generations to transform what has been an agricultural society for centuries.

VALUE ADDITION

Over the long haul, it is almost guaranteed that industrialization will win. The benefits, particularly in Orissa, are too large. The attraction of captive mines, plants and a deepwater port all in close proximity is just too appealing to abandon. As Balasubramaniam Muthuraman, managing director of Tata Steel, summarized it in 2004 when 40 steel projects were announced for Orissa by various companies, the state provides long-term reserves of highquality iron ore, cheap electricity and easy access to both major steel-consuming markets and raw materials. But the protests have significantly slowed POSCO and others.

POSCO was introduced to India and Orissa in 2004 by BHP Billiton, the Australian mining company, which supplies it with iron ore in South Korea. POSCO wanted to boost its total steel production to 50 million tons annually from its existing 31 million tons. But it failed to win approval for a proposed greenfield steelworks in China, where the government insisted that old facilities be modernized first. It also looked briefly at Brazil. At the time, BHP was pursuing (now abandoned) bauxite and other projects, and persuaded POSCO that India could provide both iron ore exports for South Korea and steel orders from South Korean users already established there—Hyundai, LG Electronics and Samsung.

POSCO opened a subsidiary near Pune, on the other side of India, two years later. The POSCO-India Pune Processing Centre (POSCO-IPPC), a joint venture with LG, has a steel processing capacity of 170,000 tons annually and has been so successful that the company is setting up a second processing plant nearby and may add a third. POSCO-IPPC was an investment of $20 million, also the planned cost of the second. In 2007, its first year of operation, the subsidiary had revenues of $60 million, expected to rise to $100 million this year.

That experience led the company to believe things could happen quickly and certainly with a minimum of protest. POSCO Chairman Lee acknowledged at the outset that there would be many difficulties, but those had more to do with “a very unpleasant climate and uncompetitive infrastructure such as railroads, road systems and housing.” But “with our power and capacity, we can achieve it.” In Orissa in the eastern side of the country, however, that has been far from the case.

POSCO’s delays have arisen over permission to use 4,004 acres at Kujang, near the port of Paradip, for the steelworks, allied port facilities and a power station. Another source of delay has been obtaining leases for iron ore mines 300 to 350 kilometers inland. The land is flat and includes a large area of 3,566 acres owned by the state government. Only 438 acres are in private hands. Of the 4,000 acres, almost 3,000 are what is called “deemed forest land,” even though, following repeated cyclones, there aren’t that many trees left.

Plans were drawn to build a 12-million-ton capacity steelworks in three consecutive 4-million-ton stages within a specially designated SEZ in Orissa. When completed, that would require 20 million tons of iron ore annually. Spread over the 30-year projected life of the project, that meant POSCO needed 600 million tons of reserves. In theory, access should have been easy and swift. But in India, nothing is simple, and POSCO still doesn’t have possession.

“This is one of the flagship foreign investment projects in the country,” says Kamal Nath, India’s minister for commerce and industry. “But in India, one has to weave one’s way through the procedures. That is not just a legal or financial process, it’s a social process. POSCO is the first experience of a huge project from mining to steel production. And in a democracy, all the stakeholders have to have a voice—and in India, they have a particularly loud voice—so POSCO has been through that learning curve.”

To ease transport of POSCO’s envisioned iron ore, the Orissa government is building roads and railroad links. But because mining in India is constitutionally a “concurrent” subject, controlled by both the central and state governments, lease grants are highly political and dominated by Indian mining companies that wield considerable clout. So much clout that, acting on advice from a top Orissa official, POSCO asked BHP Billiton to withdraw from the project so that it can hire an as-yet unnamed Indian company to extract the ore.

In 2002, Orissa adopted a “value addition” policy. “We decided that only companies investing in the state would receive mining leases,” says B.J. Panda, a member of parliament from Orissa’s regional Biju Janata Dal party, which runs the state government. At that point, India was exporting iron ore at a rate of 5.5 million tons a year—as Tharoor says, doing to itself what colonial powers had done for years, exploiting the natural resources while leaving the country itself undeveloped.

Steel companies favor “value addition” projects because they cut ore costs by as much as 50% compared with the global market. Mineral-rich states such as Orissa also favor integrated projects because they bring with them additional development, jobs and substantial tax revenues for the state government.

A total of 257 companies and individuals applied for mining leases along with POSCO. Under India’s rules, each applicant had to be given a hearing. That threeyear process was completed in August, leading to Orissa confirming in September that POSCO would receive prospecting leases.

Villagers facing resettlement to make way for the POSCO plant

It is still possible that the mines might be ready to feed the first stage of the POSCO steelworks on commissioning, now planned for 2010 even though no construction has begun. It has been agreed, however, that the state-owned Orissa Mining Corp. will supply ore on an interim basis if necessary.

It is widely rumored—and believed—that other big steel companies have been lobbying and bribing officials, which has slowed POSCO and others significantly. There were similar suspicions in the 1990s over bauxite projects. While not confirming those suspicions, POSCO officials privately say they suspect rivals are especially concerned because the plant will use its new economical and environmentally friendly Finex process, which employs low-quality iron ore and does away with blast furnaces. The first Finex plant went into production in South Korea last year (see “Breaking New Ground,” Forward, July/August 2008).

SIMPLE GEOGRAPHY

In the last year—on top of the hold-up on forest land, on top of lengthy hearings over mining leases, on top of potential competitive dirty tricks—POSCO has faced increasingly hostile armed demonstrators.

To understand at least some of the dynamics, look first at the simple geography of the place. Orissa and West Bengal border each other on India’s northeastern coast. Both are mountainous (see map, pg. 21). Less than a quarter of Orissa’s roads are paved, and most of the rural population has no access to safe drinking water. The mountains hold a fifth of the country’s coal, a third of its bauxite and more than a quarter (3.6 billion tons) of India’s iron ore. The delta has been home to rice paddies, small family farms and fishermen for generations, and is where most of the population lives.

The region is also given to often violent extremes in everything from weather to religious tensions. Cyclones have destroyed vast swathes of forest. Some 10,000 people died in a cyclone in 1999. More than 80 people drowned and 2,000 acres of crops were destroyed in flooding in September. Violence between Hindus and Christians, a bare 2% of Orissa’s population, has escalated since 1999, raising the death toll to 25 in September. Also in September, Christian radicals retaliated by attacking a number of Hindu temples.

The POSCO steel project could displace as many as 20,000 people who will end up off the land or working in one of the many new plants. This prospect brought Amnesty International, the human rights group, into the dispute on the basis of the potential for “forced displacement” of the local population for POSCO’s plant. “Amnesty International seeks to remind governments of their obligations to find ways to balance respect for human rights with attempts to achieve economic growth,” the group said in one statement on the Orissa situation. “Sustainable development cannot be measured solely in terms of economic indicators. It is a holistic process that embraces the development of civil society….”

Or, at times, not so civil. Since June 2005, there have been frequent protests against POSCO. Barricades have been erected in the area where the plant is to be built. There has been violence from time to time. Survey teams have been forced to leave. In September, a particularly bad month for the area, there were torrential monsoon floods, burning churches and temples, and thousands of protesters armed with bows, arrows, axes and lathis (wooden sticks) converging on the gates of POSCO’s proposed site. A starker illustration of India’s past slamming up against its future can hardly be imagined.

DISPLACED

Farmers are not the only people who may be displaced by development. Projects frequently face opposition from tribal communities known as the Adivasis. There are about 50 million tribe members in India, mostly forest dwellers whose ancestors have lived for thousands of years in remote regions such as the mineralrich central highlands of Orissa and its neighboring states of Andhra Pradesh and Madhya Pradesh. Inaccessible until the mid-1900s, these areas have now been penetrated by mining companies and others.

Rice paddies in Orissa, the traditional crop for decades

Tribes protecting what they regard as a sacred mountain and their “ancestral homelands” have blocked bauxite mining in Orissa’s Niyamgiri hills by Vedanta Resources, a London-based, Indian-controlled metals group, for the last two years. Vedanta, which had been charged with illegally harvesting forests, was cleared by India’s authorities to begin mining last August, but opposition continues.

Tata Steel’s planned 12-million-ton-per-annum steelworks on 3,400 acres at Kalinganagar in Orissa soured in January 2006 when 12 tribe members died during protests against the state government ousting villagers forcibly from the site. This became a turning point in attitudes over how to handle the transition of agricultural land to industry. National and regional politicians, along with companies, realized that a more cooperative stance had to be adopted. Tata decided it needed to build trust with the local people itself, so it took over the job of resettlement from the government. So far, the company has resettled about 750 of the 1,050 families involved, even though it does not yet have access to the full site. It hopes to start steel production in 2010 or 2011.

Companies in general have become more active in their approach to compensation. ArcelorMittal is working with bankers to provide investment advice to local people who will be displaced by its plants. This will ensure they are not cheated out of what will be more money than any of them have ever seen. ArcelorMittal is also hoping that half the money can go to the wives. POSCO will plant 3,000 acres of forest to replace the estimated 280,000 trees that will have to be cut down.

POSCO promises to provide bigger plots of land and homes on a nearby site, plus compensation for existing homes and land. There is also one job per family on offer in the steelworks, both during and after construction, plus job training for a second family member. Those who want to continue fishing will receive assistance, including a boat and nets, and POSCO will build a new wooden jetty. There also will be help and advice on animal husbandry and other occupations. “If people want more, we will negotiate,” says Sung.

The company plans to start construction in the area “where people have shown the most eagerness,” Sung explains. “We will not do any forced displacement in any place. We hope the people of Dhinkia [the village where most protest has occurred] will gradually change their minds when they see something developing on the site.”

TIME AND PATIENCE

All of this will take time and patience, two qualities long demanded of any company seeking to do business in India. And for that, POSCO’s Korean executives now seem more temperamentally suited. They have gotten over initial impatience and realized that, unlike already-industrialized Pune, Orissa will take more work—or will come around after the election. Canceling the project and withdrawing does not seem to be an option, despite threats that the company issues occasionally when frustrations escalate.

“We’ll try to win the heart of the people, and [we] believe we can achieve that,” says Cho Soung-Sik, chairman and managing director of POSCO-India.

The Indian government is equally keen for POSCO to succeed because of the project’s international prestige and the big boost it would give to Orissa’s economy. In meetings with the president of India, its minister of finance, the vice chairman of its planning committee and the prime minister of Orissa, Lee received assurances that they would “give the substantial help that is required to facilitate the move.” That was in 2006. Now a governmentsponsored investment commission, headed by Ratan Tata, who runs one of India’s two biggest private-sector groups, has helped ease bureaucratic blockages. Given Tata’s own problems in West Bengal over its Nano plant, he probably will not concentrate much on POSCO’s problems.

The government hopes ground-breaking will take place on the steelworks before state and national elections in April. But it will not force the pace because of fear of violence, which would be especially counterproductive before the polls.

“We have faced hurdles we didn’t expect,” says Sung, “but there is no concept of decline, no risk of us pulling out.”