Bloomberg News

Jindal to Invest $6.3 Billion as Bolivia Fails: Corporate India

July 19, 2012

Jindal Steel & Power Ltd. (JSP), India’s second-biggest steelmaker by value, will spend 350 billion rupees ($6.3 billion) to expand production at home and in Oman after scrapping a deal to develop a Bolivian iron ore mine.

Factory capacity will more than quadruple to 13 million metric tons by 2015, V.R. Sharma, chief executive officer of the steel business, said yesterday in a phone interview. The company, which runs a 3 million ton-a-year mill in India’s central state of Chhattisgarh, is building a 5 million ton plant in the eastern state of Orissa, a 3 million ton mill in Jharkhand and a 2 million ton facility in Oman, he said.

Jindal, run by billionaire lawmaker Naveen Jindal, said June 17 it terminated a contract to build the $2.1 billion El Mutun mine, joining Tata Steel Ltd. (TATA) and Steel Authority of India Ltd. (SAIL) in failing to develop projects overseas. Indian steelmakers have sought resources in Africa, Canada, the U.S. and Australia and explored markets in Europe, the Middle East and Southeast Asia to set up new capacity.

“The termination of the Bolivian project is positive for the company as it will help divert investments to more fruitful projects,” said Niraj Shah, an analyst at Mumbai-based Fortune Equity Brokers India. “It was surprising how Jindal got such a big deposit without any competition from mining heavyweights BHP Billiton Ltd. (BHP) and Rio Tinto Group. It always looked fraught with risk.”

Shah, who has a buy recommendation on the stock, said he did not count the Bolivian project in its valuation.

The shares of New Delhi-based Jindal fell 0.2 percent to 425.55 rupees at the close of trading in Mumbai. The stock has declined 6.1 percent this year, compared with a 12 percent gain in the benchmark Sensitive Index. (SENSEX)

‘Not Smooth’

“There are challenges in India, but things are not smooth elsewhere either,” Sharma, 59, said. “The growth markets for steel are India and Southeast Asia and our projects are well placed to feed this market.”

Jindal signed an accord in 2007 with the Bolivian government to develop 20 billion tons of iron ore reserves at El Mutun, build a 1.7 million ton steel mill, a sponge iron plant and an iron pellet factory. India’s iron ore reserves total about 8 billion tons.

Jindal, which has already spent about 150 billion rupees on the new projects, will buy iron ore fines from miners in India, including NMDC Ltd. (NMDC), and convert it into pellets for use in the furnaces, Sharma said. Unlike most of its rivals, Jindal operates a pellet plant and is building two more to expand its capacity for turning fines into pellets.

Tax, Freight

Iron ore fines, dust that currently does not find a market in India, comprise more than 90 percent of the nation’s iron ore exports. An increase in export duty and railway freight and a drop in prices of iron ore are hampering overseas sales, said R.K. Sharma, secretary general at the Federation of Indian Mineral Industries, a lobby group for the mining industry.

“Miners will be seeking more and more customers within the country,” Sharma said in an interview.

Iron ore with 62 percent content delivered to the Chinese port of Tianjin fell 0.9 percent to $128.30 a ton yesterday, the lowest price since Nov. 8, according to data from The Steel Index Ltd. Prices are down 7.4 percent this year. Iron ore will average $143 a ton this year, with the short-term outlook dependent on economic stimulus from China, the world’s largest importer, researcher Wood Mackenzie Ltd. said.

Price Volatility

Jindal’s strategy to buy its entire iron ore requirement from external suppliers will expose the company to price volatility and uncertain shipments, said Giriraj Daga, an analyst with Nirmal Bang Securities Ltd. in Mumbai. The stock has suffered also because of the company’s failure to secure coal supplies for its steel and power businesses, he said.

“You don’t think of making money from a steel plant which is totally dependent on the market for iron ore,” Daga said.

While demand for cars, houses and appliances is stoking steel consumption in India, work on new capacity has slowed because of farmer opposition to land acquisition and delays in environmental and mining approvals. Local projects by producers such as Steel Authority of India, Tata Steel and Essar Steel Ltd. have been delayed and face cost overruns, said A.S. Firoz, chief economist at the steel ministry.

“The constraints are numerous and there’s no change except for further deepening of some of the problems over the past few months,” Firoz said in a telephone interview. “Companies are facing difficulties in getting land, capital, raw material and skilled labor.”

Power Delay

The Bolivian setback also comes at a time when Jindal’s plan to expand its power business is facing delays because of the slow pace of government clearances and inadequate fuel supplies.

A lack of coal and gas has prompted Indian power-generation companies, including Adani Power Ltd., GVK Power & Infrastructure Ltd. and Reliance Power Ltd. (RPWR), to defer projects with a total capacity of 42 gigawatts. NTPC Ltd. (NTPC), the nation’s biggest generator, has scaled back plans to add coal-fired capacity by 42 percent in the five years ending 2017.

Jindal is racing to add 1,200 megawatts of generation capacity at Chhattisgarh, half of the planned expansion at the site, to avail tax breaks valid until March 2013, according to Nirmal Bang Securities’ Daga. Operating income from Jindal’s power business was lower than from the steel operations in the year ended March 31, the first time in four years.

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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