Maoist Hideout Threatens $3 Billion Steel Plant: Corporate India

Attacks by Maoist rebels in India are preventing the nation’s second-largest maker of steel from mining an iron-ore reserve it says is vital to feed a planned $3 billion expansion of its biggest plant.

The Rowghat mine in the central state of Chhattisgarh is crucial for Steel Authority of India Ltd.’s adjacent Bhilai plant, which will run out of ore in about five years, Chairman C.S. Verma said. The company has failed to remove forest cover to mine the 2,030 hectares (5,016 acres) of deposit because of “violent reprisals” from Maoist rebels who, according to Jitendra Singh, junior minister for home affairs, use the area as their hideout.

“It’s hard to imagine running the plant without this mine,” Verma said in an interview. “We’re doing everything possible to increase security to start work. Rowghat will be the lifeline for Bhilai.”

Steel Authority’s challenge will be to secure an alternate supply of iron ore should it fail to start Rowghat in time for the expanded production at Bhilai. Rowghat is one of several industrial projects that have been stymied by the Maoists, who run a parallel regime in some of India’s richest mining regions, as lack of jobs and poverty draws locals to their ranks.

“The clock is ticking,” said Giriraj Daga, an analyst at Nirmal Bang Equities Pvt. in Mumbai. “Steel Authority’s earnings will be at stake if Rowghat is not ready in time.”

Rowghat will produce 12 million tons of ore a year, making it the company’s biggest mine, according to Steel Authority’s website.

Steel Authority shares fell 2.4 percent to 80.85 rupees at 9:45 a.m. in Mumbai, the lowest level in eight months. The stock has fallen 1 percent this year, compared with a 14 percent gain in the benchmark Sensitive Index. (SENSEX)

Campaign of Violence
The Maoist guerrillas are active in a dozen of India’s 28 states, many of which are rich in iron ore, coal, bauxite, manganese and other minerals. The rebels have pressed a campaign of violence against the government, police and landowners since a peasant uprising in the eastern state of West Bengal in 1967. They have been accused of raising funds through extortion.

Maoist rebels killed 15 members of India’s security forces in two attacks in June last year in Chhattisgarh. In April the previous year, the rebels killed 76 policemen in the same Dantewada district, the deadliest attack on security forces in the decades-long conflict.

Bhilai accounts for 36 percent of Steel Authority’s 13.4 million metric ton capacity and about 35 percent of its profit, according to the company’s website. The plant, which started production in 1961, makes rails, steel plates as well as rods.

New Delhi-based Steel Authority is investing 172.7 billion rupees ($3 billion) to expand Bhilai, part of a $13 billion plan to increase capacity 60 percent, improve products and develop mines. The company spent 403.2 billion rupees as of March 31 on the expansion, which has been delayed by at least two years.

Own Ore
Steel Authority’s profitability emanates from its own source of iron ore for its entire requirement. The company imports almost 70 percent of its coking coal, which makes it the second-biggest spender on raw material among the three biggest steelmakers in the country.

“The company’s profits have already borne the brunt of the increase in coking coal prices,” said Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. in Mumbai. “The absence of iron ore mines can further dent margins, especially because its conversion cost is fairly high.”

Steel Authority’s cost of turning iron ore into a ton of steel was 16,464 rupees in the year ended March 31, more than double that of JSW Steel Ltd. (JSTL)’s 8,105 rupees, according to Shah. Tata Steel Ltd. (TATA), the country’s largest producer of the alloy, incurred 21,703 rupees.

Falling Profit

Steel Authority’s profit fell in eight of the past nine quarters on higher import costs of coking coal and currency losses on overseas loans taken to buy fuel and plant equipment.

India could lose $80 billion of investment in developing mineral deposits should the government fail to stop rebel violence, London-based investment banking and securities firm Execution Noble Ltd. has said.

Inventories piled up at NMDC Ltd. (NMDC), which runs the biggest iron ore deposit in Chhattisgarh, after Maoists in 2009 blew up an underground pipeline that transported iron ore to Essar Steel Ltd.’s pellet plant in the adjoining state of Andhra Pradesh. The repaired pipeline was damaged again last year.

State-run National Aluminium Co. (NACL)’s expansion of its alumina refinery suffered delays, after Maoists invaded the company’s bauxite mines in 2009 and captured workers to grab explosives used in mining. The incident spread fear among workers, who would not turn up for work until the police declared the area safe almost after two weeks, C.R. Pradhan, then chairman of the company, said yesterday in a phone interview.
‘Fear of Life’

“Even after the area was declared safe, mine workers stopped work after sunset,” Pradhan said. “Almost 5,000 construction workers at the refinery site fled to their native places fearing for their lives.”

Such threats have often deprived Indian companies of the resources the land holds. Local steelmakers have started importing iron ore, despite the country’s capacity to produce almost twice its requirements.

Spot prices of iron ore with 62 percent metal content at China’s Tianjin port have declined 32 percent this year to $94.8 a ton a yesterday, the lowest level in almost 34 months, according to data compiled by Bloomberg.

“Imports of iron ore will increase in times to come,” said Shah of Fortune Equity Brokers. “It’s the most plausible solution.”

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