Welspun Maxsteel, the wholly owned subsidiary of the $3bn Welspun Group, has kept its proposed steel plan in Maharashtra state, central-west India on hold due to a shortage of raw materials and energy.
The delay in environment clearances has also forced the company to keep the project in abeyance for now.
In August 2009 Welspun proposed to set up a steel plant with an annual capacity of 1.5Mt/y in an investment of Rs 60000M (US$1.08bn). It was to include a 330MW natural gas fired power station based on government assurance of adequate natural gas supply for both the steelmill and power plant from the Krishna-Godavari (KG) basin. But, neither adequate gas supplies have been assured and environmental clearance is not yet given.
Welspun wanted to build this steelplant to complete its backward integration. Steel plates from the plant would have been used for its steel pipe business. Welspun Corp has a pipe mill in Gujarat. The company had planned the investment to shield itself from fluctuating steel prices and to achieve complete integration from the raw material to the end product.
Apollo, a global private equity company, agreed to invest Rs 22500M ($405M) in Welspun Corp in June 2011. Welspun Maxsteel was formed in May 2009 after Welspun Steel Ltd completed the acquisition of Vikram Ispat, the sponge iron division business of Grasim Industries Ltd. The Raigad plant was set up in 1989 with an annual capacity of 750kt of sponge iron in the form of hot briquetted iron and an initial investment of Rs5250M ($94.6M). The company was held by the promoters of Welspun Group and in June 2011, when Apollo announced a Rs 22500M ($405M) investment, was sold to Welspun Corp for Rs 8050M ($145M). Apollo invested Rs 1400M ($25.2M) for a 12.5% stake and another Rs 1300M ($23.4M) in expansion of the plant.
The company's direct reduced iron plant has an annual capacity of 900kt is operating normally. However, there are closure fears. The company says it is losing Rs150M a month ($2.7M) as the net weighted cost of gas has soared to $12 per unit, a threefold increase in recent times.
In 2009, the government estimated a total gas output of 60Mm3/d from the D6 gas block in the KG Bsin (KG-D6), estimated to rise to 80Mm3/d and later to 100Mm3/d in phases in four years. The output at present is 32.3Mm3/d. Consequently, the government cut the supply target for each consumer with a cut of 25% imposed on the Welspun allocation, which may go down further.
However, the biggest worry is the increase in the pricing of iron ore. "When this steel plant was proposed, the government assured us of an iron ore mining lease on a fixed price basis for a long and sustainable period. From the annual pricing system earlier, the government changed it to quarterly and has now made it index times costlier,” said a company source.