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Posco: A New Steel Plant in India

The document discusses steel manufacturing plans of Posco and other companies in India. Posco committed to build a $12 billion steel mill in India in four phases reaching 12 million tons annually. Posco recognized the risks as no other steelmaker has built a plant from scratch in another country before. Meanwhile, China will increase steel capacity by 100 million tons in the next two years, increasing pressure on global steel prices.

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186 views

Posco: A New Steel Plant in India

The document discusses steel manufacturing plans of Posco and other companies in India. Posco committed to build a $12 billion steel mill in India in four phases reaching 12 million tons annually. Posco recognized the risks as no other steelmaker has built a plant from scratch in another country before. Meanwhile, China will increase steel capacity by 100 million tons in the next two years, increasing pressure on global steel prices.

Uploaded by

shadi22
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Posco: A New Steel Plant in India©

China and India are widely expected to be the two growth engines of the
world economy in the 21st century. The two economies, however, are a study
in contrasts. While China’s economy is dominated by manufacturing, India’s
has a relatively larger share in agriculture.

Consistent with the difference in economic structures, India produces


much less steel. In 2005, India’s annual steel manufacturing capacity was 45
million metric tons, which was less than one-seventh that of China’s 330
million tons. Ironically, India is one of the world’s top four producers of iron-
ore, the others being Brazil, Russia, and Australia.

Lured by prospects of future growth in manufacturing and India’s iron-


ore deposits, five international steel-makers have announced plans to build or
expand capacity in India. The combined increase in capacity would be 75
million tons, or about 7.5% of current global production.

India’s second-largest producer, Tata Steel, plans to increase capacity


at its plant in Jamshedpur, Jarkhand State, from 5 to 33 million tons a year.
Mittal Steel announced plans for a 12 million ton facility, also in Jarkhand
State.

Seeking to expand overseas, Korea’s Posco contracted with the


government of Orissa State for up to 600 million tons of iron ore over 30 years.
Posco committed to build a 12 million ton steel mill at a cost of US$12 billion.
The mill would be built in four phases, with the first phase capacity of 4 million
tons a year.

Chairman and CEO of Posco, Mr Lee Ku-taek, recognized the risks,


“The world’s leading steelmakers have purchased steelworks abroad but have
never constructed steelworks abroad from scratch”.1

Meanwhile, in China, steel-making capacity will increase by 60 million


tons in 2005, and a further 40 million tons in 2006. This increase in supply,
and prospects of a glut, would increase the downward pressure on steel
prices.

©
2005, I.P.L. Png. This case is based, in part, on “Expansion plans in India fire up
steel-glut worries”, Wall Street Journal Asia, November 1, 2005.
1
“Posco aims to expand beyond South Korea”, Wall Street Journal Asia, November 1,
2005.
Questions

1. Consider the investment decisions of Tata and Posco in India. If only


one company expands capacity, then it will earn profits from the
increased capacity, while the other earns and loses nothing. If both
expand, then there will be excess supply and both companies will incur
losses from their additional capacity. Using a suitable game in
strategic form, identify the pure-strategy equilibria.

2. Now, suppose that one company can commit to its investment before
the other. Using a suitable game in extensive form, identify the
equilibrium or equilibria.

3. Referring to your answer (2) above, explain how Posco’s long-term


contract with Orissa State to purchase iron ore can be a strategic move
to persuade other steel manufacturers not to expand capacity.

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