ArcelorMittal (NYSE:MT) has obtained legal possession of 2,600 acres of land in the state of Karnataka in India, six years after it announced its intentions to enter India. It plans to set up a steel plant with an annual production capacity of 6 million tonnes at a cost of Rs.30,000 crores (approximately $5.5 billion). The project will include a 750 MW captive power unit to meet the power requirements of the plant. Work on the plant will begin after ArcelorMittal obtains statutory approvals, such as environmental clearances, for the project. 
The legal possession of land is a significant milestone for the simple reason that land acquisition is the single biggest obstacle for new projects in India. There have been violent protests by local communities and activists against various companies’ projects in different parts of India. ArcelorMittal has borne the brunt of these protests in the past. It had initially announced mega investment plans worth $30 billion in 2006 for setting up two steel plants in the states of Jharkhand and Odisha. Each of these was expected to have an annual production capacity of 12 million tonnes. However, the projects got mired in land acquisition issues and the company decided to shift to Karnataka. ((ArcelorMittal India acquires land for steel plant in Karnataka, NDTV))
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The news about land acquisition has come amid concerns and questions about ArcelorMittal’s ability to finance new projects. The company already has a significant debt burden of $23.2 billion which it is struggling to reduce. Following in the footsteps of S&P and Fitch, Moody’s recently cut its debt rating for ArcelorMittal to below investment grade. This has already caused interest rates for new debt to increase.
While the land issue has now been settled, there is a long way to go before the steel plant can be constructed. There is a ban on mining of iron ore in Karnataka right now due to previous allegations of illegal mining by certain individuals and companies. If the ban is not revoked soon, ArcelorMittal will have to figure out alternative supply arrangements for iron ore to feed its plant. This will certainly increase the cost of production because apart from Karnataka, most of India’s iron ore assets are located in its eastern belt which includes the states of Odisha and Jharkhand. Karnataka is in the southern part of India so the cost of transportation will be high.
ArcelorMittal reported weak third quarter results recently. It reported a net loss of $709 million compared to a net profit of $659 million in Q3 2011 and a net profit of $959 million in the previous quarter. The company is suffering due to an unfavorable economic environment in North America, Europe and China. Growth in future is expected to be driven by demand from fast developing countries like India and China so we think that this investment in India will pay off in the long term.
ArcelorMittal is the world’s leading steel and mining company with a presence in more than 60 countries. It is the leader in all major global carbon steel markets, including automotive, construction, household appliances and packaging. The company also has a world class mining business with a global portfolio of over 20 mines in operation and development, and is the world’s fourth largest iron ore producer. With operations in over 22 countries spanning four continents, the company covers all of the key industrial markets, from emerging to mature and has outstanding distribution networks.
We have a price estimate for ArcelorMittal of $18, which is 15% ahead of the market price. We will be revising our model shortly in light of the recent earnings results.Notes:
- ArcelorMittal acquires land for Rs 30,00-crore Karnataka steel plant, Economic Times [↩]