Welspun Maxsteel, wholly owned subsidiary of the $3-billion Welspun Group, has kept its proposed steel factory plan in Maharashtra on hold due to the shortage of raw material and energy. The delay in environment clearances has also forced the company to keep the project in abeyance for now.
The company proposed in August 2009 to set up a steel plant with annual capacity of 1.5 million tonnes, at an investment of Rs 6,000 crore (Rs 60 billion). Power back up from gas-based power plants with a capacity of 330 Mw was part of the plan.
"The proposed plans were made based on the government assurance of adequate gas supplies for both steel mills and power plants from the Krishna-Godavari (KG) basin. The government had also assured us a green signal after it was satisfied with all the requisites. But, neither adequate gas supplies are ensured to us nor environment clearance given. Hence, we decided to put the plant on hold," said a senior management official.
Welspun was pinning its hopes on this expansion to complete its backward integration. The steel plates from this plant would have been used as raw material for its steel pipe business. Welspun Corp has a pipe mill in Gujarat.
The company had planned this investment to shield itself from fluctuating steel prices and getting completely integrated from the raw material to the end product.
Apollo, a global private equity company, had agreed to invest Rs 2,250 crore (Rs 22.5 billion) in Welspun Corp in June 2011.
Welspun Maxsteel was formed in May 2009 after Welspun Steel Ltd completed the acquisition of Vikram
The Raigad plant was set up in 1989 with an annual capacity of 750,000 mt of sponge iron in the form of hot briquetted iron and an initial investment of Rs 525 crore (Rs 5.25 billion).
The company was held by the promoters of Welspun Group and in June 2011, when Apollo announced a Rs 2,250-crore investment, was sold to Welspun Corp for Rs 805 crore (Rs 8.05 billion).
Apollo invested Rs 140 crore (Rs 1.4 billion) for a 12.5 per cent promoter stake and another Rs 130 crore (Rs1.3 billion) in expansion of the plant.
The company's direct reduced iron plant with annual capacity of 900,000 tonnes is operating normally. However, there are closure fears. The company says it is losing Rs 15 crore (Rs 150 million) a month, 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 60 mscmd from the D6 gas block in the K-G Bsin (KG-D6), estimated to rise to 80 mscmd and later to 100 mscmd in phases in four years. The output at present is 32.3 mscmd.
Consequently, the government cut the supply target for each consumer. A cut of 25 per cent has been imposed on the Welspun allocation, which may go down further.
The biggest worry is the change 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-based, which has made iron ore price several times costlier," said a company source.
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