Risky Venture
The shaft furnace steel mill being jointly built in Ceara, Brazil by Dongkuk Steel and POSCO is receiving a lot of attention. Risking the future of the company, Dongkuk Steel pushed ahead with the project. And if the construction is completed without interruption amid the absence of its Chairman Chang Sae-joo and turns out expected profits, the company will be able to revive.
According to industry sources on May 13, all eyes are now on whether the shaft furnace steel mill, which is being built by Companhia Siderúrgica do Pecém, or CSP, starts commercial production at the first half of next year as scheduled and brings profits to investment companies of the CSP.
CSP is the operation company with the single purpose of promoting the expansion of the steel industry in Brazil. Dongkuk Steel and POSCO hold 30 percent and 20 percent of its stakes, respectively. The other 50 percent is owned by Brazilian mining company Vale. The steel mill has the area of 3800 m3, and aims to produce up to 3.12 million tons of molten metal a year. The figure is close to the current level of the total annual crude steel production of 3.6 million tons. For the construction, US$5.4 billion (about 6 trillion won) has been invested. Among them, US$3 billion (3.29 trillion won) is raised in the form of long-term debt from the Brazilian Development Bank (BNDES), and the other US$2.4 billion (2.63 trillion won) is raised from investment companies. Dongkuk Steel has currently invested US$700 million (768.46 billion won) from a total of US$800 million (878.24 billion won).
Donkuk Steel decided to take part in such a large project since Chairman Chang believed that there is no future with the existing electric furnace business. In order to compete with the shaft furnace steel mill in China in terms of prices, the company thinks that it has a chance of success when it establishes a steel mill in Brazil, the largest iron ore producer in the world, purchases raw materials at low prices, and locally supplies products. The company asked POSCO, which has wide experience in shaft furnace steel mill construction and operation, to cooperate, and POSCO accepted the proposal. However, some say that excessive investment instigated the downward trend of the company. Dongkuk Steel posted 229 billion won (US$208.6 million) in net losses last year. Since then, it sold its land and office building in Suha-dong, Jung-gu, Seoul, at the price of 420 billion won (US$382.58 million) and considered stopping the operation of the second thick plate plant.
The problem is that the imprisonment of its Chairman Chang could harm the credit rating and weaken momentum. The conclusion of the contract of CSP getting a loan of US$3 billion (3.29 trillion won) from BNDES was delayed for weeks due to the prosecution's investigation on Chang. Others say that Vale, which holds a majority CSP stake, could be more actively involved in management.
How fast the mill will be on the rails after completion is the key to success. Dongkuk Steel and POSCO said that it is difficult to predict how much the mill will make during the beginning of its operations. A shaft furnace steel mill takes longer time to turn out profits after commercial operations. Whether Dongkuk Steel will build the resources to revive, and POSCO will succeed in maximizing profits through cooperation amid the emergency situation is the question to answer.