India's SAIL Annuls $400 Million Contract Awarded to POSCO for Steel Plant Expansion

India's primary steel producer Steel Authority of India Limited (SAIL) (New Delhi), has cancelled the $400 million contract awarded to POSCO E&C (Pohang, South Korea), the engineering and construction arm of global steel giant POSCO (Pohang) for construction of a blast furnace at SAIL's steel manufacturing facility in Bhilai, Madhya Pradesh. According to reports from Industrial Info Resources (Sugar Land, TX), the project is expected to double the steel plant's production capacity to 2.7 million tons per year.

Early last year, SAIL floated a tender inviting domestic and international construction firms to bid for the project. POSCO E&C emerged as the winning bidder in the global tendering process. A letter of acceptance was subsequently issued for the project, but prolonged price-related discussions stalled the signing of a contract agreement between the two companies. According to SAIL's policy, a formal contract is to be signed within one month of issuing the letter of acceptance. However, POSCO reportedly delayed the signing of the agreement, and by the time the company decided to formalize the contract, the economic slowdown had set in. In the wake of the global market scenario, SAIL decided to renegotiate the prices and pressed for a reduction of 15-20 percent in rates in view of the changed market conditions.

In June this year, SAIL's supervisory board terminated the contract awarded to POSCO, citing that POSCO was not responding to SAIL's requests despite several reminders. SAIL is now expected to invite fresh tenders for the project and is reportedly not averse to POSCO making a bid again. Industry experts indicate that SAIL will definitely benefit from the present market situation and could finalize the contract at prices much lower than had been agreed with POSCO. The earlier agreement with POSCO was considered to be an expensive proposition for SAIL.

Both companies are blaming each other for the contract falling through, with POSCO crying foul over the cancellation of the contract, stating that this move is unprofessional after procedural delays. POSCO claims that the final agreement was to be signed in September 2008, but SAIL issued a draft copy of the contract only at the end of October last year after repeated requests and correspondence. POSCO's senior management team made several trips to India and even visited Bhilai twice to firm up the contract agreement. SAIL allegedly issued last minute alteration requests in the agreement each time, consuming time and delaying the process of formally signing the contract. POSCO claims that on December 24, 2008, when both companies finally met to sign the contract, SAIL, at the last minute, requested amendments to certain clauses in the agreement. POSCO has also refuted allegations that it did not respond to requests from SAIL. The company states that it replied to every request, including the last one made on June 11 this year. POSCO is exploring all avenues, including taking legal action, to salvage the $400 million contract. Although the company is open to discussions with SAIL in order to iron out differences, the likelihood seems bleak.

Earlier, POSCO completed the engineering, procurement and construction project for SAIL's IISCO facility in West Bengal. The project is expected to be commissioned by March 2010, which will enable the steel plant to produce 2.5 million tons per year of hot metal. POSCO E&C won this contract in collaboration with Nagarjuna Construction Company Limited (Hyderabad, Andhra Pradesh).

SAIL embarked on a capacity augmentation program across its facilities in Bokaro, Durgapur, Bhilai, Burnpur and Rourkela, in order to increase the company's total production capacity from 15 million tons per year to about 26 million tons per year by 2010. This includes the $2.47 billion expansion of the Bhilai steel plant. The earlier cost of the overall capacity expansion was about $11.13 billion, but SAIL later revised the budget to $16.5 billion because of overbooked suppliers and a steep increase in prices of machinery and equipment. In the present economic situation–with the slump in prices, reduced demand for heavy equipment and suppliers willing to offer on-time delivery and larger discounts–SAIL is now expected to complete the capacity enhancement program within the originally planned budget of $11.13 billion. However, the projects are now expected to be completed through the Eleventh Five-Year Plan period, 2007-12.