Baosteel abandons Brazil JV

Special Report:Global Financial Crisis

BEIJING, Jan.20 -- Baosteel has abandoned a

proposed joint venture to build a steel mill with Brazilian mining firm CIA Vale

do Rio Doce due to weak market demand and local opposition.

Last Friday, the Brazilian company said it had agreed

with the Chinese steelmaker to drop the project and liquidate Companhia

Siderrgica Vitria (CSV), the joint venture set up for the project.

The Brazilian steelmaker said in a market filing that

the Chinese steelmaker decided to exit the venture due to the weak market

trends.

Chen Ying, board secretary, Baosteel Ltd, said she

could not comment as the decision was made by the parent company Baosteel Group.

Baosteel and Vale had signed a plan in August 2007 to

build a five-million-ton steel slab plant in the southeastern Brazilian state of

Espirito Santo. Baosteel was supposed to hold an 80 percent stake in the joint

venture. As per plans, construction on the plant was expected to start early

this year with production slated for the end of 2011.

"The advantage of building a plant in Brazil is the

proximity to local iron ore resources and the advantage of not having to ship

raw materials to the plant," said Yang Baofeng, analyst, Dongfang Securities.

Shipping costs from Brazil soared as much as 108 U.S.

dollarsper ton in June 2008, but the price slid to 14.07 dollarsper

ton by last week.

The falling demand for steel worldwide has been seen

as the main reason for the project's failure. "We've seen an output drop across

the world since August as downstream users are all cutting their budget, and

less than 80 percent of Chinese steel capacity is running," said Nie Xiuxin,

analyst, Ping An Securities.

Hu Hao, analyst, Centaline Securities, expects a

stagnant steel demand throughout the next two years. But he was of the view that

the failure might not prove that costly for Baosteel.

"Since the investment decision is made by Baosteel

Group, it will not affect the overall domestic market or Baosteel as a listed

corporation," said Hu.

The short-lived project, which would have generated

4,500 jobs, has also encountered Brazilian opposition due to its possible threat

to local environment. Media reports had said that the Espirito Santo government

had wanted the two companies to relocate CSV for environmental concerns.

Nie, however, argues that it is not the end of the

road for Baosteel's overseas dreams. "Despite the setback, Baosteel would

continue to explore premium mergers and acquisitions both at home and abroad,"

said Nie.

(Source: China Daily)