POSCO pulls out of $5.3 billion steel mill in Karnataka

By Hyunjoo Jin

SEOUL (Reuters) - South Korea's POSCO said on Tuesday it will pull out of a $5.3 billion steel mill development in Karnataka, but will proceed with another $12 billion project billed as India's largest foreign direct investment.

POSCO said in a regulatory filing that it had agreed to cancel the project with the government of Karnataka because of delays in receiving iron ore mining rights and opposition from residents which had held back land acquisition.

The move could provide fresh impetus to POSCO's main steel project in Odisha. Already eight years in the making, it has recently gained momentum with the clearing of legal obstacles to the granting of an iron ore exploration licence.

"We will proceed with a steel mill project in Odisha, which is making progress. The latest move will make us more focused on the project," POSCO spokeswoman Kim Ji-young said.

POSCO, the world's fifth-biggest steelmaker, had pursued three steel mills in India as a way of hedging its bets on the slow-moving Odisha project.

In 2010, POSCO signed a preliminary agreement with the Karnataka state government to construct a mill capable of producing 6 million tonnes of steel a year. A year earlier it signed a separate steel mill deal with state-run Steel Authority of India .

The company spokeswoman said the talks with SAIL had "stalled".

Will Byun, an analyst at Woori Investment & Securities, said the Odisha project was the only one of the three that was "gaining steam".

"But overseas projects are not easy to do, and it is unlikely that the Odisha steel mill will break ground soon," he said.

He said POSCO had not completed land acquisition and was likely to take up to a year to gain iron ore mining rights.

POSCO has been struggling to gain a foothold in India and tap into the country's iron ore reserves and customer base. The company is trying to expand overseas to offset competition from smaller rival Hyundai Steel Co backed by automaker Hyundai Motor Co .

POSCO shares ended down 0.8 percent in line with the wider market's 0.5 percent fall.

"Expectations for POSCO's India projects have already been lowered," said Choi Moon-sun, an analyst at Korea Investment & Securities.

"POSCO needs to make investments in an effective manner ... It is not easy for POSCO to pursue both of the two projects in India," he said.

Backed by billionaire investor Warren Buffett, POSCO is grappling with a prolonged steel market slump caused by the weak global economy, especially in China. It posted only a small profit recovery from January to March.

(Editing by Stephen Coates)