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 US$108 per ton in June 2008, but the price slid to US$14.07 per 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.

(China Daily January 20, 2009)