Posco: A New Steel Plant in India

China and India are widely expected to be the two growth engines of the world economy in the
21st century. The two economies, however, are a study in contrasts. While Chinas economy is
dominated by manufacturing, Indias has a relatively larger share in agriculture.
Consistent with the difference in economic structures, India produces much less steel. In 2005,
Indias annual steel manufacturing capacity was 45 million metric tons, which was less than
one-seventh that of Chinas 330 million tons. Ironically, India is one of the worlds top four
producers of iron-ore, the others being Brazil, Russia, and Australia.
Lured by prospects of future growth in manufacturing and Indias iron-ore deposits, five
international steel-makers have announced plans to build or expand capacity in India. The
combined increase in capacity would be 75 million tons, or about 7.5% of current global
production.
Indias second-largest producer, Tata Steel, plans to increase capacity at its plant in
Jamshedpur, Jharkhand State, from 5 to 33 million tons a year. Mittal Steel announced plans for
a 12 million ton facility, also in Jharkhand State.
Seeking to expand overseas, Koreas Posco contracted with the government of Orissa State for
up to 600 million tons of iron ore over 30 years. Posco committed to build a 12 million ton steel
mill at a cost of US$12 billion. The mill would be built in four phases, with the first phase
capacity of 4 million tons a year.
Chairman and CEO of Posco, Mr Lee Ku-taek, recognized the risks, The worlds leading
steelmakers have purchased steelworks abroad but have never constructed steelworks abroad
from scratch.1
Meanwhile, in China, steel-making capacity will increase by 60 million tons in 2005, and a
further 40 million tons in 2006. This increase in supply, and prospects of a glut, would increase
the downward pressure on steel prices.

2005, I.P.L. Png. This case is based, in part, on Expansion plans in India fire up steel-glut worries, Wall
Street Journal Asia, November 1, 2005.
1
Posco aims to expand beyond South Korea, Wall Street Journal Asia, November 1, 2005.

Assignment
1) Consider the investment decisions of Tata and Posco in India. If only one company expands
capacity, then it will earn profits from the increased capacity, while the other earns and loses
nothing. If both expand, then there will be excess supply and both companies will incur losses
from their additional capacity. Using a suitable game in strategic form, identify the Nash
equilibria.
2) Now, suppose that one company can commit to its investment before the other. Using a suitable
game in extensive form, identify the equilibrium or equilibria.
3) Referring to your answer (2) above, explain how Poscos long-term contract with Orissa State to
purchase iron ore can be a strategic move to persuade other steel manufacturers not to expand
capacity.

It is a Group Assignment: that means you should work in your assigned study groups and submit a single set
of answers/explanations as a group. It is expected that all the members of the group contribute approximately
equally to the preparation of the group assignment. This does not mean that everyone's ideas must be
included. In other words, everyone should contribute about equally to the overall process.
Submit a write-up (at the most 2 pages including diagrams; font size 12; font face: Times New Roman)
focusing on the analysis and explanations to the points given above as assignment. Use ONLY simple
Microeconomics concepts and tools taught to you. Your analysis must be based ONLY on the facts given in
the case as in 2005 do not use any developments after that or any current developments/issues in your
analysis. Please note that illogical conjectures/guesses shall not earn any rewards and your exercise will be
futile.
A Cover Page for the assignment has been put up in the Assignment folder - write down your Section and
Group No. at the place mentioned at the bottom of the cover page, join it with the assignment report, and
then submit it through SafeAssignment link. Submission Deadline: 25th August 2016 (5:30 pm. sharp)