Cash-strapped South Korean steelmaker Posco confirmed that it will still build a mega steel plant in India despite a raft of issues that has led shareholders to question the validity of the project.

Posco wants to build a $12bn (£7.8bn , €9.1bn) steel mill in the eastern Odisha state but it has encountered long delays following protracted land disputes, environmental concerns, and litigation.

Choi Moon-sun, an analyst at Korea Investment & Securities said "question marks are growing over whether Posco's Indian investment would be valid."

"Posco does not have enough money to finance the project."

Posco's Problems?

A string of acquisitions over the years has left Posco with a heavy debt burden, which has more than doubled over the last three years to 39.6 trillion Korean won.

Slowing growth in large steel consuming markets, such as China, has hurt steel prices and margins, pulling down profits.

Asia's fourth-biggest steelmaker by output, reported a 51% drop in second-quarter profit as weak demand cut prices. Its operating margin dropped to 7.8% in 2012, from 27.2% in 2005, the year it announced the Odisha project.

Large Posco shareholders are now raising concerns about diminishing potential returns from the Odisha investment. Operations at the delayed plant were to commence in 2010.

"The steel market is not in good shape, and we share investors' concerns about the overall market conditions," an unnamed Posco executive told Reuters.

"The Odisha investment would be a burden to us."

The official, however, confirmed Posco was sticking with its Odisha plan, noting that it would be years before the mill starts production.

Market conditions may improve by then, the official added.

Posco Prospects

Posco's stock price has slumped 6.3% so far this year. However, it rallied 9.4% this month as restocking demand, pushed up Chinese steel prices, fuelling hopes of a market recovery.

Posco is looking to expand overseas in order to reduce its dependency on its core South Korean market, which accounts for about 60% of its sales.

Competition from smaller rival Hyundai Steel, backed by automaker Hyundai Motor, is eating into its market share.

Posco expects to start production at a 3 million tonne steel mill in Indonesia by the end of 2013. In Brazil, it will partner with Vale and Dongkuk Steel Mill for a 3 million tonne mill that will produce slabs 2015 onwards.

Posco's Odisha investment is India's largest foreign direct investment (FDI) deal. Last week, the steelmaker said it was dropping plans to develop a separate $5.3bn steel mill in southern India's Karnataka state.

The world's top steelmaker ArcelorMittal has also shelved plans to build a steel plant in Odisha citing long-draw-out land disputes as the reason for pulling out.