Samantha Shields in Rustavi, Georgia -

An Indian steelmaking joint venture in Georgia is hoping to spearhead the rejuvenation of the country's metallurgical industry and boost its economy by using local scrap metal to produce construction materials.

GeoSteel, a $60m mini-mill that melts steel scrap then rolls it into reinforcing bars for the walls of buildings, was opened by President Mikheil Saakashvili in November last year and has the capacity to produce 175,000 tonnes of material a year. "By using the locally available steel scrap that was being exported and was contributing very little towards the budget of the country and converting it into steel bars for construction, a great amount of foreign currency that is presently flowing out from the country can be retained," GeoSteel's president, Bipin Sharma, tells bne in an interview at the plant.

Rustavi is a faded steel town built under Stalin 35 kilometres southeast of Tbilisi. In its Soviet heyday, it smelted iron ore from neighbouring Azerbaijan into steel and employed tens of thousands of workers. Today, most of its factories and workshops lie idle.

The new mill employs 500 people, and a further 1,000 in spin-off services. It is 49% owned by JSW, India's third-biggest steelmaker, and 51% by UK-registered Georgian Steel Holding Group. The European Bank for Reconstruction and Development contributed $28m to its financing. "This steel plant in Rustavi is a step towards the revival of the steel industry of Georgia and towards improving the economic and social conditions of the residents of Rustavi," Sharma said.

Since the collapse of the Soviet Union and consequently Georgia's steel industry the country's scrap dealers have been collecting metal and exporting it to major steel producer, Turkey, through the Black Sea port of Poti. While market fluctuations might sometimes still make it more profitable for dealers to sell to Turkey, cheaper transport costs and easier logistics in Georgia mean GeoSteel will almost always be able to source the 200,000 tonnes of scrap it will eventually need each year domestically, Sharma said.

Better days

The start-up of the plant has not been without problems. The mill, which was built from scratch and includes an electric arc furnace for melting scrap into liquid steel, a rolling mill and a power station, was started in 2007 when the Georgian economy was seeing growth of over 10% a year and world steel markets were buoyant.

Construction was well under way when the August 2008 war between Russia and Georgia began and was immediately followed by the global financial crisis. Georgian growth skidded to a halt and the economy shrank by 3.9% in 2009. The foreign direct investment that had been fuelling that growth fell by over 50% the same year and building projects all over the country were abandoned.

Sharma said GeoSteel never considered abandoning the project, but the mill has only been operating at 40-70% of its total capacity since it began production, and won't be able to approach full capacity until conditions improve.

GeoSteel wants to sell the bulk of its output in Georgia, and also to export to Armenia and Azerbaijan. It has already sold some material in Armenia, but has so far come up against bureaucratic hurdles when trying to deal with Azerbaijan.

It's also facing competition from Ukrainian reinforcing bar producers, and suffering because the Georgian government, keen to promote its free market credentials, does not impose any import quotas to protect domestic producers, a practice which is widespread in other steel producing countries.

Sharma said the plant is running at a loss for now, but that he's confident the recovery of the world's major economies and the first indications that demand for steel is picking up again will have a trickle down effect.

The latest statistics from Brussels-based industry body the World Steel Association showed that production increased in all major steel producing countries in February, rising 24.2% to 108m tonnes compared with the same month in 2009. "There are signs that steel markets, and construction steel markets are improving. We should be breaking even within three months," Sharma said.