POSCO may quit steel mill project in India's Karnataka: source

SEOUL (Reuters) - South Korea's POSCO <005490.KS> is considering pulling out of a $5.3 billion steel mill project in India's Karnataka state because of opposition from residents and political instability, a source told Reuters on Tuesday.

The move, which is expected to be decided by this week, highlights the challenges facing POSCO as it tries to gain a foothold in India and tap into the country's iron ore reserves and customer base. The steelmaker is trying to expand overseas to offset competition from smaller rival Hyundai Steel Co <004020.KS> backed by automaker Hyundai Motor Co <005380.KS>.

"POSCO is in internal talks to quit the Karnataka project because protests by local residents make it difficult for us to acquire land," the source with knowledge of the matter said, asking not be named because the discussions are confidential.

The source added that the world's No.5 steelmaker by output will make a decision this week about whether or not to drop the plan to build a mill in Karnataka capable of producing 6 million tonnes of steel a year. POSCO signed a preliminary agreement with the state in 2010.

The source said POSCO would however proceed with another steel mill project worth $12 billion in the eastern state of Odisha.

POSCO shares dipped 0.3 percent in line with the wider market's <.KS11> 0.3 percent fall as of 0128 GMT.

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

"POSCO need 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.

POSCO's Odisha project in May overcame one of the last legal hurdles to the granting of a mining license, raising the South Korean firm's chances of getting preferential access to iron ore.

The South Korean steelmaker has waited eight years to get the necessary clearances, land and mining license to start work on the project, billed as India's largest foreign direct investment.

While the project may still face obstacles from protesters and over issues such as land ownership, a supportive federal government is expected to clear the path for POSCO's top concern - a captive mine that will give it steelmaking raw material iron ore.

(Reporting by Hyunjoo Jin; Editing by Stephen Coates)