The latest prosecution’s raid on Dongkuk Steel Mill and its investigation into the group owner are casting a cloud on the future of the nation’s faltering third-largest steelmaker, which had hoped for revitalization through its ongoing Brazil project.

The prosecution unexpectedly raided the headquarters of the steelmaker in Seoul on Saturday, on suspicion that the firm stashed some 10 billion won ($9.06 million) in U.S. accounts to avoid taxes. It is also suspected of exaggerating the sales price of raw materials it sold to Russian and Japanese buyers.

News reports said that company chairman Chang Sae-joo is suspected of having gambled abroad with the embezzled fund, coming once again under the prosecutorial scrutiny in 11 years. 

Market insiders are now expressing doubts about whether the steelmaker will be able to complete its mammoth project to build a steel mill in northwestern Brazil by the end of this year, citing the probe, the widened deficit the company posted last year and a continued slowdown in the global steel industry.

A day before the raid, Dongkuk president Nam Yun-Yong said in a shareholders meeting that the Brazilian project is nearing fruition and that he is “assured to see a profit turnaround starting 2017 after it begins operations in earnest.”

The project goes back to 2001 when Dongkuk decided to enter the Brazilian market. In 2008, it established Companhia Siderrgica do Pecm, a joint venture with Vale SA and POSCO, which is building a mill with the capacity to produce 3.21 million tons of crude steel a year starting in 2016.

Dongkuk has invested a total of 862 billion won into the project.

“The CSP project in Brazil is our only hope for the firm’s turnaround. If this doesn’t go well, I don’t know how we’ll survive in the market,” a Dongkuk employee, who asked not to be identified due to the sensitivity of the issue, said on Wednesday.

The steelmaker posted 3.6 trillion won in sales last year, down 10.2 percent from the previous year, with an operating loss of 67 billion won. Including its six affiliates, sales were 6.68 trillion won in the same period, down 9.3 percent from the previous year, with an operating profit of 20.4 billion won.

Dongkuk is South Korea’s first private steelmaker founded by late chairman Chang Kyung-ho in Busan in 1954 ― 14 years earlier than when the country’s largest steelmaker POSCO was established.

The company prospered in the 1960s and 1970s by manufacturing steel plates used for building ships, the first to be able to do so in Korea. It is now ranked on the list of top 30 conglomerates here.

But its reputation nosedived in 2004 when the founder’s son and current chairman Chang Sae-joo was found guilty of using corporate funds to pay his personal debts.

“It will be difficult for Dongkuk Steel Mill to solely focus on the Brazilian business amid one of the worst economic slumps in years, slowing demand in the market and with the prosecution targeting the firm,” said an analyst from Daewoo Securities, asking not to be named.

By Suk Gee-hyun (monicasuk@heraldcorp.com)