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Submitted to: Dr. V. K. Vasal

Department of Financial Studies, University of Delhi

Submitted By:
Naveen Pachisia (2230)

This is to certify that the project entitled, “Evaluation of Steel Sector” is based
on my original research work, and my indebtedness to other works has been
duly acknowledged at the relevant places in this study. Further this work has
been not been submitted earlier for the award of any other degree.

(Naveen Pachisia)
Master of Finance and Control
Department of Financial Studies
University of Delhi, South Campus

Internal Guide External Guide

……………………………………… ……………………………….

(Dr. V.K. Vasal) (Mr. Anil Sodani)

Faculty Deputy General Manager
Department of Financial Studies Jindal Saw Limited
University of Delhi, South Campus

At the successful completion of my project, I would like to express my sincere
gratitude to all the people without whose support this project would not be

I wish to express my heartiest thanks to Dr. V. K. Vasal, Faculty, Department of

Financial Studies, University of Delhi South Campus for his valuable support and
advice for carrying out this project. I thank him sincerely for giving me the
opportunity to work on this project, and being the guiding spirit behind this

I would also like to express my sincere gratitude towards Mr. Anil R. Sodani,
Deputy General Manager, Syndicate Bank, for his kind co-operation and valuable
inputs throughout the duration of this project, and also for helping me have a
keen insight of the steel sector.

I also take this opportunity to thank my family and friends, and above all the
Almighty for being with me throughout the time that it took to complete this
Executive Summary

India is a reputed name in the world steel industry; the country's steel industry is
catching up the pace and luring the steel majors from all over the world. The
industry has gained strength from the strong Indian economy, and strong
sectors like infrastructure, construction and automobile.

Although India consumes less steel as compared to other Asian countries, it was
ranked the fifth major crude steel producer in the world in 2008. Thus, the
country offers vast scope for the steel industry in future

Analyzing the Indian Steel Industry focuses on the Indian Steel Industry and
analyses each and every aspect of the industry. Starting from an analysis of the
competitiveness of the industry to the production/consumption scenario of the
industry, the report analyzes the Indian Steel Industry through a SWOT
framework analysis, a PEST framework analysis, and a Porter's Five Forces


To realise the potential of the Indian Steel Industry the steel makers have to
realise the potential of having strategic alliances. There have been almost
revolutionary changes in the global steel scene with fierce competitive pressures
on performance, productivity, price reduction and customer satisfaction. National
boundaries have melted to encompass an ever increasing world market. Trade in
steel products has been on the upswing with the production facilities of both the
developed and the developing countries complementing each other in the
making of steel of different grades and specialty for the world market. The TATA-
Corus deal viewed as one of the revolution in the Indian Steel Industry. In this
study, the detail aspect of the strategic alliances would be studied. The technical
feasibility, economic feasibility and the social aspects entailed in it

The global steel industry has been going through major changes since 1970.
China has emerged as a major producer and consumer, as has India to a lesser
extent. Consolidation has been rapid in Europe.

Growth of the industry

Global steel production grew enormously in the 20th century from a mere 28
million tonnes at the beginning of the century to 781 million tonnes at the end.

World Steel Production in the 20th Century

Over the course of the 20th century, production of crude steel has risen at an
astounding rate, now fast approaching a production level of 800 million tons per
year. Today, it is difficult to imagine a world without steel.

During the 20th century, the consumption of steel increased at an average

annual rate of 3.3%. In 1900, the USA was producing 37% of the world’s steel.
With post war industrial development in Asia that region now (at the turn of the
century) accounts for almost 40%, with Europe (including the former Soviet
Union) producing 36% and North America 14.5%.

Steel consumption increases when economies are growing, as governments

invest in infrastructure and transport, and build new factories and houses.
Economic recession meets with a dip in steel production as such investments
falter. If you were to overlay the above graph with a time sheet showing major
historical events, the peaks and dips become meaningful. Note for example the
peaks corresponding to the years of the two World Wars, followed each time by a
dip, and soon after by strong climbs as the major economies recovered from the
war and entered new periods of prosperity and growth, most notably in the
1950s and 1960s. The trend over the past three decades can also be seen to be
in line with cyclical economic trends, with alternating periods of prosperity and
recession. That was the period when the steel industry developed in Western
Europe and the USA followed by the Soviet Union, Eastern Europe and Japan.
However, steel consumption in the developed countries has reached a high
stable level and growth has tapered off.

After being in the focus in the developed world for more than a century,
attention has now shifted to the developing regions. In the West, steel is referred
to as a sunset industry. In the developing countries, the sun is still rising, for
most it is only a dawn.

Towards the end of the last century, growth of steel production was in the
developing countries such as China, Brazil and India, as well as newly developed
South Korea. Steel production and consumption grew steadily in China in the
initial years but later it picked up momentum and the closing years of the
century saw it racing ahead of the rest of the world. China produced 220.1
million tonnes in 2003, 272.2 million tonnes in 2004 and 349.36 million tonnes in
2005. That is much above the production in 2005 of Japan at 112.47 million
tonnes, the USA at 93.90 million tonnes and Russia at 66.15 million tonnes.

Growth potential of the industry

Growth of the Chinese steel industry appears to be staggering. However, when

one considers that China has a population of 1.3 billion, the per capita steel
consumption is around or below that of the developed countries. Indeed, while
China has been progressively raising steel production for many years, it has also
been importing substantial quantities of steel. It is only now that China has
become a net exporter of steel. This indirectly means that China has also
reached a level of production saturation and its steel industry is more likely to
witness more of consolidation and reorganisation in coming years rather than
any major expansion of its assets.

Amongst the other newly steel-producing countries, South Korea has stabilised at
around 46-48 million tonnes, and Brazil at around 30 plus million tonnes. This
brings the focus of the industry to India. Considering a steel consumption of
300 kg per man per year to be a fair level of economic development, India will
have to come up to somewhere around 300 million tonnes, if it is to fulfil its
ambitions of being a developed country. That of course is a long journey from
the present production level of around 50 million tonnes but one must consider
its past before coming to a conclusion about its potential. India was producing
only around a million tonnes of steel at the time of its independence in 1947. By
1991, when the economy was opened up steel production grew to around 14
million tonnes. Thereafter, it doubled in the next 10 years, and then it is doubling
again, maybe over a slightly longer span. Steel Production in India is expected to
reach 124 million tons by 2012 and 275 million tons by 2020 which could make it
the second largest steel maker.

In the developed countries, the trend is on consolidation of industry. Cross-

border mergers have been taking place for several years. The focus is on
technological improvements and new products.

Globally, the steel industry became a billion tonne industry in 2004. How much
more it will grow will depend primarily on how much more steel is consumed in
the developing countries.

Reduction in workforce

Steel is no more the labour-intensive industry it used to be. Earlier, it was often
associated with the image of huge work force living in a captive township. All
that has changed dramatically. A modern steel plant employs very few people. In
South Korea, Posco employs 10,000 people to produce 28 million tonnes. As a
thumb rule, one can put the direct employment potential at 1,000 per million
tonnes. It could be less. However, steel being a basic industry; it generates
substantial growth of both upstream and downstream facilities. According to
some estimates one person-year of employment in the steel industry generates
3.5 person-years of employment elsewhere. Considering all these, total
employment generation will be substantial.

The third quarter of the twentieth century witnessed massive growth of the
global steel industry. Annual production rose more than three times in 15 years
from 1960. In the last quarter of the century, production reached a plateau,
rising only by around 100 million tonnes. Increase in production gave way to
increases in productivity.

During the period 1974 to 1999, the steel industry had drastically reduced
manpower all around the world. In USA, it was down from 521,000 to 153,000. In
Japan, it was down from 459,000 to 208,000. In Germany, it was down from
232,000 to 78,000. In UK, it was down from 197,000 to 31,000. In Brazil, it was
down from 118,000 to 59,000. In South Africa, it was down from 100,000 to
54,000. South Korea already had a low figure. It was only 58,000 in 1999. The
steel industry had reduced manpower around the world by more than 1,500,000
in 25 years.

Employment in the steel industry 1974, 1990 and 1996-2000

In thousand

Country 1974 1990 1996 1997 1998 1999 2000

44 21 13 12 12 12 12
Belgium 64 26 23 21 20 20 20
Denmark 2 1 1 1 1 1 1
Finland 12 10 7 7 8 7 8
France 158 46 39 38 38 38 39
FR Germany 232 125 86 82 80 78 77
Greece 0 3 2 2 2 2 2
Ireland 1 1 0 0 0 0 0
Italy 96 56 39 37 39 39 39
Luxembourg 23 9 5 5 4 4 4
Netherlands 25 17 12 12 12 12 12
Portugal 4 4 2 2 2 2 2
Spain 89 36 24 23 22 22 22
Sweden 50 26 14 14 14 13 13
United 197 51 37 36 34 31 29
European 996 434 306 293 290 280 278
Yugoslavia 42 69 17 17 17 15 15E
Canada 77 53 53 53 55 57 56
United 521 204 167 163 160 153 151
Brazil 118 115 79 74 63 59 63
South Africa 100 112 71 70 61 54 56
Japan 459 305 240 230 221 208 197
Republic of n/a 67 66 64 59 58 57
Australia 42 30 21 20 20 24 21E
World 644 770 750 799 777 789 848
Production (3)


India's Steel Industry is more than a century old. Before the economic reforms of
the early 1990s the Indian steel industry was a predominantly regulated one with
the public sector dominating the industry. Tata Steel was the only major private
sector company involved the production of steel in India. Sail and Tata Steel
have traditionally been the major steel producers of India. In 1992, the
liberalization of the India economy led to the opening up of various industries
including the steel industry. This led to the increase in the number of producers,
increased investments in the steel industry and increased production capacity.
Since 1990, more than Rs 19,000 crores (US$ 4470.58 million) has been invested
in the steel industry of India.

India's steel industry went through a rough phase between 1997 and 2001 when
the overall global steel was facing a downturn and recovered after 2002. The
major factors that led to the revival of the steel industry in India after 2002 were
the rise in global demand for steel and the domestic economic growth in India.

India has now emerged as the eighth largest producer of steel in the world with a
production capacity of 35MT. almost all varieties of steel is now produced in
India. India has also emerged as a net exporter of steel which shows that Indian
steel is being increasingly accepted in the global market.
The growth of the steel industry in India is also dependant, to a large extent, on
the level of consumption of steel in the domestic market. Steel consumption is
significant in housing and infrastructure. In recent years the surge in housing
industry of India has led to increase in the domestic demand for steel.

More than 3500 different varieties of steel are available in the steel industry of
India. These can however be classified into two broad categories -

Flat Products - Flat products include plates and hot rolled sheets such as coils
and sheets. Flat products are derived from slabs. One of the major uses of steel
plates is in ship building.

Long Products - Long products include bars, rods, wires, ropes and piers.
These are called long products due to their shapes. Long products are made
from billets and blooms. Long products are mostly used in housing and
construction and also in rail tracks.
Size of the Indian Steel Industry

The steel industry is one of the major industries of India. It has also gained
considerable importance in the global steel industry. This century old industry of
India was mostly a regulated one till 1990.

The economic reforms undertaken in India in the early 1990s gave a major boost
to the steel industry and it grew considerably in terms of investment, production
capacity and number of producers. The industry faced a downturn during the late
nineties but revived again by 2002.

The size of India's steel industry has increased considerably in recent years.
According to latest available estimates, India ranks eighth among the top steel
producers of the world with a production capacity of 35 MT.

The steel industry of India has capital investments

Of more than Rs 100, 000 crores. The total employment in the industry is more
than two million (including direct and indirect employment).

Some of the major reasons that have led to the growth in the size of
India's steel industry are -

Abundant availability of iron-ore in India

Good facilities for steel production
Increased consumption of steel in the sectors like construction.

Growth Potential of India’s Steel Industry

India has traditionally been one of the major producers of steel in the world. Till
the 1990s the steel industry of India was regulated and controlled by
government policies. After the economic reforms of the early 1990s, the Indian
steel industry has evolved significantly to conform to global standards.

India has set a vision to be an economically developed nation by 2020. The steel
industry is expected to play a major role in India's economic development in the
coming years. The steel industry of India has a very high growth potential and is
expected to register significant growth in the coming decades. India is expected
to emerge as a strong force in the global steel market in coming years.

The two major aspects that are expected to play a significant role in the
growth of the steel industry in India are -

Abundant availability of iron ore in the country

The country has well established facilities for steel production

Steel production in India has grown from 17 MT in 1990 to 36 MT in 2003. It is

expected that by 2011, the steel production in India will grow to 66 MT.
The current scenario of the Indian steel industry indicates that there is huge
growth potential in his industry. The per capita-consumption of steel in India,
according to latest available estimates, is only 29 kg. This is much less compared
to the global average of 140kg. The per capita consumption level of developed
nations like the United States of America is 400kg. In this respect, one of the
major initiatives that need to be taken is to focus on increasing the consumption
of steel in the rural areas of India. The potential for the growth of consumption of
steel in the rural areas of India for purposes like rural housing, rural
infrastructure, etc is high which needs to be tapped efficiently.

In order to realize the growth potential in the steel industry of India, it is essential
to ensure that the industry can remain competitive. One of the major aspects in
this regard is the availability of inputs. Shortage of inputs like coke has led to
increase in costs earlier. Moreover proper infrastructure facilities like transport
infrastructure, power etc are of prime importance in maintaining the
competitiveness of the industry.

Most developed countries have regulations that are aimed to protect the
domestic steel industry. The Indian steel industry has comparatively much lesser
protection through regulations. Proper regulatory measures should be adopted by
the government to protect the domestic steel industry.
FDI in Steel Industry
The foreign direct investment in India being made in the steel industry of India
has been picking up in the recent years as a result of the immense growth
potential of the country's steel industry. In the Asian continent India is second
only to China in terms of growth potential. The gross domestic product of India
has increased in the recent times.

This has sparked off the demand for production of steel in the country and the
production has increased as well. In the recent times India has been among the
top producers of crude steel of the world. All these factors are supposed to be
important for attracting foreign direct investment in the Indian steel industry.

The Indian national government also has been pretty liberal with their approach
to the foreign direct investment being made in the country. The Indian
government has also relaxed the various foreign investment laws. This has led to
more international steel giants coming to India to tap the abundant resources
present in the country.

The increased interest shown by such companies has led to a growth in the steel
industry of India. Research and studies have shown that Orissa and Jharkhand
would be the steel junctions of India.

In the recent times these two states, which are located in the eastern part of
India, have been experiencing a number of steel projects in India. These projects
have been funded by the Indian national government, as well as, a number of
companies that are forces to reckon with in the context of the Indian steel

Since, the government has also been taking steps to make sure that the
production and demand for Indian steel remains high in the international market,
it may be assumed that an increasing number of companies from around the
world would be interested in the Indian steel industry

Challenges before Indian Steel Industry

There are certain challenges before the steel industry of India in the recent times.
India has been one of the major producers of steel in the world and has also
been attracting a lot of foreign direct investment. A few issues would need to be
attended to if India wants to be counted as one of the major and most economical
producers of steel. The three areas that need to be improved upon in the view of
the exports are the infrastructure, ability to draw the top names in steel, and
wealth creation issues.

The condition of the infrastructural facilities of the steel industry in India is not at
all conducive to a sustainable growth and development of the steel industry of
the India.

The methods that are adopted for the creation of wealth in the Indian steel
industry are also supposed to act as hindrances to the growth and development
of the Indian steel industry. The Indian steel industry has also not been able to
draw the best professionals in the steel industry and that has been a major
drawback of the industry.

The experts are also of the opinion that not enough policies or measures have
been adopted to amend the situation in case of the infrastructural facilities
available in the steel sector. Even though India is capable of producing steel at a
good rate and also increase the volume of production there is not enough land
available to support such activities. One of the major reasons for such problems
is the consistently increasing population of India.
Porter’s Five Forces Analysis of the Steel Industry & Firm Level
capabilities analysis

Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or
Switching costs of firms in the
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in
Absolute cost
Proprietary learning
Access to inputs
-Switching costs
Government policy
-Buyer inclination to
Economies of scale
Capital requirements
trade-off of
Brand identity
Switching costs
Access to distribution

Expected retaliation
Proprietary products
Bargaining leverage RIVALRY
Buyer volume -Exit barriers
Buyer information -Industry
Brand identity concentration
Price sensitivity -Fixed costs/Value
Threat of backward integration added
Product differentiation -Industry growth
Buyer concentration vs. industry -Intermittent
Substitutes available overcapacity
Buyers' incentives -Product differences
-Switching costs
-Brand identity
-Diversity of rivals
-Corporate stakes
1. Competition from substitutes.
Increasing substitutes in the form of plastics, aluminium and advanced

2. Threat of Entry
High barriers to entry in the integrated mill segment. However, with the
mini-mills, the barriers are being lowered due to lower costs (a tenth of
those in the integrated mills per ton of steel produced).

3. Competition from rivals.

Highly competitive since products are not differentiated and have high
fixed costs as well as exit barriers. There is also competition from the
cheaper imports as well as the cyclicity of demand.

4. Bargaining power of buyers

Price sensitive market due to no product differentiation.

5. Bargaining power of suppliers

Unionised labour leading to high bargaining power of labour supply. Cost
competition among steel manufacturers also leads to high bargaining
power of suppliers.

Sources of competitive advantage in the steel industry

1. Length of production time, i.e., technology used in production process.

2. The cost of production, especially since the steel market is highly

price-sensitive. Low-cost, high-quality imports pose a significant threat
to the domestic industry and hence, competitive pricing is essential to
be ahead.

3. “Dependable delivery”, i.e., lower delivery time to consumers.

4. Quality of steel produced and distributed.

5. People
• High productivity of labour at its plants/production facilities.
• High performance orientation through performance linked
compensation plans for employees.
• Dedicated workforce indicated by lower turnover (only 5%) than the
industry average (10%-12%). This could be attributed to the equality of
treatment among workers at the production facilities (same colour

6. Firm level capabilities

• Simple and flat organization structure with only about 5 layers.
SWOT Analysis of Indian Steel Industry


1.The government offers a wide range of concessions to investors in India,

engaged in steel industry. The main concessions include, inter alia:

* Steel in specified backward districts is eligible for a complete tax holiday for a
period of 5 years from commencement of production and a 30 percent tax
holiday for 5 years thereafter.

* Environment protection equipment, pollution control equipment, energy saving

equipment and certain other equipment eligible for 100 percent depreciation.

* One tenth of the expenditure on prospecting or extracting or production of

certain minerals during five years ending with the first year of commercial
production is allowed as a deduction from the total income.

* Export profits from specified minerals and ores are eligible for certain
concessions under the Income tax Act.

* Minerals in their finished form exempt from excise duty.

* Low customs duty on capital equipment used for minerals; on nickel, tin, pig
iron, unwrought aluminium.

* Capital goods imported for steel under EPCG scheme qualify for concessional
customs duty subject to certain export obligation.

2. World's largest producer of mica; third largest producer of coal and lignite &
barites; ranks among the top producers of iron ore, bauxite, manganese ore and

3. Labours easily available

4. Low labour and conversion costs.

5. Large quantity of high quality reserves.

6. Exports iron-ore to China and Japan on a large scale

7. Strategic location: Proximity to the developed European markets and fast-

developing Asian markets for export of Steel, Aluminium


• Coal steel in India is associated with poor employee productivity. The

output per miner per annum in India varies from 150 to 2,650 tonnes
compared to an average of around 12,000 tonnes in the U.S. and
Australia; and

• Historically, opencast steel has been favoured over underground steel.

This has led to land degradation, environmental pollution and reduced
quality of coal as it tends to get mixed with other matter;

• India has still not been able to develop a comprehensive solution to deal
with the fly ash generated at coal power stations through use of Indian
coal. Clean coal technologies, such as Integrated Gasification Combined
Cycle, where the coal is converted to gas, are available, but these are
expensive and need modification to suit Indian coal specifications.

• Poor infrastructure facilities

• Steel technology is outdated

• Low innovation capabilities

• Labour force is highly un-skilled and inexperienced

• High rate of accidents

• Lack of R&D programs and training and development

• Most of the Indian steel companies do not have access to Indian capital

• There is a lack of respect for the steel industry and it suffers from the
incorrect perception that ore deposits are depleted.

• There is limited access to capital, and mines are increasingly more costly
to find, acquire, develop and produce.
• There are long lead times on production decisions.

• The Indian steel industry suffers from an out-dated, unattractive approach

to steel education that is partly to blame for insufficient human resources.

• Improvement in operational efficiency of the steel companies -

Steel companies are in need of an organizational transformation to
gradually align its operating costs to international standards. Steel costs of
Indian companies are at least 35 percent higher than those of leading coal
exporting countries such as Australia, Indonesia, and South Africa. To
match productivity, they will need to invest in new technologies, improve
processes in planning and execution of projects, and institutionalize a
comprehensive risk management framework.

• Steel operations are not environment friendly. Least importance is given

to environment concerns.

• High rate of illegal steel

The Opportunities

India has an estimated 85 billion tonnes of mineral reserves remaining to be

exploited. Besides coal, oil and gas reserves, the mineral inventory in India
includes 13,000 deposits/ prospects of 61 non-fuel minerals. Expenditure outlay
on steel is a meagre sum when compared to other competing emerging steel
markets and the investment gap is most likely to be covered by the private
sector. India welcomes joint ventures between foreign and domestic partners to
mobilise finances and technology and secure access to global markets.

• Potential areas for exploration ventures include gold, diamond, copper,

lead, zinc, nickel, cobalt, molybdenum, lithium, tin, tungsten, silver,
platinum group of metals and other rare metals, chromate and
manganese ore, and fertiliser minerals.

• The main opportunities in the steel sector (excluding coal and industrial
minerals) are in the development and production of surplus commodities
such as iron ore and bauxite, mica, potash, few low-grade ores, steel of
small gold deposits, development of placer gold resources located on the
frontal belt of the Himalayas, steel known deposits of economic and
marginal categories such as base metals in Bihar and Rajasthan and
exploitation of lacerate for nickels in Orissa, molybdenum in Tamil Nadu
and tin in Haryana.

• Considerable potential exists for setting up manufacturing units for value

added products.

• There exists considerable opportunities for future discoveries of sub-

surface deposits with the application of modern techniques.
• Current economic steel practices are generally limited to depths of 300
meters and 25 percent of the reserves of the country are beyond this

• Strengthening of logistics in coal distribution - In India, the logistics

infrastructure such as ports and railways are overburdened and costly and
act as bottlenecks in development of free market. Privatization of ports
may bring the needed efficiencies and capacities. In addition, capacity
addition by the Indian Railways is necessary to increase freight capacity
from the coal producing regions to demand centres in the northern and
central parts of the country. On the Indian rail network, freight trains get a
lower priority than passenger trains, a problem that promotes delays and
inefficiency. Special freight corridors would raise speeds, cut costs, and
increase the system's reliability.

• Focusing on technology for future - India's numerous technology

research institutes are working on energy related R&D. However, there is
a possibility that they are operating in a fragmented fashion. The
Government may get improved recoveries on its investment by
concentrating on few important technology areas. To start with focus may
be applied for tighter emission standards and development of inexpensive
clean-coal technologies viz. extraction of methane from coal deposits.

• Estimated 82 billion tonnes of reserves of various metals yet to be tapped

• While India has 7.5% of the world's total bauxite deposits, aluminium
production capacity is only 3% of world capacity, indicating the scope and
need for new capacities


• Foreign Investment in the Steel Sector

During 1999, the Government had cleared 7 more proposals of leading

international steel companies for prospecting and exploration in the mineral
sector to the tune of US$ 62.5 million. 65 licenses have been issued till date for
prospecting an area of around 90,142 skims in the states of Rajasthan,
Maharashtra, Gujarat, Bihar, Haryana and Madhya Pradesh. Prospecting licenses
have been granted in favour of Indian subsidiaries of well-known steel

• Large integrated international metal manufacturers including POSCO,

Mittal Steel and Alcan have announced plans for expansion in India

• Steel companies and equipment suppliers are under the constant threat of
being taken over by foreign companies.

• A heavy tax burden discourages further investment.

• Politicians undervalue the industry's contributions to the economy

Competition Analysis of the Steel Industry

 Differential Pricing

 Downstream producers compete with integrated producers for the

same end-product

 Allegations of differential pricing between the intermediate and the

end product

 Cartelization?

 Threat of imports, public perception, users’ of HRC constitute a

large lobby

 Suspicions of concerted action by steel majors (PSUs operation)

 Cartelization, when the market is strong, but not when it is weak

 Single largest steel product traded, and requires large investment

 Five producers dominate the market

 Vertical integration: example, SAIL and TISCO also manufacture
downstream products, though much of it is merchandised

 Intra-industry competition is complex due to merchant operations, where

users of intermediate face competition with the same finished product also
produced by the producers of intermediates

 Government intervention has played a major role in determining the

competition scenario

Tata - Corus: Visionary deal or costly blunder?

Is the Corus acquisition by Tata Steel a defining moment for the company has
made out to be?

After four months of twists and turns, Tata Steel has won the race to acquire
Corus Group. The bidding war between Tata Steel and Brazilian company CSN
was riveting and ended in a rapid-fire auction. Initial reactions to the deal are
highly diverse and retail investors are completely puzzled by the market

Going by the stock market reaction yesterday, the acquisition is a big blunder.
The stock tanked 10.5 per cent after the deal was announced and another 1.6
per cent today. Investors are worried about the financial risks of such a costly

Media reaction to the deal has been just the opposite. Almost all the reports
were adulatory while editorials praised the coming of age of Indian industry. A
prominent financial daily presented the deal almost as revenge of the natives
against the old colonial masters with a picture of London covered in our national

Its editorial warned the market 'not to bet against Tata', citing the previous
instances when sceptics were proved wrong by the group. Official reaction has
been no different and the finance minister even offered all possible help to the
Tata Group.

Is the acquisition too costly for Tata Steel? Is price the only criterion while
evaluating an acquisition? Should managers focus on keeping shareholders
happy after every quarter or should they focus on the long-term, big picture?
These are tough questions and, unfortunately, answers would be clear only after
many years - at least in this case.

When could the steel cycle turn?

The last few years were some of the best ever for the global steel industry as
robust demand from emerging economies like China pushed up prices. Profits of
steel manufacturers across the globe swelled and their market capitalisations
have multiplied many times.

Global Steel output

(in million tonnes)

Country 2005 2006 % change

China 355.8 418.8 17.7

Japan 112.5 116.2 3.3

US 94.9 98.5 3.8

Russia 66.1 70.6 6.8

South Korea 47.8 48.4 1.3

Germany 44.5 47.2 6.1

India 40.9 44.0 7.6

Ukraine 38.6 40.8 5.7

Italy 29.4 31.6 7.5

Brazil 31.6 30.9 (2.2)

World production 1,028.8 1,120.7 8.9

How long will the good times last? Tata Steel believes the steel cycle is in a long-
term uptrend and the risk of a downturn in prices is low. In fact, the global steel
industry might witness sustained growth as during the 30-year period between
1945 and 1975.
The massive post-war infrastructure build-up in Western countries led to the
sustained steel demand growth in that period. The coming decades would see
similar infrastructure spending in emerging economies and steel demand would
continue to grow, according to this view.

The International Iron and Steel Institute (IISI), a respected steel research body,
corroborates this in its outlook. The growth in demand for global steel would
average 4.9 per cent per year till 2010 according to the IISI. Between 2010 and
2015, demand growth is expected to moderate to 4.2 per cent per annum
according to IISI forecasts. Much of this demand growth would come from China
and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per
cent annually from 2010 to 2015.

Now consider steel prices. Expectations of sustained demand growth have

already led to massive capacity additions, mostly in emerging markets. Chinese
steel capacity has expanded significantly over the last decade while a large
number of mega steel plants are being planned in India. Capacity additions by
Russian and Brazilian steelmakers would also be significant in future as they
have access to raw material.

Would the capacity additions outrun the demand growth and lead to subdued
steel prices? Under normal circumstances, that could have been a very strong
possibility. But many industry leaders believe that the global steel industry would
see a structural shift in the coming years.

Some of the inefficient steel mills in mature markets would face closure while
others would shift production to high value-added products using unfinished and
semi-finished steel supplied by steel mills in locations like India, Russia and Brazil
with access to raw material. This would limit aggregate supply growth and keep
prices stable in future.

Major global steel makers are also not unduly worried about the possibility of
large-scale exports from China, which would depress international steel prices.
Chinese capacity is expected to continue to grow in the coming years, but so
would the demand.

Besides, Chinese steel plants are not expected to emerge very efficient as they
depend on imported raw materials, which limit their pricing power. Many steel
analysts expect significant consolidation in the Chinese steel industry as margins
erode further in future. The Chinese government has already started squeezing
the smaller units by withdrawing their raw material import permits.

The need for scale

going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by
2010 and 1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global
steel player by far, has a present capacity, which is just 6.8 per cent for
projected demand in 2015. To maintain its current share, Arcelor-Mittal would
have to add another 50 million tonnes of capacity by then. This confirms the
view that there is still considerable scope for consolidation in the steel industry.
Global steel ranking

Company Capacity (in million


Arcelor - Mittal 110.0

Nippon Steel 32.0

Posco 30.5

JEF Steel 30.0

Tata Steel - Corus 27.7

Bao Steel China 23.0

US Steel 19.0

Nucor 18.5

Riva 17.5

Thyssen Krupp 16.5

As the industry consolidates further, Tata Steel - even with its planned Greenfield
capacity additions - would have remained a medium-sized player after a decade.
This made it absolutely vital that the company did not miss out on large
acquisition opportunities. Apart from Corus, there are not many among the top-
10 steel makers, which would become possible acquisition targets in the near

Tata Steel - Corus : Present capacity

(in million tonnes per annum)

Corus Group (in UK and The 19


Tata Steel - Jamshedpur 5

NatSteel - Singapore 2

Millennium Steel - Thailand 1.7

Aggregate present capacity 27.7

Tata Steel - Corus : Projected capacity
(in million tonnes per annum)

Corus Group (in UK and The 19


Tata Steel - Jamshedpur 10

Tata Steel - Jharkhand 12

Tata Steel - Orissa 6

Tata Steel - Chattisgarh 5

NatSteel – Singapore 2

Millennium Steel - Thailand 1.7

Aggregate projected capacity 55.7

With Corus in its fold, Tata Steel can confidently target becoming one of the top-
3 steel makers globally by 2015. The company would have an aggregate
capacity of close to 56 million tonnes per annum, if all the planned Greenfield
capacities go on stream by then.

Neat strategic fit

Corus, being the second largest steelmaker in Europe, would provide Tata Steel
access to some of the largest steel buyers. The acquisition would open new
markets and product segments for Tata Steel, which would help the company to
de-risk its businesses through wider geographical reach.

A presence in mature markets would also provide Tata Steel an opportunity to go

further up the value chain as demand for specialised and high value-added
products in these markets is high. The market reach of Corus would also help in
seeking longer-term deals with buyers and to explore opportunities for pushing
branded products.

Corus is also very strong in research and technology development, which would
add to the competitive strength for Tata Steel in future. Both companies can
learn from each other and achieve better efficiencies by adopting the best

But at what cost?

Now that Tata Steel has achieved its strategic objective of becoming one of the
major players in the global steel industry and steel demand growth is likely to be
robust over the next decade, has the company paid too much for Corus? Even
those analysts and industry observers who agree on the positive outlook for steel
demand growth and the need to achieve scale believe so.

The enterprise valuation of Corus at around $13.5 billion appears too steep
based on the recent financial performance of Corus. Tata Steel is paying 7 times
EBITDA of Corus for 2005 and a higher 9 times EBITDA for 12 months ended 30
September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA
multiple of around 4.5. Considering the fact that Arcelor has much superior
assets, wider market reach and is financially much stronger than Corus, the price
paid by Tata Steel looks almost obscenely high.

Tata Steel's B Muthuraman has defended the deal arguing that the enterprise
value (EV) per tonne of capacity is not very high. The EV per tonne for the Tata-
Corus deal is around $710 is only modestly higher than the Mittal-Arcelor deal.
Besides, setting up new steel plants would cost anywhere between $1,200 and
$1,300 per tonne and would take at least five years in most developing

But, are the manufacturing assets of Corus good enough to command this price?
It is a well-known fact that the UK plants of Corus are among the least efficient in
Europe and would struggle to break even at a modest decline in steel prices from
current levels.

Recent financial performance of Corus would dent the hopes of Tata Steel
shareholders even further. EBITDA margins, after adjusting for one-time incomes,
have steadily declined over the last 3 years. For the 9-month period ended
September 2006, EBITDA margins of Corus were barely 8 per cent as compared
to around 40 per cent for Tata Steel.

Corus Financials

Year 2004 2005 Jan-Sep 2006

Revenues 18.32 19.91 14.10

EBITDA 1.91 1.86 1.12

EBITDA Margin (%) 10.44 9.34 7.96

Operating Profits 1.30 1.17 0.75

Operating Profit Margin (%) 7.09 5.89 5.29

Net Profit 0.87 0.72 0.25

Net Profit Margin (%) 4.73 3.63 1.77

Figures in $ Billion

The price of an asset is more a factor of its future earnings potential than its past
earnings record. Operating margins of Corus can be significantly improved if Tata
Steel can supply slabs and billets. Tata Steel is targeting consolidated EBITDA
margins of around 25 per cent as and when it starts supplying crude steel to
Corus. If the company can sustain such margins on the enlarged capacities, it
would be quite impressive.

But that is a long way off as Tata Steel would have sufficient crude steel capacity
only when its proposed new plants become operational. Till then, the company is
targeting to maximise gains through possible synergies between the two
operations, which are expected to yield up to $350 million per annum within
three years.

In the meanwhile, Tata Steel has to make sure that cash flows from Corus are
sufficient to service the huge amount of debt, which is being availed to finance
the acquisition. According to the details available so far, Tata Steel would
contribute $4.1 billion as equity component while the balance $9.4 billion,
including the re-financing of existing debt of Corus after adjusting for cash
balance, would be financed through debt. The debt facilities are believed to be
structured in such a way that they can be serviced largely from the cash flows of

Interest rates on credit facilities for such buy-outs are often higher than market
rates because of the risks involved. At an expected interest rate of 7 per cent per
annum, the interest outgo alone would be over $650 million per year. Along with
repayment of principal, the annual fund requirement to service this debt would
be around $1.5 billion - assuming a 10-year repayment horizon.

The current cash flows of Corus are barely sufficient to cover this, even after
considering the synergy gains. If international steel prices decline even
modestly, Tata Steel would have to dip into its own cash flows or find other
sources like an equity dilution to service the debt.

Besides, funds may also be required for upgrading some of the Corus plants to
improve efficiencies. Tata Steel would have to manage all this without
jeopardising its Greenfield expansion plans which may cost a staggering $20
billion over the same 10-year period.

No wonder investors are deeply worried!

To its credit, the Tata Steel management has acknowledged that it would not be
an easy task to manage the next five years when Corus would have to hold on to
its margins without the help of cheaper inputs supplied by Tata Steel. If the
group can survive this initial period without much damage, life may become
much easier for the Tata Steel management.

Investors would consider Corus a burden for Tata Steel until such time there is a
perceptible improvement in its margins. That would keep the Tata Steel stock
price subdued and any decline in steel prices would have a disproportionately
negative impact on the stock.

However, long-term investors would appreciate that right now steel

manufacturing assets are costly and Corus was a prized target which made it
even more costly. With the strategic importance of such a large deal in mind,
Tata Steel management has taken the plunge.

If it can pull it off, even after a decade, the Corus acquisition would become the
deal, which would transform Tata Steel.

Other Mergers

Merger of KISCO with IISCO

KISCO was set up in 1995 as a Joint Venture Company of Kudremukh Iron Ore
Company Limited (KIOCL), MECON Limited and MSTC Limited (all PSUs under the
administrative control of Ministry of Steel) for manufacturing of Pig Iron and
Ductile Iron Spun Pipe (DISP). The profitability of the composite project was
assured from the DISP component being a finished product with high margins.
However, due to poor market condition prevalent then, KISCO could not access
the primary market for public equity and DISP plant could not be installed as per
schedule. Due to heavy losses, its net worth was eroded and the company was
referred to BIFR in 2003. In the meantime, KIOCL has acquired the entire equity
and KISCO became its subsidiary. Based on the merger/ rehabilitation scheme
submitted by KIOCL, BIFR approved the merger of KISCO with KIOCL with effect
from 1.4.2007 vide their Orders dated 18.6.2007 and 18.7.2007. Accordingly,
KISCO has been merged with KIOCL for all practical purposes with effect from
1.4.2007. Consolidated Balance Sheets indicating positive Net Worth after the
merger are to be filed with BIFR to get the name of KISCO struck from its

Merger of SIIL with NMDC

Sponge Iron India Ltd. (SIIL) a Public Sector Undertaking under the administrative
control of Ministry of Steel was set up in 1975 to develop indigenous rotary kiln
based technology for sponge iron production using iron ore and non-coking coal
extensively available in the country with the assistance of UNDP/ UNIDO. Due to
various constraints, both internal and external, the company could not make
profits in sponge iron business over a long period of time and the accumulated
loss of the company continued to increase particularly due to recession in steel
market during 1993-99. The Government of India granted a financial re-
structuring package to the Company in 2000 envisaging waiver of interest and
conversion of loan into equity. After this, the Company was referred for
disinvestment. However, due to continuous improvement in overall techno-
economic performance, improving market trend and financial restructuring, the
company turned around during 2000-01 and continued to remain in profit during
the subsequent years. After that the Company was taken out of disinvestment
list because of it being a profit making Company as per the policy envisaged
through National Common Minimum Programme (NCMP).The Ministry of Steel
had set up an Expert Group to examine the various merger proposals of the PSUs
under the Ministry. The Expert Group has recommended the merger of SIIL with
NMDC keeping in view the raw material potential of SIIL and proposed capacity
expansion of sponge iron by the NMDC.
Acquisition and merger of Neelachal Ispat Nigam Ltd. (NINL) by SAIL

As per the recommendations of Committee of Secretaries (CoS), an Empowered

Committee headed by Secretary, Department of Disinvestment (DOD) was
constituted in January, 2006, to oversee the modalities of the merger. SAIL Board
in its 312th meeting held on 24.3.06 accorded in-principle approval for acquiring
equity share capital of NINL through cash payment and subsequently merging it
with SAIL.

Merger of Maharashtra Elektrosmelt Ltd. (MEL) with SAIL

Pursuant to the approval of the Expert Group set up by the Ministry of Steel that
MEL should be merged with SAIL, Board of Directors of SAIL in their 314th
meeting held on 25.5.06 and in the 193rd meeting of MEL Board held on 26.5.06
accorded in principle approval for the merger of MEL with SAIL.

Merger of Bharat Refractories Ltd. (BRL) with SAIL

In-principle approval in respect of merger of BRL with SAIL was obtained from the
SAIL Board on 22.9.06 on a clean-slate basis and communicated to the Ministry
of Steel on 13.10.06. BRPSE had also recommended the financial restructuring
package for BRL. Valuation of assets of BRL has been carried out by MECON Ltd.
and thereafter approval of the cabinet for the merger process will be sought.

Acquisition of NISCO and developing it further

For taking over of the assets of National Iron & Steel Company Limited (NISCO)
including about 125 acres of land on a clean slate basis, Government of West
Bengal has been requested to provide the final clearance for transfer of NISCO at
a nil cost to SAIL. SAIL has proposed to modify the existing mill at NISCO and set
up rolling facilities to produce 45380 tonnes per annum of Fe 500 grade TMT
bars at an estimated investment of Rs. 48.28 crore (Road – Rs 16 Crore, TMT Mill
– Rs 27.89 crore, Contingency – Rs 4.389 crore).

Acquisition of Steel Complex Ltd., Calicut, Kerala

Steel Complex Ltd.(SCL), with a 50,000 tonnes per annum capacity for producing
continuous cast billets has approached SAIL through the Government of Kerala
for necessary help for its revival. SAIL provided technical guidance from June to
December, 2007 due to which the performance of SCL improved by about 18%.
SAIL has also provided an interest free trade advance of Rs. 5 crore in December,
2007 for purchase of scrap. The billets produced by SCL will be purchased by
SAIL for onward conversion and sale by SAIL.

Possible Impact of Mergers and Acquisitions

Mergers and acquisitions bring a number of changes within the organization. The
size of the organizations change, its stocks, shares and assets also change, even
the ownership may also change due to the mergers and acquisitions. The
mergers and acquisitions play a major role on the activities of the organizations.
However, the impact of mergers and acquisitions varies from entity to entity; it
depends upon the group of people who are being discussed here. The impact of
mergers and acquisitions also depend on the structure of the deal.

Impacts on Employees

Mergers and acquisitions may have great economic impact on the employees of
the organization. In fact, mergers and acquisitions could be pretty difficult for the
employees as there could always be the possibility of layoffs after any merger or
acquisition. If the merged company is pretty sufficient in terms of business
capabilities, it doesn't need the same amount of employees that it previously
had to do the same amount of business. As a result, layoffs are quite inevitable.
Besides, those who are working would also see some changes in the corporate
culture. Due to the changes in the operating environment and business
procedures, employees may also suffer from emotional and physical problems.

Employment in the iron and steel industry, 1975-1996

Country 1975 1996

Australia 35.000 12.300

Belgium 61.400 23.100

Brazil 123.900 80.000

France 157.000 38.500

Germany 226.700 85.900

Hungary 64.000 14.200

India 200.000 280.000

Italy 96.000 39.200

Japan 324.400 155.000

Poland 156.000 91.600

Spain 90.900 23.800

Russian Federation 837.600 705.200

South Africa 108.700 60.400

United Kingdom 190.700 37.000

United States 470.400 237.500

• Impact on Management

The percentage of job loss may be higher in the management level than
the general employees. The reason behind this is the corporate culture
clash. Due to change in corporate culture of the organization, many
managerial level professionals, on behalf of their superiors, need to
implement the corporate policies that they might not agree with. It
involves high level of stress.

• Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on

the shareholders. If it is a purchase, the shareholders of the acquired
company get highly benefited from the acquisition as the acquiring
company pays a hefty amount for the acquisition. On the other hand, the
shareholders of the acquiring company suffer some losses after the
acquisition due to the acquisition premium and augmented debt load.

• Impact on Competition

Mergers and acquisitions have different impact as far as market

competitions are concerned. Different industry has different level of
competitions after the mergers and acquisitions. For example, the
competition in the financial services industry is relatively constant. On the
other hand, change of powers can also be observed among the market
A Sector Analysis

For the quarter ended December 2009 the Steel sector as a whole reported
impressive set of numbers. During the quarter under review the Aggregate Sales
of 90 companies increased by 20% to Rs 44680
crore. Thanks to higher capacity utilization and
lower input costs, the Aggregate Operating Profit
Margins (OPM) more than doubled to 22.2% in the quarter ended September
2009 from 10.6% in the corresponding previous quarter. . As a result of rise in
revenues and spike in margins, the aggregate Operating Profits surged by 150%
to Rs 9931 crore.

With 35% rise in Other Income to Rs 906 crore, and relatively lower 8% and 10%
increase in interest and depreciation to Rs 1878 crore and Rs 1791 crore
respectively, the steel sector shined with remarkable 460% surge in PBT to Rs
7168 crore. Despite 484% jump in provision for tax, the sector secured 451%
jump in net profit to Rs 4962 crore in the quarter ended December 2009.

On the back of robust demand scenario from key user industry segment the steel
sector as a whole reported impressive performance for the quarter ended
December 2009. Furthermore the performance of the steel industry as a whole
looks spectacular because of lower base effect. The corresponding quarter last
year (i.e. quarter ended December 2008) was one of the most challenging
quarters for most of the domestic players within the steel sector.

For the quarter ended December 2009 SAIL's net turnover increased by 11% to
Rs 9697 crore. Its sales volume increased by 24.5% to 2.9 million tonnes during
this period. The lower growth in turnover as compared to volume growth was
primarily due to 12% fall in sales realization during quarter ended December
2009/ But thanks to fall in cost of imported coal, and as the company not only
increased volumes but enriched product mix, Sail's net profit almost doubled
(99% higher) to Rs 1675.55.

During the quarter under review Tata Steel reported a 33% increase in Total
Income to Rs 6374.88 crore. During this period, the company recorded 37% rise
in steel production to 16.88 lakh tonnes, while Steel sales surged by 49% to
15.96 lakh tones. Thanks to surge in sales and as input cost eased, the
company's OPM increased by 310 basis points to 33.8%. The subsequent
Operating Profit for the quarter under review stood at Rs 2156.90 crore which
was 46% higher when compared with corresponding period last year. The
ensuing net profit for the period under review increased sharply by 156% to Rs
1191.75 crore.
JSW Steel's Net Sales for the quarter ended December 2009 stood at Rs 4587.66
crore, which was 65% higher when compared with corresponding period last
year, mainly driven by volumes in spite of lower realizations. The PBIDT for the
quarter under review was Rs 1222.15 crore including forex gains of Rs 102.55
crore and PBIDT margin for the quarter was 26.5% as against 15.3% during the
corresponding quarter last year. The company turned around with a net profit of
Rs 514.23 crore in the quarter ended December 2009 from a net loss of Rs
127.50 crore in the corresponding previous quarter.

The pig iron Industry reported impressive set of numbers for the quarter ended
December 2009. For the quarter under review the Aggregate Sales of 4 pig iron
companies stood at Rs 741 crore which was 23% higher on a Y-o-Y basis
comparison. The ensuing Aggregate PAT for the period under review stood at Rs
60 crore as compared to an Aggregate Net loss of Rs 229 crore during the
corresponding period last year.

The sponge iron Industry also reported remarkable set of numbers for the
quarter ended December 2009. For the quarter under review the Aggregate
Sales of 11 sponge iron companies stood at Rs 3313 crore which was 2% higher
on a Y-o-Y basis comparison. The Aggregate OPM of the sponge iron companies
increase by 630 basis points to 26.3%. The subsequent Aggregate Operating
Profit for the period under review stood at Rs 872 crore which was 34% higher on
a Y-o-Y basis comparison. The resultant PAT for the period under review stood at
Rs 430 crore, which was 50% higher on a Y-o-Y basis comparison.
Why Mergers & Acquisitions??- Is It Technical Viable and economically

The challenges that confront Indian steel industry in the age of globalisation are
complex in nature. The secret of sustainable turnaround lies in how Indian steel
industry faces the challenges and develops combative and anticipatory prowess.
Problems and solutions may vary with organisations but there is more a
commonality than initially meets the eye.

Important performance indices such as Debt-Equity Ratio (D/E), Return on Net

worth (Post tax) (RONW), Net Sales/Total Assets and Net Profit/Net Sales have
been calculated and depicted in the excel sheet. The rising trend of D/E from
2.13 to 2.90 in the last four years. This shows that the industry is shouldering an
increasing debt burden and becoming more leveraged.

An improvement in Net Sales/Total Assets (Asset Turnover Ratio) from 0.42 to

0.52, although this figure lags behind international standards. (This ratio for the
US steel industry was 1.2 during the period 1975-1993)8. This improvement
indicates that the industry is utilising its assets more efficiently and/or is
shedding assets.

RONW (Post-Tax), as depicted, has plummeted from a + 3% return in 1997-1998

to -9% before making a partial recovery to +3% in 2001-2002. This indicates that
the industry, in general, is eroding its networth, losing money and thus,
becoming unattractive to the equity investors.

The ratio of Net Profit/Net Sales exhibits the decreasing profit levels, from + 2%
in 1997-1998 to a low of -6% and to somewhat recovered position of + 2% in
2000-2001. This indicates losses and heightening competition in the Indian steel

These four indices taken together show that the steel industry had been passing
through a difficult phase characterised by increasing debt, low asset utilisation,
industry wide losses (except Tata Steel) and intense competition. The reason
being its timely collaboration with Corus. The rejuvenating performance of the
company is reflected in the rising share prices of Indian steel companies. As can
be seen from the consolidated statements, the company have now been able to
perform consistently and the share prices have remained above Rs 100 (face
value Rs 10) defying the industry trend.

Reasons for Alliances

Survival Strategy- Considering the factor of its competition from international rivals
such as Mittal Steel who were trying to have a stronghold in the country as well as it was
losing its share in the international market. As such its collaboration with Corus made it
the 5th largest steel making company.

Cost Reduction- Reducing operating costs. Reduction in working capital costs.

Reduction in product inventory (unsold stock). Improving techno-economic parameters.
Substitution of raw material. Differentiated sourcing. Effective supply chain
management. Social infrastructure costs.

Revenue Maximisation- The alliances within the major steel producers gives
the companies access to larger markets. Wider markets offer large sources of
increasing the revenue. Aggressive marketing and large source provide large
access to revenue.

Focussed Marketing- The objective of focussed marketing is to have a

differentiated marketing strategy for products and services. Though the concept
may be new to the steel industry, it may be emphasized that focussed marketing
with the help of differentiation strategy is the only way by which steel makers
can outpace competition in today’s business scenario.

Market Expansion-Enhancing steel consumption could prove to be a potent

medium-term strategy for the Indian steel manufacturing units. New avenues
should be explored and market expanded for steel companies to turnaround. As
is evident today, most of the consumption of steel is concentrated in the urban
institutional segment and a smaller chunk goes to the urban trade. There is a
need today to expand the market beyond to the rural market.

Growth Strategy- While survival strategy must ensure that the company
should survive and sustain itself, it becomes necessary that effective long-term
strategies should also be formulated that could go beyond the immediate
present and ensure the company’s future prospects.

Technological Strategy-Technology strategy should involve assessment and

benchmarking of the strengths and weaknesses of the technological scenario of
the whole industry and consequent identification of technological threats and

Market Sustenance-In order to be ahead of the competition, it is necessary for

the Indian steel industry to aggressively handle the market and adopt either the
differentiated strategy, strategy of cost leadership or the strategy of focus.

The steel producers witnessed strong growth in sales volumes and savings in
input costs. Steel is highly capital intensive, with higher fixed costs, and hence
the rise in capacity utilization leads to disproportionately higher growth in
margins. So, despite fall in average realizations, the sector reported
exceptionally good growth in profits on better volumes, lower costs, and also due
to lower base. Further, the cut in excise duties too have helped.

Flat Steel prices in Mumbai have increased by over 5% to Rs 31537 per tonne in
January 2010 from Rs 29932 in November 2009. Long Steel prices in Gobindgarh
in Punjab have surged by 18% from Rs 21691 per tonne in November 2009 to Rs
25613 in January 2010. On the other hand, the sponge iron prices at Raipur in
Chattisgarh have sizzled by over 26% from Rs 14035 in November 2009 to Rs
17749 per tonne in January 2010. Though iron ore and coal prices have also
hardened during this period, we still expect healthy growth in revenues, margins
and profits, factoring in strong growth in demand and improving realizations. The
uptick in various steel intensive user industries like automobile, construction,
real estate, infrastructure and capital goods sector together augurs well for the
steel sector.

Steel Sector Aggregates

Powered by strong demand and fall in costs

Figures in Rs Crore
Particulars 0912(03) 0812(03) Var. (%)

Sales 44680 37362 20

OPM 22.2 10.6

Operating Profit 9931 3971 150

Other Income 906 670 35

PBIDT 10837 4641 134

Interest 1878 1738 8

PBDT 8959 2903 209

Depreciation 1791 1624 10

PBT 7168 1279 460

Tax 2206 378 484

PAT 4962 901 451