Steel Industry Introduction: Steel plays a vital role in accelerating growth and development of a nation.

It is
used as a basic material in the manufacture of metal products, electrical machinery, transport equipment,
textile, etc and thus considered to be the backbone of the human civilization. It is a product of large and
technologically advanced industry having strong forward and backward linkages in terms of material flow
and income generation. In other words, the production and per capita consumption of steel is a major
contributor to a countrys gross domestic product (GDP) and an indicator of its industrial and economic
strength. Iron ore, manganese ore and chrome ore are the critical raw material inputs for the steel industry.
Their timely and assured availability in adequate quantity and quality, on long term basis, is a prerequisite
for the rapid and orderly growth of the sector. India is the eighth largest crude steel producing country in
the world. It is endowed with richest iron and coal ore mines. Its cost of production of steel is comparatively
much lower than that in other countries. It has several advantageous features which gives the dominant
position to its steel industry on the world map. Some of these are:- I. Establishment of new state-of-the-art
steel plants in the country with lesser dependence on external aid II. Continuous modernization as well as
implementation of de-bottlenecking and technology upgradation schemes in the older plants III.
Improvement in energy efficiency of the plants in terms of coke rate and power consumption IV. Utilization
of better quality raw materials, such as imported coking coal, accessed from global sources V. Optimum
processing of raw materials like washing of coal, beneficiation and sintering of iron ore etc. Steel Industry 3
of 27
4. Market Scenario: After liberalization, there have been no shortages of steel materials in the country.
Apparent consumption of finished (carbon) steel increased from 14.84 Million Tonnes in 1991-92 to 43.471
million tonnes (Provisional) in 2006-07. During April-June, 2007, apparent consumption of finished
(carbon) steel was 10.103 million tonnes(Provisionally estimated) Steel industry that was facing a
recession for some time has staged a turnaround since the beginning of 2002. Efforts are being made to
boost demand. China has been an important export destination for Indian steel. The steel industry is
buoyant due to strong growth in demand particularly by the demand for steel in China. Steel Industry 4 of
27
5. Global Scenario: The Asian countries have their respective dominance in the production of the steel all
over the world. India being one among the fastest growing economies of the world has been considered as
one of the potential global steel hub internationally. Over the years, particularly after the adoption of the
liberalization policies all over the world, the World steel industry is growing very fast. Steel Industry is a
booming industry in the whole world. The increasing demand for it was mainly generated by the
development projects that have been going on along the world, especially the infrastructural works and real
estate projects that has been on the boom around the developing countries. Steel Industry was till recently
dominated by the United Sates of America but this scenario is changing with a rapid pace with the Indian
steel companies on an acquisition spree. In the last one year, the world has seen two big M&A deals to take
place :- The Mittal Steel, listed in Holland, has acquired the world's largest steel company called Arcelor
Steel to become the world's largest producer of Steel named Arcelor-Mittal. Tata Steel of India or TISCO (as
listed in BSE) has acquired the world's fifth largest steel company, Corus, with the highest ever stock price.
It has been observed that Steel Industry has grown tremendously in the last one and a half decade with a
strong financial condition. The increasing needs of steel by the developing countries for its infrastructural
projects have pushed the companies in this industry near their operative capacity. Steel Industry 5 of 27
6. The most significant growth that can be seen in the Steel Industry has been observed during the period
1960 to 1974 when the consumption of steel around the whole world doubled. Between these years, the rate
at which the Steel Industry grew has been recorded to be 5.5 %. This roaring market saw a phase of
deceleration from the year 1975 which continued till 1982. After this period, the continuous fall slowed
down and again started its upward movement from the early 1990s. Steel Industry is becoming more and
more competitive with every passing day. During the period 1960s to late 1980s, the steel market used to be
dominated by OECD (Organization for Economic Cooperation and Development) countries. But with the
fast emergence of developing countries like China, India and South Korea in this sector has led to slipping
market share of OECD countries. The balance of trade line is also tilting towards these countries. The main
demand creators for Steel Industry are Automobile industry, Construction Industry, Infrastructure

Industry, Oil and Gas Industry, and Container Industry. New innovations are also taking place in Steel
Industry for cost minimization and at the same time production maximization. Some of the cutting edge
technologies that are being implemented in this industry are thin-slab casting, making of steel through the
use of electric furnace, vacuum degassing, etc. The Steel Industry has enough potential to grow at a much
accelerated pace in the coming future due to the continuity of the developmental projects around the world.
This industry is at present working near its productive capacity which needs to be increased with increasing
demand. Steel Industry 6 of 27
7. The following table gives a clear picture upon the major crude steel producers in the world as of the year
2004. Country Crude Steel Production (mtpa) China 272.5 Japan 112.7 United State 98.9 Russia 65.6 South
Korea 47.5 F.R.Germany 46.4 Ukraine 38.7 Brazil 32.9 India 32.6 Italy 28.4 In the year 2004, the global
steel production has made a record level by crossing the 1000 million tones. Among the top producers in
the steel production, China ranked 1 in the world. Production of steel in the 25 European Union countries
was at 16.3 mmt in January 2005. Production in Italy increased by 11.5 per cent in comparison to the same
month in 2004. Italy produced 2.5 mmt of crude steel in January 2005. Austria produced 646,000 metric
tones. In Russia it increased by 4.0 per cent to reach at 5.5 mmt in January. In case of the North America
region particularly in Mexico it was 1.5 mmt of crude steel in January 2005, up by 8.0 per cent compared to
the same month in 2004. Production in the United States was 8.3 mmt. Brazil had produced 2.6 mmt of
crude steel in January 2005. In South America region it was 3.7 mmt for January 2005. According to rating
made by the World Steel Dynamics", Indian HR Products are categorized in the Tier II category quality of
products. Both EU and Japan have ranked the top. USA and South Korea comes as like India. Major
Players: Steel Industry 7 of 27
8. Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully
integrated iron and steel maker, producing both basic and special steels for domestic construction,
engineering, power, railway, automotive and defense industries and for sale in export markets. The
Government of India owns about 86% of SAIL's equity and retains voting control of the Company. However,
SAIL, by virtue of its "Navratna" status, enjoys significant operational and financial autonomy. Major units
of SAIL are as under: Integrated Steel Plants Bhilai Steel Plant (BSP) in Chhattisgarh Durgapur Steel
Plant (DSP) in West Bengal Rourkela Steel Plant (RSP) in Orissa Bokaro Steel Plant (BSL) in Jharkhand
Special Steel Plants Alloy Steels Plants (ASP) in West Bengal Salem Steel Plant (SSP) in Tamil Nadu
Visvesvaraya Iron and Steel Plant (VISL) in Karnataka Subsidiaries Indian Iron and Steel Company
(IISCO) in West Bengal Maharashtra Elektrosmelt Limited (MEL) in Maharashtra Bhilai Oxygen Limited
(BOL) in New Delhi Joint Venture SAIL has promoted joint ventures in different areas ranging from
power plants to e-commerce. NTPC SAIL Power Company Pvt. Ltd Steel Industry 8 of 27
9. Set up in March 2001, this 50:50 joint venture between SAIL and the National Thermal Power
Corporation (NTPC) operates and manages the Captive Power Plants-II of the Durgapur and Rourkela Steel
Plants which have a combined capacity of 240 MW. Bokaro Power Supply Company Pvt. Limited This 50:50
joint venture between SAIL and the Damodar Valley Corporation formed in January 2002 is managing the
302-MW power generation and 1880 tonnes per hour steam generation facilities at Bokaro Steel Plant. .
Bhilai Electric Supply Company Pvt. Limited Another SAIL-NTPC joint venture on 50:50 basis formed in
March 2002 manages the 74 MW Power Plant-II of Bhilai Steel Plant which has additional capacity of
producing 150 tonnes of steam per hour. UEC SAIL Information Technology Limited This 40:60 joint
venture between SAIL and USX Engineers & Consultants, a subsidiary of the US Steel Corporation,
promotes information technology in the steel sector. Metaljunction.com Private Limited A joint venture
between SAIL and Tata Steel on 50:50 basis, this company promotes e- commerce activities in steel and
related areas. SAIL-Bansal Service Center Pvt. Ltd. SAIL has formed a joint venture with BMW industries
Ltd. on 40:60 basis to promote a service centre at Bokaro with the objective of adding value to steel. North
Bengal Dolomite Limited Steel Industry 9 of 27
10. A joint venture between SAIL and West Bengal Mineral Development Corporation ltd on 50:50 basis
was formed for development of Jayanti Dolomite Deposit, Jalpaiguri for supply of Dolomite to DSP and
other plants. Romelt-SAIL (India) Ltd A joint venture between SAIL, National Mineral Development

Corporation (NMDC) and Russian promoters for marketing Romelt Technology developed by Russia for
reducing of iron bearing materials, which is carried out with carbon in single stage reactor with the use of
oxygen. Others major steel producers are: Tisco ( Tata Iron and Steel Corporation ltd) Essar Steel
Jindal Vijaynagar Steels Ltd Jindal Strips Ltd JISCO Saw Pipes Uttam Steels Ltd Ispat Industries
Ltd Mukand Ltd Mahindra Ugine Steel Company Ltd Tata SSL Ltd Usha Ispat Ltd Kalyani Steel Ltd
Electro Steel Castings Ltd Sesa Goa Ltd NMDC Lloyds SteeI Industries Ltd Pricing Strategy: Steel
Industry 10 of 27
11. Rise in steel prices for the past two years has been the cause of concern of many user industries.
Particularly, in some of the direct users and downstream segments where steel component is high, the
impact is a little harsh. Generally these fall under the category of building and other steel-structured
construction, tube-making, heavy machineries, bicycles, auto-components steel furniture etc. The ability to
absorb the increased cost of raw materials depends on the individual market competitiveness, which is
characterized by excess capacity, demand growth, export opportunities and other relevant factors. The
construction sector, however, is guided by the escalation clauses in the tenders, which may absolve the
individual bidders to get away with equivalent compensation. In India these clauses are anarchic, to say the
least, and therefore the impact of rise in raw material expenses is felt heavy in construction. That brings us
to the issue of retardation of investment in construction. Has the rise in steel cost led to a diversion of
investment from construction sector to other areas? The answer is negative. A comparison of Gross Capital
Formation in Construction and also in Machinery and Equipment with steel price movement in the past
years would show that there exists no negative relation between the two. The availability of any basic input
at a low price always results in overuse of the material. Abundant availability of steel in Russia in 60s and
70s brought about an overdose of steel use in many applications leading to overweight and more use of
energy. When the prices rose, some amount of substitution took place. In India the emergence of plastic
and PVC in place of galvanized sheets and hot rolled coils in drums, buckets and pipes, aluminum in place
of cold rolled sheet in bus bodies, bumpers, auto-components, asbestos in place of galvanized corrugated
sheets for roofing, point out the similar phenomenon. The current price increase in steel may only
strengthen this trend. Apart from substitution effect, one positive fallout of price rise is the more
parsimonious use of steel in various applications, which has made the user segment more quality-conscious.
Lot has been discussed on the probable reasons for steel price rise. This range from global price trend which
shot up regularly since Q2 2003, the increased cost of inputs for steel making like coking coal, coke, iron ore
and power, enhanced transportation cost resulting Steel Industry 11 of 27
12. from rail freight and diesel price rise and burgeoning port handling charges - all leading to a higher cost
of steel to the consumer. Price of steel went down sharply in 2001 and 2002. It had severely affected
prospective investment in the sector and almost dubbed the sector as dying. Indian financial Institutions
including government-controlled banks were genuinely perturbed over massive NPAs and debtrestructuring exercise became the only mode of interaction between these institutions and steel-producing
units. A look at some of the financial figures during the past few years for steel companies along with a few
consuming units as compiled by CMIE show interesting facts. Financial performance of Steel and a few
related Industries Segment 1997-98 2001-02 2002-03 2003-04 A) Steel Value of output (Rs.cr) 40944.9
49534.2 64934.6 76822.0 % Rise in raw material & stores expenses (%) 0.9 1.6 21.4 18.1 Interest
Payments(Rs.cr) 4165.9 5367.0 5032.7 3944.9 Profits after tax(Rs.cr) (-) 1228.2 (-) 5706.4 (-) 466.8 4741.6
Total Borrowings(Rs.cr) 46461.8 51348.1 50967.6 45065.9 Investments(Rs.cr) 2558.0 4062.5 4294.6
5320.1 B) Steel Wires Value of output(Rs.cr) 1210.0 1496.9 861.5 1003.8 % rise in raw material & stores
expenses (%) 12.7 6.7 (-) 1.1 29.4 Interest Payments(Rs.cr) 77.6 80.9 45.3 41.7 Profits after tax(Rs.cr) (-)
31.2 (-) 79.4 (-) 49.8 (-) 38.5 Total Borrowings(Rs.cr) 516.9 697.1 446.8 397.9 Investments(Rs.cr) 7.0 10.0
11.1 7.2 C) Machinery Value of output(Rs.cr)rrr 63545.2 77298.2 76564.6 82047.4 % rise in raw material &
stores expenses (%) 3.8 (-) 1.3 (-) 1.3 7.8 Interest Payments(Rs.cr) 3961.4 4227.9 3746.4 3266.8 Profits after
tax(Rs.cr) 873.3 (-) 61.2 (-) 529.4 (-) 303.8 Total Borrowings (Rs.cr) 25744.8 30030.2 28248.6 27273.8
Investments(Rs.cr) 5315.3 8429.5 8098.7 8342.8 D)Air conditioners & Refrigerators Value of output(Rs.cr)
2544.9 3267.8 2823.7 2844.5 % Rise in raw material & stores expenses (%) 5.6 4.4 (-) 0.1 (-) 2.9 Interest
Payments(Rs.cr) 160.4 181.1 109.0 80.9 Steel Industry 12 of 27

13. Profits after tax(Rs.cr) (-) 133.4 (-) 234.5 (-) 229.3 (-) 225.1 Total Borrowings(Rs.cr) 1147.3 1250.2 862.0
1066.2 Investments(Rs.cr) 95.9 55.6 38.9 41.5 E) Automobile Value of output (Rs.cr) 33385.6 42321.9
46540.5 56957.2 % Rise in raw material & stores expenses (%) (-) 7.6 0.3 10.4 24.3 Interest Payments
(Rs.cr) 1342.5 1447.8 1224.3 862.4 Profits after tax(Rs.cr) 1796.9 380.2 1315.0 3084.7 Total
Borrowings(Rs.cr) 13142.7 14635.3 12466.5 7959.4 Investments(Rs.cr) 4190.0 5532.8 6949.3 12187.8
Keeping in view the problem of averaging in making industry-wise analysis, where, for instance, mild
carbon steel producers could have been clubbed with alloy and stainless steel producers, the above analysis
throws many interesting highlights. High growth in value of output in steel in 02-03 and 03-04 reflects
volume growth as prices were depressed, while rise in input cost for steel was substantial. This was reflected
in negative PAT in 02-03 and nominal profits in 03-04, which could happen due to remunerative prices in
Q3/Q4 of 03-04. As borrowings maintained a significantly higher level, it is no wonder that interest
accruals were quite high. It goes to the credit of the steel industry that investments were sustained at a
reasonably high level. In steel wire sector the negative growth in value of output reflects a recessionary
condition in the end product market as rise in input cost was also negative in 02-03 which, however, went
up sharply in 03-04 and steel cost may be one of them. The Machinery sector went through a near
recessionary condition in 02-03 when value of output dipped with negative growth in raw material prices
including steel. The negative PAT since 01-02 signifies constraints in the end user segments. Air conditioner
and Refrigerator segment has not been affected much by input cost rise as shown by negative growth in raw
material cost in 02-03/03-04. In fact in whole of 02-03 and 03-04 the growth in consumer durable
segment was less impressive and this was mostly due to excess supply resulting from emergence of new
players coupled with lack of consumer demand. Conversely the automobile segment had witnessed a
significant rise in raw material cost in 02-03/03-04, which, apart from rise in steel cost may emanate from
rise in cost of auto ancillaries. As PAT of auto-ancillaries Steel Industry 13 of 27
14. has gone up by 8.8 and 14.6 per cent in 02-03 and 03-04 respectively, it is logical to assume that
increased cost of input (steel) has been passed on, at least large part of it, on the finished products. It may
be mentioned that value of output of auto-ancillaries went up by an average 20 per cent during 01-02 to 0304. When the financial results of 04-05 would be available, the rise in raw material cost including steel, in
the user segments may exhibit a higher growth. To what extent it affects the bottom line of these industries,
would be determined by the nature of competitiveness in each industry. The prices of almost all end
products are increasing and this reflects the low price elasticity of demand in the presence of a positive
income effect. The purpose of this analysis is not to list out reasons justifying increase in steel price. As a
basic input for industrialization the affordable steel price facilitates growth of all end- using industries. But
a high capital-intensive industry like steel must fetch a remunerative price to become self-sustaining and
not to become a drag on national economy and a scare-field for the prospective investors. Important Policy
Measures: i. In the new Industrial Policy announced in July, 1991 Iron and Steel industry, among others,
was removed from the list of industries reserved for the public sector and also exempted from the
provisions of compulsory licensing under the Industries ( Development and Regulation) Act, 1951. ii. With
effect from 24.5.92, Iron and Steel industry has been included in the list of `high priority' industries for
automatic approval for foreign equity investment upto 51%. This limit has been recently increased to 74%.
iii. Price and distribution of steel were deregulated from January, 1992. At the same time, it was ensured
that priority continued to be accorded for meeting the requirements of small scale industries, exporters of
engineering goods and North Steel Industry 14 of 27
15. Eastern Region of the country, besides strategic sectors such as Defense and Railways iv. The trade
policy has been liberalized and import and export of iron and steel is freely allowed. There are no
quantitative restrictions on import of iron and steel items, covered under Chapter No. 72 of the ITC (HS)
Code. The only mechanism regulating the imports is the tariff mechanism. Tariffs on various items of iron
and steel have drastically come down since 1991-92 levels and the government is committed to bring them
down to the international levels. v. Freight equalization scheme was modified in January'92, removing
freight disadvantage to states located near steel plants in the country. At the same time, it was ensured that
far-flung areas and distant states were protected by stipulating that the main producers charge either actual
freight or freight element existing prior to withdrawal of the scheme, whichever is less. vi. Levy on account
of Steel Development Fund was discontinued from April'94 providing greater flexibility to main producers

to respond to market forces. vii. Iron & Steel are freely importable as per the Extant Policy viii. To check
unbridled cheap imports of steel the Government has fixed floor prices for seven items of finished steel viz.
HR coils, HR sheets, CR coils, Tinplates, CRNO and ASBR. ix. Iron & Steel are freely exportable. x. Advance
Licensing Scheme allows duty free import of raw materials for exports. Duties & Levies on Steel Customs
Duty - Peak rate for non-agricultural products reduced from 15 % to 12.5 %. - Customs Duty on stainless
steel and other alloy steel has been reduced from 10 % to 7.5 %. Duty on non- alloy steel remains unchanged
at 5%. Steel Industry 15 of 27
16. - Duty on steel melting scrap has been raised to 5%. - Duty on refractories reduced to 7.5 %. Duty most
of the raw material for manufacture of refractories has also been reduced to 7.5%. - Duty on ores and
concentrates reduced from 5 % to 2 %. In respect of Ministry of Steel this would mean a reduction in duty of
3% on iron ore, manganese ore and chrome ore. - The Special Countervailing Duty (CVD) of 4 % to be
imposed on all imports with a few exceptions viz. ships for breaking, coal and coke etc. Full credit to be
allowed to manufacturers of excisable goods. Service tax: Service tax rate increased from 10% to 12%. Direct
Taxes: No change in rates of personal income tax or corporate income tax. No new taxes are also being
imposed. Levies on Steel SDF LEVY- This was a levy started for funding modernization, expansion and
development of steel sector. The Fund, inter-alia, supports : 1) Capital expenditure for modernization,
rehabilitation, diversification, renewal & replacement of Integrated Steel Plants. 2) Research &
Development 3) Rebates to SSI Corporations 4) Expenditure on ERU of JPC Steel Industry 16 of 27
17. SDF levy was abolished on 21.4.94 Cabinet decided that corpus could be recycled for loans to Main
producers Interest on loans to Main Producers is set aside for promotion of R&D on steel etc. An
Empowered Committee has been set up to guide the R&D effort in this sector. EGEAF Was a levy started
for reimbursing the price differential cost of inputs used for engineering exporters. Fund was discontinued
on 19.2.96. FDI Rule & Competitors The NSP has been approved by the Cabinet on3rd November, 2005.
The Policy inter alia seeks to enhance the indigenous production to 110 million tones per annum by 201920 from the present level of 38 million tones, implying a compound annual growth rate of 7.3%. This
requires additional investment of about Rs. 2,30,000 crores. This is expected to generate additional
employment of around 1 million by 2020. The basic objective is to ensure that India has a modern, efficient
and globally competitive steel industry of world standards catering to diversified steel demand. On the
demand side, the Policy seeks to enhance steel usage at various levels of the economy. On the supply side,
the Policy proposes to adopt measures for removing major supply side bottlenecks like improving the
availability of critical raw materials. Steel Industry 17 of 27
18. With the upturn in the steel industry, the foreign companies/investors have started showing interest in
the investment by way of investing in the existing company or in setting up of Greenfield steel projects. In
addition to above, POSCO, South Korea has proposed to set up a 12 million tonne steel plant in the state of
Orissa involving an investment of US$ 12 billion.Mittal Steel Company has also entered into a MoU with
Government of Jharkhand for setting up a 12 million tonne steel plant involving an investment of US$ 9
billion. FII in Steel Sector Foreign institutional investors (FIIs) raised their stakes in most of the steel
companies while individual investors sold a substantial chunk of their holdings in the big steel companies in
January-June 2007. Individual investors, particularly the small shareholders having less than Rs 1 lakh
investments, have sold heavily booking profits. According to analysts, this trend is an outcome of difference
of perceptions between the two groups of investors, one is the retail segment and the other is institutional
buyers. FII holding in Steel Authority of India has gone up from 5.6 per cent in the beginning of January to
6.39 per cent by June-end during which the holding of individuals has come down from 2.28 per cent to
1.89 per cent. Steel Industry 18 of 27
19. Similarly, in the case of Tata Steel, the FII holding has gone up from 18.11 per cent to 22.65 per cent
during January-June, while individual holding has come down from 24.74 per cent to 22.2 per cent. In
Jindal South West too, the FIIs have raised their stakes from 18.21 per cent to 21.17 per cent during the first
six months while individual holding has come down from 13.89 per cent to 11.51 per cent. Exception
However, an exception is Essar Steel where FII holding remained static at 2.04 per cent throughout the six
months while there had been a marginal increase of 0.01 per cent in the case of Ispat Industries. Individual

holding has come down in both these companies. Interestingly, while all the small shareholders have been
consistent in selling, large individual shareholders have raised their stakes in Essar in tandem with mutual
funds and also in Ispat Industries where corporate bodies too have raised their stake. According to Mr. P.K.
Choudhury, Managing Director of credit rating agency ICRA Ltd, :the small investors have exited at what
they thought was the right price and many of them had actually purchased the shares at the time of public
issue. On the other hand the institutions, who buy the shares after proper analysis of the economic
fundamentals, are still seeing better prospect for the Indian steel industry. The difference of perception is
because the retail investors have opted for short-term gains while the institutions have taken their stand for
the medium-term, Mr. Choudhury said. Role of Government: Steel Industry 19 of 27
20. The economic reforms initiated by the Government since 1991 have added new dimensions to the
industrial growth in general and the steel industry in particular. Accordingly, several policy changes have
been announced for the sector, from time to time, by the Government of India. The major being, the New
Industrial policy which had opened up the iron and steel sector for private investment by:- I. Removing it
from the list of industries reserved for public sector II. Exempting it from compulsory licensing. Since then,
the private sector has been playing an important and dominant role in production and growth of the steel
industry. They not only enhance the productive capacity of primary and secondary steel, but also contribute
substantial value addition in terms of quality, innovation and cost effectiveness. During the period AprilDecember, 2006, 20.5 million tonnes of steel has been produced by private sector steel units, out of the
total production of 33.15 million tonnes in the country. The private sector units consist of major steel
producers like Tata Steel Ltd., Essar Steel Holdings Ltd., Jindal Steel and Power Ltd. (JSPL), Ispat
Industries ltd. (IIL) etc. as well as relatively smaller and medium units such as sponge iron plants, re-rolling
mills, electric arc furnaces and induction furnaces. Under the industrial policy, iron and steel has been
made one of the high priority industries. Price and distribution controls have been removed as well as
foreign direct investment upto 100% (under automatic route) has been permitted, with a view to make the
steel industry efficient and competitive. The trade policy has been liberalized making import and export of
iron and steel items freely allowable, with almost no quantitative restrictions on them. Other policy
measures such as convertibility of rupee on trade account, permission to mobilize resources from overseas
financial markets and rationalization of existing tax structure have also benefited the Indian steel industry.
Apart from this, the Government has envisaged considerable additions to capacity in the steel sector
specially from the sponge iron segment. It has also given licenses for setting up electric arc furnace units
(mini steel plants), which account for 30% of the steel production in the country, producing mild steel as
well as alloy steel. Further, all efforts Steel Industry 20 of 27
21. are being made to ensure that the sector continues to meet the requirements of small scale industries,
exporters of engineering goods and North-Eastern region of the country, as well as that of strategic sectors
such as defense and railways. Another important initiative, undertaken by the Ministry, has been the
announcement of the 'National Steel Policy' in 2005 which set out the Government's vision for future
growth of the sector. The policy largely aims to develop a modern and efficient steel industry of world
standards, catering to the diversified steel demands. It focuses on achieving global competitiveness not only
in terms of cost, quality and product-mix, but also in terms of global benchmarks of efficiency and
productivity. It seeks to enhance indigenous production of steel to 110 million tonnes (mT) per annum by
2019-20 from the 2004-05 level of 38 mT. This implies a compounded annual growth of 7.3 percent per
annum. The increasing presence of the Indian steel companies in the world market with a wide- ranging
export basket, including technologically sophisticated products, is a pointer to the enhanced
competitiveness of this industry. They are having an efficient and strong base, with rising level of per capita
consumption, which is promoting massive industrialization in the country as well as improving standard of
living of the people. Further, there has been an increase in the research, design and development activities,
largely carried out by the existing iron and steel plants; national research laboratories; academic
institutions; etc. The significant improvements have been made in the areas of iron and steel making
processes, upgradation of raw materials, product development, and increase in productivity as well as
reduction in energy consumption. All this shows that there exists innumerable investment opportunities in
the sector both for domestic and foreign investors. Steps taken to boost steel industry: In budget 2004-05,
the customs duty on non-alloy steel was reduced from 15 % to 10 per cent and on alloy steel from 20 per

cent to 15 per cent. In August 2004, the customs duty on non-alloy steel was further reduced from 10 per
cent to 5 per cent; on melting scrap from 5 per cent to 'zero' and on ships for breaking from 15 per cent to 5
per cent. Steel Industry 21 of 27
22. Further, customs duty on several raw materials used by the steel sector like non-coking coal, met coke
and nickel has been reduced to 5 per cent and on coking coal to 'zero'. To bring down the prices of steel, the
excise duty on steel products was reduced from 16 per cent to 8 per cent with effect from February 28, 2004
with a caveat that the duty regime will be reviewed. Budget 2004-05 revised this partially by increasing the
duty from 8 per cent to 12 per cent, as the intended impact of duty cut on moderating prices was not
achieved. What is further needed: While the increase in the domestic prices of steel because of an increase
in international demand cannot be avoided, attention needs to be paid to the problem of adequate and
reliable supply of coal to the steel industry. Efforts are required for securing assured linkages of coking coal
from overseas sources. Furthermore, cross-border investment in captive coal mines, especially for coking
coal, in major source countries as well as investment for developing coal mines in India, needs to be
encouraged. Further, the movement of raw materials and finished steel would need good rail and road
network as well as substantial improvement in port handling, storage and haulage facilities. Steel Industry
22 of 27
23. Opportunities for growth The New Industrial Policy Regime The New Industrial policy has opened up
the steel sector for private investment by (a) removing it from the list of industries reserved for public sector
and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct
investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the
role of facilitator, providing broad directions and assistance to new and existing steel plants, in the
liberalized scenario. The Growth Profile Steel Industry 23 of 27
24. The liberalization of industrial policy and other initiatives taken by the Government have given a
definite impetus for entry, participation and growth of the private sector in the steel industry. While the
existing units are being modernized/expanded, a large number of new/greenfield steel plants have also
come up in different parts of the country based on modern, cost effective, state of-the-art technologies. At
present, total (crude) steel making capacity is over 34 million tonnes and India, the 8th largest producer of
steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international
quality standards. As per the ratings of the prestigious "World Steel Dynamics", Indian HR Products are
classified in the Tier II category quality products a major reason behind their acceptance in the world
market. Case Study TATA-CORUS MERGER Ratan Naval Tata, the chairman of the increasingly global Tata
Group, has revealed a more daring side to his usually understated personality. Barely a week after pulling
an all- nighter to outgun Brazilian rival CSN for the $12.1-billion Corus acquisition, the 69-year- old Tata
chose to celebrate by taking an F-16 combat aircraft for a supersonic spin at the Bangalore Aero India show.
There is no doubt that Tata has pulled off a coup Corus makes nearly four times more steel than Tata
Steel. Together, the combine becomes the fifth largest producer in the world and the second in Europe. But
to make the most of the deal, Tata has to manage several variables including steel prices, raw material
supplies and interest costs on the $8- billion debt that is being raised to fund the deal. Soon he may also
have to deal with the sensitive issue of possible job cuts in Coruss manufacturing plants. There are also the
Steel Industry 24 of 27
25. usual sets of integration challenges that come with such large buyouts. The deal may be done, but the
hard work is just beginning. Tata group was willing to go as high as 630 pence per share in the nine-round
bidding auction. Arun Gandhi, the M&A whiz of the group, wouldnt confirm that figure but indicated that
the Tatas were prepared to bid higher than the 608 pence that sealed the deal. When the bidding began, he
was stationed at the office of the groups lawyer on Primrose Street, London, EC 2A 2HS, all night with a
motorcycle stationed kerbside, revved up and ready to go, in case networks failed and the e-mail bids could
not be sent. In the run up to the auction, Tata had maintained a low profile despite CSNs aggressive stance.
They underestimated our firepower, says Gandhi, who admits that even bankers to the transaction ABN
Amro and Deutsche Bank were in the dark as to how far Ratan Tata was willing to go. The only blip,
though, was the way the stock markets reacted. Tata Steel has lost a billion dollars in market capitalization

since it first announced its intention to buy Corus in October last year. (The BSE Sensex rose 18 per cent
during the same period.) The market perception is that the Tata Group paid too much for this acquisition.
Several brokerage houses have pointed out that the deal implies a high enterprise value/ earnings before
interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 9 for Corus versus 4.6 for Tata
Steel. (L.N. Mittal paid 5.8 times EBITDA for Arcelor.) Ratan Tata disagrees: We believe that, looking back
in time, the price today will prove to be one that was worthwhile because the price of steel companies is
likely to be even higher in the coming year. (See interview on page 36). Despite the thumbs-down from the
markets, the Tata Group is convinced of the long-term synergies in manufacturing, access to global
customers, opening India to Corus or leveraging research and development for Tata Steels greenfield
projects. It hopes these will save costs up to $350 million per year. The combined entity could also scout for
more acquisitions together effectively it is eyeing more buyouts in finished steel and iron ore. Steel
Industry 25 of 27
26. But tying up the funding is the immediate priority. The Corus acquisition is being routed through a
special purpose vehicle (SPV) called Tata Steel, UK. (A similar structure was used for the Tetley buy in
2000.) So far, the Tatas have indicated that group holding company Tata Sons will pump in $4.1 billion as
equity into the SPV. The balance $8 billion will be raised by junk bonds and senior term loans (part of it has
been tied up with banks like ABN Amro, Deutsche Bank and CSFB). These loans will be serviced out of
Coruss profits; Tata Steel need not repay this. This has effectively ring-fenced Tata Steel shareholders. Of
the $4.1-billion equity component, analysts say that $2.3 billion-2.4 billion could be tapped from Tata
Steels cash reserves. This leaves another $1.7 billion-1.8 billion that is yet to be raised. There are three
routes through which this could be mobilized. First, if Tata Sons pumps in this amount as equity into the
SPV, there will be a minimal impact on Tata Steels balance sheet. This will be good for Tata Steel
shareholders (see How Tata Sons Could Further Protect Tata Steel Shareholders). Tata Sons has the
resources to do so. Its 78.3 per cent holding in TCS is worth Rs 99,700 crore, and it generates over Rs 3,250
crore in cash profit every year. In the second scenario, Tata Steel could borrow $1.7 billion-1.8 billion.
Analysis done by brokerage firm CLSA shows that the interest on this borrowing could dilute earnings per
share (EPS) by 1.4 per cent in FY08. But such a borrowing may be difficult as Tata Steel may need to raise
more debt in the next 18-24 months for its greenfield projects in Orissa, Chhattisgarh and Jharkhand. The
third option is that Tata Steel could dilute equity, possibly through a preferential issue to Tata Sons. This
will hurt Tata Steels EPS even more. CLSA predicts a 13.1 per cent decline in EPS in FY08 if this option is
exercised (see EPS Unfriendly?). Steel Industry 26 of 27
27. The financial strength of the Tata Group is not in doubt. But the funding puzzle is yet to be solved. The
$4.1-billion equity component is the first bit of the jigsaw. The second piece in the puzzle is the $8 billiondebt being raised by the SPV. This debt has to be serviced out of Coruss profits. This is a short-term
concern. Given Coruss EBITDA margins of only 8 per cent, compared to Tata Steels 30 per cent, the UKbased firms ability to service the additional debt of $8 billion is under scrutiny. Analysts say that the new
debt of $8 billion, which will be serviced through Coruss cash flow, will roughly bear an interest cost of 8
per cent. In other words, the annual interest cost would be as much as $640 million. Based on results for
the 12 months ended September 2006, Corus already has an interest outgo of $400 million, which means
the total interest outgo could be over a billion dollars after the acquisition. However, after factoring in a tax
break of 30 per cent on the interest paid, (interest cost on funds used for acquisitions are an allowable
expense in the UK), the net interest outflow may be about $725 million. Coruss current EBITDA of $1.45
billion covers the interest outgo more than comfortably, but a significant drop in steel prices would
adversely impact it and its ability to service debt. Brokerage house First Global estimates that a $50 fall in
global steel prices could lead to a $414-million loss from the acquisition in FY08 (see Price Impact). If
there is a $75 fall, the losses could climb to $846 million. This does not seem to be just a street view. The
world steel consumption growth is expected to slow down from 8.9 per cent in 2006 to 5.2 per cent in 2007
and 4.2 per cent in 2010, an ICRA industry monitor said. Steel Industry 27 of 2