Table of Contents

Concepts of Location Strategy : Operations Management.............................................................................................3

Value of a good location strategy:..............................................................................................................................3
Key Success factors of a good location strategy:.......................................................................................................3
Key steps involved in Factor rating method...............................................................................................................4
CASE STUDY : ESSAR STEEL DECISION ON HYPERMARTS AND EXPRESSMARTS...................................4
Factors that can affect Location Strategy decisions........................................................................................................5
ABSTRACT FROM “THE HINDU BUSINESS LINE”...............................................................................................8
ABSTRACT FROM “THE ECONOMIC TIMES”........................................................................................................9
Essar Steel to expand its retail chain in Kerala..........................................................................................................9
ABSTRACT FROM “Annual report – Essar Steel 2009”............................................................................................11
ABSTRACT FROM “Annual report – Essar Steel 2008”............................................................................................17
ABSTRACT FROM “Annual report – Essar Steel 2007”............................................................................................20
ABSTRACT FROM “Annual report – Essar Steel 2006”............................................................................................23
Discussion on the Location strategy
of Essar Steel

Concepts of Location Strategy : Operations

Management
Value of a good location strategy:

One of the most important decisions a firm makes

Increasingly global in nature
Long term impact and decisions are difficult to change
The objective is to maximize the benefit of location to the firm

Key Success factors of a good location strategy:

Corporate desires
Attractiveness of region
Labor availability, costs, attitudes towards unions
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs
Proximity to competitors
Called clustering
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries

Key steps involved in Factor rating method

Develop a list of relevant factors called critical success factors

Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
 Multiply score by weights for each factor for each location
Recommend the location with the highest point score

Key steps involved in Transportation method

Finds amount to be shipped from several points of supply to several points of demand
Solution will minimize total production and shipping costs
A special class of linear programming problems

CASE STUDY : ESSAR STEEL DECISION

ON HYPERMARTS AND
EXPRESSMARTS
Based on the concepts listed above, let us discuss them with a case study. For our convenience and relevance to the
topic of focus, we can take Essar Steel Company’s location specific decisions for our review. They initiated a
concept of retailing a steel product which they manufactured. This was an innovative step in the Indian steel
industry and they are the first to do it in Steel.

A practice that was followed traditionally, was a concept of having distributors and dealers to distribute the products
manufactured by the company. Other Steel companies like SAIL, Tata Steel, Jindal Steel works etc. followed the
same and are still following model of distributorship.

They generally identify and define a distributor in a district or state and leave the rest to distributor, to identify the
dealer or end user within their region.

Quite differently, Essar steel brought in a bit of innovation by removing the distributor ship in the middle but
entering directly in to the dealer market and end user.

Firstly we will analyze and determine the various factors Essar Steel would have considered to determine the
Location Strategy. Then, we will evaluate the Transportation method which could have been a key point in their
decision making process.

Factors that can affect Location Strategy

decisions.
Key Success Wei Ma Tota Hypermarts Mar Tot
Distribution Model
Factor ght rks l /Expressmarts. ks al
Cost of Delivery in this is
Cost of Delivery and Stocking
low because mostly the
would be bit high but are nullified
Cost of Delivery 0.15 distributor bears the cost of 80 12 50 6
by other business practices involved
picking up the goods from
in this process.
the yard
Most of the time
Cost of owning a Expressmart is
manufactures reduces the
minimal and hence more
Proximity to number of distributors for
0.2 30 6 Expressmart can be controlled and 80 16
customer their product to reduce the
managed with in a district with the
complexity of their
help of technology
distribution network
Since the number of Since the billing is controlled by
distributor are small the tightly integrated system with a
Price
0.15 inflation of price is most 20 3 common backend across the world. 80 12
transparency
likely to occur and will be Prices are transparent and are not
controlled by the distributor inflated but are tighly controlled.
Becaused of the highnumber of
expressmarts, the supply is good
unless there is a legitimate shortage.
Distributore controls the
Availability 0.2 20 4 The Expressmart or the hypermart’s 80 16
availability of the products
cannot induces their business
practices of stocking up and
creation spurious demad situations.
The Stock owner ship is transferred
from hypermart to Expressmarts
once the stock is moved the
Expressmart locations. Inventory
Shelf time at hypermart is often less
than a day before expressmarts
owns the stock. Expressmarts are
During good season,
still integrated with the system
distributors tend to stock the
Realization of through ownership has changed and
0.2 material causing bottlenecks 30 6 90 18
Inventory hence mother company still controls
in realization of the
the price of the product and thus
inventory
creating a good business practices
with marginal profits and not
creating spurious demands. Stock is
also realized faster as the
expressmarts pays for the stock
transferred to their ownership in
advance.
As there is no situation of holding
Spurious Demand figures
stock , the demand is not created
Demand are gathered mostly affected
0.1 10 1 spuriously but are actual in line with 80 8
identification by the business practices of
the market situation and end user
the distributor which errand
consumption.
Total 1 32 76
As evaluated in the above table, factor- rating method as resulted in showing that hypermart / Expressmart strategy
is a correct decision. The score earned by the distribution network is very low compared to the Hypermarts and
Expresssmarts concept of distribution. Hence as derived by us the decision has really helped Essar Steel to penetrate
in to a market strongly held by SAIL and TATA Steel, which still follows a tradition business practice to bring its
goods into the market.
ABSTRACT FROM “THE HINDU
BUSINESS LINE”
Date:29/01/2010 URL: http://www.thehindubusinessline.com/2010/01/29/stories/2010012953272100.htm

Essar Steel to double retail outlets, add new products

Hyderabad Jan. 28

Essar Steel, part of the diversified Essar Group, is planning to nearly double its retail outlets that include both
company-owned and franchise outlets and add third party products in its stores, as part of its plans to focus more on
retail sales.

The company, which has about 85 Essar-owned hypermarts and 300 franchisee-owned outlets across the country,
will be adding about 70 more hypermarts and 200 franchisee outlets within a year. “Our initiative, the first of its
kind in the domestic steel industry, to have retail sales through company owned outlets has given us good results.
Retail sales at present account for about 25 per cent of our business,” Mr Vikram Amin, the company's Executive
Director (Sales and Marketing), said on Wednesday.

The primary objective of these outlets is to make available steel in smaller packages to customers with quicker
delivery, transparent pricing and customized quantities. The hypermarts primarily cater to customers in the SME
(small and medium enterprises) segment, ranging from small manufacturers, local fabricators and engineering firms
to large corporations and construction companies.

Essar Steel has identified Andhra Pradesh as one of the potential markets in the country, with plans to increase its
network of hypermarts from the present five to six and add about 15 Expressmart (franchisee-owned outlets) in the
State this year. Andhra Pradesh accounts for about six per cent of Essar's total steel business.

In order to provide its retail customers with more choice of products, the company, which mainly focuses on flat
products, will be adding third party products such as structural steel products, wire rods and pipes, in its outlets.
Essar Steel plans to complete the expansion of its Hazira plant from 4.6 million tonnes to 19 million tonnes with an
investment of $ 2.5 billion by 2010-end. “Even after the expansion, our retail sales will have a share of about 25 per
cent,” Mr Amin said.

On steel price trends, he said raw material costs continue to put pressure on production costs. Without indicating
whether the company is planning a price hike, he said it would review the situation in the next few weeks.

ABSTRACT FROM “THE ECONOMIC

TIMES”
Sat, Aug 28, 2010
Essar Steel to expand its retail chain in Kerala

KOCHI: With a thrust on the retail customer, Essar Steel, global producer of steel, will increase its retail distribution
network, Hypermarts and Expressmart in Kerala , a top official of the company said here.

Essar Steel currently has 3 Hypermarts and 15 Expressmart in Kerala and was planning to increase its Expressmart
to 23 by the end of the year 2011, Girish Rao, CEO, Essar Hypermarts, told media persons, today.

Essar Hypermarts is a pioneering initiative of Essar Steel to make steel available to end users close to the user point,
he said.

With over 500 retail outlets across the country, the concept of Essar Hypermarts has revolutionized the marketing of
steel in India, he said.

Essar Hypermarts cater to customers ranging from small manufacturers, local fabricators and general engineering
firms in the SME segment, he said.

Essar Hypermarts offers its customers a comprehensive range of flat and long steel products for a variety of
applications, he said, adding in a shift from the slow and cumbersome methods of delivering steel, Essar Hypermarts
provides immediate delivery, transparent pricing, customized quantities and guaranteed quality to its retail
customers.

'Kerala is a state which is progressing at a great speed be it infrastructure or industrialization', he said.

They have plans to open one Hypermarts at Thiruvananthapuram shortly to make it 4 Hypermarts in the state and 8
Expressmart in various parts of the state to make to 23, he said.
ABSTRACT FROM “Annual report – Essar
Steel 2009”
Source Moneycontrol.com trying to manage the global crisis in a coordinated
manner.

Directors Report Year End : Mar '09

INDIAN SCENARIO

The Directors have pleasure in presenting the 33rd

Annual Report of your Company together with the
Audited Statement of Accounts for the
year ended 31st March, 2009.
FINANCIALS
The strong growth seen in India till the year 2007-
08, lost steam in 2008-09 with the economy turning
weak since November 2008 on account of this global
turmoil. The impact of the global financial crisis has
been deeper than anticipated earlier although less
severe than in other emerging market economies.

The Government launched three fiscal stimulus

The Financial Results (Rs. in crores) Particulars packages between December 2008 and February
Year ended March 31, 2009 2009. These stimulus packages came on top of the
expanded safety-net program for the rural poor, the
farm loan waiver package and payout following the
Sixth Pay Commission report, announced earlier, all
Sales and other Income 11,873.48 of which too added to stimulating demand.

Profit before Finance Costs 2,353.12

The Reserve Bank shifted its policy stance from

monetary tightening for controlling inflation in the
GLOBAL SCENARIO
first half of 2008-09 to monetary easing in the
second half of 2008-09 to facilitate revival of the
economy and to stimulate further economic growth.
The world economy entered a major downturn
during the second half of 2008-09 with all the
advanced economies in the severest economic
STEEL INDUSTRY
recession since the World War II. The demand in
both advanced and emerging economies fell sharply
resulting in production cuts, cost controls and layoffs.
Governments and central banks around the world A) Global Overview
have responded to the crisis in an unprecedented
show of policy force in form of various fiscal
stimulus and monetary policy measures. With proper
The steel industry was riding high at the beginning
policy and structural reforms, various countries are
of 2008- 09. Steel prices witnessed an unprecedented
rise on the back of high demand from all sectors and The outlook for the Indian steel industry in 2009-10
high input material cost. However with the effects of remains optimistic with GDP growth estimated to be
the global crisis showing across all sectors, mainly around 5-7%, high thrust on infrastructure in the 11
construction, automotive and consumer durables, the th Plan and continuation of lower inflation.
real demand for steel started drying up towards the
second half of 2008-09. This also led to sharp
correction in the steel and raw material prices in the
OPERATIONS
same period. The prices of Hot Rolled Coils
corrected by more than 55-60% from the peak levels Manufacturing:
of USD 1100-1150 per metric tonne to around USD
500 pmt during the last six months. Prices of key
raw material like coking coal, iron ore, thermal coal
and scrap also crashed by nearly 60% to the current Your Company has made efforts to increase the
levels where they seem to have stabilized. operational efficiency and quality of products
produced at Hazira during FY 2008-09.

Companies worldwide responded to the slowdown

through means of controlled production levels and The major steps taken in this regard were:
production cuts in the developed world have been in
the range of 35-50%.
- Improvement in physical property and chemistry in
the quality of pellets at the pelletisation plant.
China, the key driver for the global steel industry
also witnessed a dip in the production and
consumption of steel on the back of slow demand - Increase in usage of Hot DRI by 11% resulting in
from construction and manufacturing industries. energy savings at Steel Melt Shop.

B) Domestic Overview - Quality improvement program was implemented by

Steel demand in India depends mainly on the
construction and auto sectors. Both sectors have
shown phenomenal growth over the past few years
and were on an upswing till mid 2008 when the effect
of the global liquidity crunch led to a massive
slowdown in these two sectors causing the demand
for steel to slacken. Apart from this, the Indian Flat
Steel industry which exports nearly 20% of its
production, suffered nearly 38% dip in exports during
October-December 2008 resulting in an overall dip
in production of nearly 9% amongst the Flat Steel
producers.
entering into an umbrella agreement with Kobe
Steel, Japan.
- Development of Neural Network Model for
Property Prediction of HP, coils was taken up. Trials
conducted for grades like LNC56, LNP46 and
LNP54 with modified chemistry. This will help in
reducing grade extra cost without affecting
chemistry/physical properties of the product.
The Major benefits derived from the above steps are:
 - Natural gas consumption in the HBI process was
reduced by 2 Sm3/tone compared to the last financial
year.
- Power consumption in the HBI process was
reduced by 3 KWH/tone compared to the last
financial year.
- Overall, power consumption was reduced by 65
KWH/ tonne compared to the last financial year
- Liquid Steel yield was improved by 0.65%
compared to what was achieved in last financial
year.
- Cost saving to the tune of Rs. 13 crore achieved by
way of optimization of ferro-alloy consumption
grade.
Sales and Marketing
The financial year 2008-09 was indeed a year of
contrasts and some performance parameters need to
be highlighted. Revenues were up 10.08% to
Rs.11,873 crore and net sales realization per tonne
was up 24% y-o-y. As much as 52% of sales were
made in the value-added segments - up from 35% in
2007-08. This was largely due to increased emphasis
on value-added products, like Electrical, Auto Hi-
strength grade, PEB, API above 12.5 mm X-70,
TMBR etc. Your Company gained in market share
(domestic) - from 12.9% in 2007-08 to 13.6% in
2008-09.
Steel Hypermarts sales in 2008-09 grossed 0.61
million tonnes, thus registering a 17% growth in
volumes. Revenues grew 28% to Rs. 2,541 crore.
Increase in revenues was achieved mainly because of
higher sales volume and better realization.
Your Company is aiming to widen its geographical
reach and further strengthen its distribution network
in FY 2009- 10 with the addition of more
Hypermarts and Expresssmarts. The four Service
Centers at Hazira, Pune, NCR (National Capital
Region) and Chennai are now fully operational; they
provide just-in-time delivery to retail and OE
customers in the automotive and white goods
segments.
Domestic sales at 2.46 million tonnes, fell 4.45% y-
o-y. However, this drop was considerably lower
when compared to the 8% fall in the combined
domestic sales volume of the top five producers in
the country.
Export volumes, at 0.64 million tonnes, dropped
21% on account of the depressed steel demand
globally. In spite of this, the realization in flat
products increased by 33%. Your Company increased
its market penetration by entering new markets, like
Sudan, Nigeria, Angola, Brazil, Peru, etc.
Overall sale of flat rolled products was down 9% y-
o-y to 3.06 million tonnes, largely because of the
economic slowdown witnessed in the second half of
FY 2008-09. However, the Government of India has
come out with a stimulus package which is likely to
provide the much-needed impetus to infrastructure,
construction and automobile industries.
Better planning and inventory management led to a
15% reduction in year-end closing stocks on y-o-y
basis.
Finance:
 During the current financial year, your Company
focused its efforts on providing finances for
expansion, strengthening of marketing network
through Service Centers, Hypermarts etc. and
strategic investments.
- LA rating to the fund based bank facilities and to
the Rs. 6,000 crore Long Term Debt program of the
Company, recognizing the improvement in the credit
quality of the Companys Long Term Debt

Furthermore, your Company also focused on

maintaining sufficient liquidity at all times to ensure - A1 rating to the non fund based bank facilities of
smooth operations of the Plant at higher capacity the Company, indicating highest credit quality in the
levels. short term

In spite of the slowdown in the steel markets in the

second half of the current financial year and the
financial crisis witnessed in the global markets, your
Company was successful in progressing with its
capital expenditure program and strategic
investments, meeting all its payment obligations in a
timely manner and retaining adequate liquidity
within the Company to meet its operational
requirements and withstand the downturn.

During the year your Company successfully

concluded the enhancement of its working capital
limits from Rs.2,600 crores to Rs.3,150 crores.

Financial tie ups for the service centers concluded in

this year along

with the commissioning of the 3 service centers at

Pune, NCR and Chennai.

Your Companys established position in the value

added segments in the steel industry, a diversified
distribution network, integrated nature

of operations, and improved capital structure ensures

operational flexibility and maximization of profits.
The financial health of your Company continues to
be robust, with comfortable levels of gearing ratio
and coverage ratio. It is reflected in the following
ratings published by ICRA Ltd. (an Associate of
Moodys Investors Service):-
12

ABSTRACT FROM “Annual report – Essar

Steel 2008”
Source Moneycontrol.com Mar 2008 - Utilisation Index of HSM increased by 0.7%, from
83.7 in 2006-07 to 84.4 in 2007-08.

- Quality improvement program with Kobe Steel

Directors Report Year End : Mar '08 Japan was implemented to supply to Auto majors
and the white goods sector.

The Financial Results (Rs. in crores) Particulars

Year ended March 31, 2008 The major benefits derived from the above steps are:

Sales and other Income 11,926.87 - HBI production has been increased by 16% over
what was achieved in the last financial year.

Profit before Finance Cost 2,324.30

- Natural gas consumption in the HBI process was
reduced by 5 sm3/tone compared to what was
consumed in the last financial year.

Manufacturing:
- Steel production was increased by 19% over what
was achieved in the last financial year.
Company has made efforts to increase its operational
efficiency and quality of products at Essar Steel,
Hazira during FY 2007-08
- Power consumption was reduced by 23 kwh/tonne
compared to what was consumed in the last financial
year.
The major steps taken in this regard were:

- Hot Strip Mill production was increased by 15

- Physical and chemistry improvement in the quality percent over what was achieved in the last financial
of pellets at the pelletisation plant. year.

- All the HBI modules were run efficiently and the Sales and Marketing
process was stable.

- Increase in usage of Hot DRI by 20% and saving

power in Steel Melt - Sales of flat rolled products were up 20% y-o-y to
3.36 million tonnes
Shop.
13

- Revenues were up 32% to Rs. 11,911 crore and net
sales realization per tonne was up 5% y-o-y
- 34% of sales were made in value added segments --
up from 27% in 2006-07.
- Domestic sales at 2.57 million tones grew 41% y-o-
y. Domestic market share was 12.4% in 2007-08 --
up from 10.5% in 2006-07.
- The Steel Hypermarts business took off in 2007-08
and at 0.53 million tonnes registered a 243% growth
in volumes. Revenues of Steel Hypermarts has
crossed more than Rs.1,900 crore. Consolidation of
business processes through JDA (a retail ERP
software), real time pricing mechanisms and
rationalisation of Steel Hypermarts locations through
express marts together contributed to delivering
higher volumes and realisations with a leaner setup.
- Better planning and inventory management led to a
38% reduction in year-end closing stocks.

- Essar moved into 2nd position in flats production

in India from a single-unit-single-location.
Finance:

- Export volumes, at 0.92 million tonnes, dropped

Your Company concluded its steel making capacity
9%, a deliberate strategy to reduce exposure to the
enhancement program of 4.6 million tonnes per
rising rupee. Despite a 9% rupee appreciation during
annum in the previous financial year. In the current
the year, the realisation in flat rolled exports
financial year, it has focused on de-leveraging the
increased by 2%. This was achieved by
balance sheet. This has resulted in an improvement in
rationalisation of geographies and a better product
your Company’s credit profile which is evidenced in
mix.
the ratings published by ICRA Ltd. (An associate of
Moody’s Investors Service).

- PLATES, which is India’s fastest growing product

segment in the flat products basket in India because
In light of the growth in business and plans for
of the infrastructure and construction boom,
setting up Steel Hyper marts (75
registered a record 1 million tonnes of sales, a growth
Hypermarts/Express Marts commissioned till date
of more than 50% over the previous year. This was
with a plan to increase the same to 100 Hypermarts/
achieved through augmenting the Hazira service
Express Marts in the near term) and steel service
centre with third-party processors.
centers in various regions, the Company is in the
process of enhancing its working capital limits from
Rs. 2,600 crore to Rs. 3,150 crore.
14

ABSTRACT FROM “Annual report – Essar

Steel 2007”
Source : Moneycontrol.com 2007 During the year, the Company completed its capacity
expansion to 4.6 million tonnes per annum at Hazira.
The.pellet plant capacity at Visakhapatnam was also
increased to 8 million tonnes per annum to cater to
Directors Report Year End : Mar '07
the increased requirements at the steel plant. Your
Company also made additions to plant and
equipment in the Cold Rolling Complex as part of its
efforts to further strengthen its product offering. Your
Company spent Rs. 3122 crores during the year for
FINANCIALS assets that were created in the manufacturing and
other support functions.

The Financial Results (Rs. in crores) Particulars

Year ended March 31, 2007 Sales and marketing

The year under review saw some significant

Sales and other Income
Profit before Finance Cost (net),
developments in the marketing of the Company's
9019.68
products. Exports crossed the 1 million tonne mark
1955.25
and your company continued to be the highest
exporter of flat steel from India.

OPERATIONS Overall sales volumes grew 13% to 2.8 million

tonnes and revenues grew by 31% to Rs 9,000 crores
from Rs 6,850 crores in the previous year. Domestic
sales accounted for Rs 6,012 crores and export sales
Manufacturing: were

Rs 2,988 crores.

The Company's production of liquid steel at its plant

at Hazira was 3.05 million tonnes, an increase of
20% from the 2.54 million tonnes produced in the
last financial year. The production of HR coils was
up 15% to 2.95 million tonnes from 2.57 million
tonnes last year.
Net average realisation across all products went up
by 19% from Rs 23,380 per tonne to Rs 27,820 per
tonne.
15
The Company's strategy to increase net sales
realisation per tonne of steel involved action in three
areas:
* Selling closer to low freight areas in the domestic
market
* Increasing the proportion of value added grades in
the sales portfolio
* Rationalising the customer base to optimise order
quantity service levels.
The success of the implementation of these policies
is outlined below:
* Close to 70% sales in the domestic market were in
the West zone and 40% of our exports were to the
Middle East - markets close to our
Manufacturing facilities at Hazira.
* 60% of total sales were to value added segments
like API (for oil & gas pipelines), HSLA (high
strength low alloy steels for the auto
Sector), IF (interstitial free steel for critical
components of automobiles), CORTEN (corrosion
resistant steel), plates for Boilers
And Ship building, etc.
* The average sales quantity per customer went up
by more than 100% leading to better planning and
delivery schedules The Company began a new
initiative in the year to address the large and
untapped potential in the retail market for steel
products. In a bid to reach out to end
users directly, the Company began commissioning
Essar Steel Hypermarts in April 2006 and in 12
months was able to setup more than 80 retail outlets
which, clocked more than 1.1 laky tonnes of sales
valued at over Rs. 350 crores. This business is
expected to grow multifold in the current fiscal. The
introduction of the most advanced communication
tools for placing steel orders, such as mobile
messaging, and exclusive in-bound and out-bound
call centers has met with tremendous response from
small customers. Your company believes that this
move will bring
Proximity, speed and higher customer satisfaction to
a market that has been exclusively catered to by
traders.
16

ABSTRACT FROM “Annual report – Essar

Steel 2006”
Source Moneycontrol.com This grade finds growing application in the highly
demanding automotive and auto component sectors.

Directors Report Year End : Mar '06

B. Sales & Marketing

FINANCIALS
Total sales value for the year registered a growth of
8% at Rs.7058.59 crore as against Rs.6537.81 crore
in 2004-05.

Sales and other Income 7058.

Sales volumes at 2,479,802 tonnes showed an
Profit before Finance Cost 1689.11
increase of 9.45% over 2,265,599 tonnes in the
corresponding period of the previous year. The

Company's domestic sales volume at 1,788,120

tonnes registered an increase of 21.02% over
OPERATIONS AND PERFORMANCE 1,477,555 tonnes sold in the previous year. The
HIGHLIGHTS.
Strong domestic demand saw the Company's sales to
domestic markets grow at the cost of export volumes
which showed a reduction of 12.22% at 691,682
tonnes from a level of 788,044 tonnes in the previous
year.
A. Operations

The Company's focus on increasing its share in high

HR Coil production for the year ended March 31,
value, specialty segments resulted in the share of
2006 grew by 10.8% to 2.58 million tonnes.
such products going up to 48% of total sales as
compared to 37% In the previous year.

The Company introduced Cold Rolled Close

Annealed products (CRCA) and Extra Deep
The Company received letters of appreciation from
Drawing (EDD) grade in a record time of five months
major auto and white goods manufacturers regarding
after completion of successful trials. The
the successful trial and Introduction of
development and successful introduction of dual
phase steel has put your Company in the list of CRCA and EDD grades of steel.
Select new producers of this grade internationally.
17
The Sona brand of products for the construction
segment performed extremely well in the year under
review with sales volumes going up
from 30,000 tonnes to 57,000 tonnes.
The Company's exports constitute approximately
27.89% of overall revenues and continue to be well
balanced across several markets in Europe, Middle
East, NAFTA countries, Africa, Australia and South
East Asia.
The Company received .the top national and regional
exporter's trophy from the Engineering Export
Promotion Council. The Company's multi
pronged strategy on focusing on specialty products
and offering a diverse range in the value added
segment In Cold Rolled as well as Hot Rolled
products has yielded excellent results. The Company
received its largest ever single order of USD 186
million for the supply of API grade steel to Iran.
This product is a winner in the Middle East markets
due to their requirements of high quality and
specialty grades for the transportation of crude and
finished petroleum products.
Essar Steel was the only Indian Steel company to
successfully contest anti dumping action in the
United States of America.
MANAGEMENT DISCUSSION AND ANALYSIS
Industry Outlook
The global steel industry continued to exhibit
cyclically and fragmented market shares and moved
towards further consolidation and setting up
manufacturing facilities in countries which have
natural resources both in terms of raw material and
energy. The demand for steel products continued to
be steady through the year, though the inventory
reduction by steel Industry consumers had an impact
on prices as corrections took place both on the
demand side and on the supply side. While the world
crude steel production exceeded 1.1 billion tonnes,
consumption was around 1.0 billion tonnes,
indicating a comfortable demand and supply
situation. Consumption of steel is closely linked to
the pace of economic growth of the region. Over the
past decade global steel consumption has grown at a
CAGR of 4.5%. Demand growth was aided by
significant demand increase in China and other
emerging economies like India. Asia accounts for
54% of global production in 2005 indicating a shift in
the production base.
Consolidation in the global steel Industry
The Steel Industry which was fragmented till now
has witnessed some amount of consolidation in the
recent years. There have been eight major
acquisitions globally in the steel Industry over the
past five years. This is a positive development for the
industry as this will
instill a sense of producer discipline and make the
industry less prone to cyclical variations. This will
also have a positive Impact on the ability of the
Industry to negotiate with suppliers of raw material.
China factor
The influence of China in world steel demand
underscores the importance of the shift in balance in
apparent demand. Chinese crude steel production
increased to 350 million tonnes in 2005, a growth of
25% YOY from 2001. At the same time, per capita
18
consumption of crude steel in China has gone up to
230 Kilograms in 2004 from 108 Kilograms In 2000,
a growth of 25%.
The Indian Steel Industry.
2005-06 was in many ways a watermark year for the
Indian steel industry. Domestic demand remained
robust on the back of a growing economy and high
consumer demand for durable goods. India's steel
industry seems to have finally come of age with
domestic and international major vying for space
both on the manufacturing side and for large share in
what is today acknowledged as one of the fastest
growing markets in the world.
With a current capacity of just over 40 million
tonnes, India ranks eighth among major steel
producing nations in the world. India has been a net
exporter over the last 5 years underlining the growing
acceptability of Indian steel products in the global
market.
A growth of between 4 and 5% over a two year
period beginning 2004-05 augurs well for the
industry. However, rising input costs such as raw
material, power, intermediate metals, etc continue to
present major challenges for the Indian steel
industry.
The National Steel Policy announced by the
Government of India last year envisages steel
production to go up to 60 Million Tonnes by 2012
and 100 Million Tonnes by 2020.
The above growth target depends on policy measures
to address critical issues facing the sector, such as;
* adequate investment and development of raw
material sources particularly iron ore, coking coal
etc.,
* streamlining of existing procedures in mining (a
committee has been formed by Govt. of India for this
purpose)
* Adequate infrastructure support like power, ports,
roads, rail to move the additional raw material and
steel that will be produced
Operations
The year under review has seen some significant
developments at Essar Steel. Your Company
implemented several measures to ensure long term
growth, stability and profitability and protect it from
the cyclically
that is inherent in the industry. The first and major
achievement was making Essar Steel a totally
integrated steel producer from iron ore to
ready-to-market products, and ensure control at
every stage in the manufacturing chain. Your
Company completed the acquisition of Hy-Grade
Pellets (HGPL) and Steel Corporation of Gujarat
(SCGL). The Company also commissioned the 267-
km pipeline, which transports the beneficiated iron
ore slurry from Bailadilla in Chattisgarh to
Visakhapatnam where the Company's pellet plant is
located. At the other end of the manufacturing
process, your Company commissioned the Cold
Rolling Mill in September 2005. The commissioning
of an additional 355 MW power capacity at Hazira
by Essar's Power Group will meet the enhanced
requirements of the steel plant for its expansion
projects.
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The capacity expansion to 4.6 million tonnes per

annum is on track and we expect to complete this by
the third quarter of this year. Essar Steel participated in several exhibitions and
seminars in India and abroad, including the
prestigious Auto Expo and AEC (Architects,

During the year, the Company further strengthened
its information technology platform and extended the
implementation of SAP to several other areas of
operations, including marketing, HR, logistics and
distribution. This will improve the accuracy and
timeliness of decision making and contribute to
better efficiencies.
The Company believes that these steps will yield
considerable benefits of costs, seamlessness in
operations, assurance of adequate raw material and
infrastructure and most importantly value addition in
the product range.
Engineers and Constructions) show in order to
showcase its products to specific customer segments.
The Company's Research and Development team
successfully introduced Extra Deep Drawing (EDO)
grade steel in the Cold Rolled Close Annealed
(CRCA) segment, as also Dual Phase steel which find
critical application in the fast growing automobile
sector.
The web based portal for retail customers
www.clickforsteel.com is being complemented by a
customer relationship program which will enable the
Company to respond faster to technical and
commercial enquiries.

Marketing

The Indian steel industry is now fully integrated with

Essar Steel's product portfolio now addresses the
high value, discerning customer profile in the
automotive, white goods, construction, general
engineering and ship building industries. The
Company has been able to move up the value chain
and add an enviable portfolio of leading Indian and
international customers.
the global industry and to that extent, your company's
fortunes are closely linked to global market forces.
The actions that we have taken over the last two
years have been aimed at creating an enterprise that
will position it in the league of high performing
international steel companies.

The Company's ability to increase its proportion of

value added products fulfills two objectives:

1. Strengthened presence at the top end of the user

segment resulting in better price realization.

2. Catering to niche, technology and quality

conscious customers with long term contracts and
assured orders.