1|Page PRAXIS BUSINESS SCHOOL MANAGERIAL ECONOMICS PRESENTED TO:SUMA DAMODARAN BY:NABENDU KAR (B08017) SUMANTA KUMAR SAMANTARAY

(B08035) INDUSTRY: INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA

2|Page CONTENTS Page THE GLOBAL STEEL INDUSTRY THE STRUCTURE OF INDIAN STEEL INDUSTRY CONSUMPTION OF STEEL INDIA SUPPLY OF STEEL IN INDIAN MARKET SUPPLY DEMAND MISMATCH MARKET SHARE OF DIFFERENT COMPETETION ANALYSIS MERGERS AND ACQUISITIONS EXPECTED GROWTH FACT ORS HOLDING BACK THE INDIAN STEEL INDUSTRY OUTLOOK 3 4 5 11 12 13 15 16 17 19 21 PRAXIS BUSINESS SCHOOL | KOLKATA

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA . The price has been rising continuously.3|Page THE GLOBAL STEEL INDUSTRY The current global steel industry is in its best position in comparing to last d ecades. The subprime cr isis has lead to the recession in economy of different countries. The shares of steel industries are also in a high pace. which may lead to have a negative effect on whole steel industry in coming years. The demand expectations for stee l products are rapidly growing for coming years. The steel industry is enjoying its 6th consecutive year s of growth in supply and demand. However stee l production and consumption will be supported by continuous economic growth. And there is many more merger and acquisitions which overall buoyed the industry and showed some good results.

Their dome stic competitors are numerous medium-sized and smallish companies and more merge rs can be expected between these companies as these firms need to improve their position with regard to the powerful suppliers of raw materials.4|Page The countries like China. its domestic output is insufficient to meet the dema nd in all segments. which all totally becomes m ore than 50% of global production. Although India is now one of the worl ds top ten steel producers. Imports increased in 2005 by 8% and it is likely that India will continue to import in many segments over the medium term.e. south and west of the c ountry. Japan accounts for 9% i. Apart from this USA.e. The integrated foundries are located in the east.1 the three biggest steelmakers in India have a combined outp ut of almost 20 million tons and have a domestic market share of 51%. According to Deut sche Bank Research. India accounts f or 53m ton and South Korea is accounted for 49m ton. China accounts for one third of total production i. In the future the east will see rapid expansion as more integrated capacities are being built in Orissa and othe r eastern states due to its raw materials. STRUCTURE OF INDIAN STEEL INDUSTRY The steel industry in India is concentrated in the east. while electric steel i s produced predominantly in the south and west. PRAXIS BUSINESS SCHOOL | KOLKATA . India and South Korea are in the top of the abo ve in steel production in Asian countries. 419m ton. UK accounts for the major chunk of the whole growth. Japan. BRAZIL. 118m ton.

has put India's steel industry on the world steel map. Steel consumption amounted to 58. operating profit and net profit.3 per c ent. wh ich account for 70 per cent of the total production capacity. steel consumption has grown by 16 per cent. 15.9 percent envisaged in the National Steel Policy. Soaring deman d by sectors like infrastructure. as the per capita steel consumption is only 35 kgs compared to 150 kg in the world and 250 kg in China. have recorded a ye ar-on-year growth rate of 13.27 mt in 2005-06. For example. real estate and automobiles. The scope for raising the total consumption of steel in the country i s huge. consumption of steel has grown by 12.7 per cent and 11. fuelled by demand for construction projects worth US$ 1 trillion.4 per cent. A study done by the Credit S uisse Group says that India's steel consumption will continue to grow by 17 per cent annually till 2012. PRAXIS BUSINESS SCHOOL | KOLKATA . dri ven by a boom in construction (43%-plus of steel demand in India). the top six companies. at home and abroa d. During the first half of the curren t year. which is higher than the world average.7 per cent in net sales. during the second quarter of 2007-08 We expect strong demand growth in India over the next five years. With this surge in demand level. well above the 6. respectively. recording a growth rate of 16.5 per cent during the last three years. steel producers have been reporting encouraging results.45 mt i n 2006-07 compared to 50.5|Page CONSUMPSION OF STEEL IN INDIA Driven a booming economy and concomitant demand levels.

387 50.32 6.4 5.444 36.4 10.471 43.6|Page YEAR WISE DEMAND OF INDIAN STEEL INDUSTRY YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 DEMAND (in m t) 34.O62 45.037 40.73 16.625 12.257 58.45 GROWTH IN % 4.3 GRAPHICAL REPRESENTATION OF GROWTH AND DEMAND OF INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA .

rising incomes and decreasi ng household sizes are forcing comprehensive measures to be taken in the housing sector. The government has announced that some 40 hotels with a total of 15. Since the model does not take sufficient account of the country’s maj or initiatives in the infrastructure area. The Indian office market is benefiting from the ongoing of f PRAXIS BUSINESS SCHOOL | KOLKATA . 5% p. p er-capita GDP – in purchasing power parity terms – should rise by nearly 4% per year until 2020. Despite the sharp increase in India’s population. Strong population growth.a. In all. In fact. In ad dition to the sports facilities. The hosting of the Commonwealth Games in New Delhi in 2010 should generate addition al stimulus for the construction industry and thus boost demand for steel. opening of the economy and rising investment. The Deutsche Bank Research Formel-G econometric model forecasts average real GDP growth of 5. The pent-up demand for housing is estimated at around 20 million units by the Indian Construction Association. average growth until 2020 might turn out to be even closer to 6%.000 beds are to be built.2%). the analysis covered 34 economies that generate some 85% of glob al GDP. for India between 2006 and 2020 O followed by Malaysia (5. accommodation for competitors and visitors is p lanned. by the end of the decade India could repla ce Japan as the world’s third biggest economy after the US and China Positive stimuli from construction industry The steel companies are pinning thei r hopes largely on the expanding construction industry.7|Page MAJOR CONSUMERS OF INDIAN STEEL INDUSTRY Support from dynamic economy India is t he economic region that has enjoyed the world’s most sustained boom. Up to 10 million new homes need to be b uilt each year until 2030. The industry is one of t he key drivers of India’s economic growth.4%) and China (5. the Ministry for Urban Development and P overty Alleviation claims that no less than 31 million dwellings are needed. human capital. The growth drivers are population growth.

f irms have to make numerous investments in modernising and expanding their machin ery portfolios Makers of building machinery are benefiting from the large-scale infrastructure projects planned by the Indian government.8|Page shoring activities of industrial nations.6 Furthermore . Their second main business area is assuming the responsibility for entire support processes. Demand is greatest for building machinery and plastic-moulding machines as well as machine tools and textile machinery. is focusing further up the value chain.a. The demand for foreign machinery comes from customers requiring especially hig h standards of performance and precision. Germany claims a particularly large share of Indian imp orts of Woodworking machinery and machine tools as well as pumps and compressors . These segments still look set for growth. nevertheless the volume is still very low by international standards. including machinery to the value of about USD 1 bn to India.) by 2008. Indian insurers are concentrated in th e software development and software product segments. Thanks to the march of technological progress the prospec ts for domestic suppliers should improve going forward.a. PRAXIS BUSINESS SCHOOL | KOLKATA . Exports by the Indian mechanical engineering industry rose recently by nearly 30% to USD 10 bn. By comparison. for example. or business p rocess outsourcing (BPO). the construction sector is benefiting from major infrastructure projects. while import growth is s lightly crimped. German mechanical engineering firms e xported products worth close to USD 117 bn. as well as on the construction and expansion of ports and airports Strong growth in mech anical engineering Mechanical engineering output has increased some 10% p. while machine-tool mak ers are being buoyed by the upturn in the automobile and auto parts industries f or example. Capi tal expenditure is to be focused on road building and the rail network. The Engineering Exports Promotion Coun cil (EEPC) forecasts that Indian exports will be worth USD 30 bn (+32% p. ove r the past five years. Since the domestic text ile and apparel industry.

but its growth rate is the highest of the most im portant clients for the steel industry. for example. However.. At the same time India’s automobile sector is establishing itsel f as an exporter to international markets. Hyundai Motor India and Tata Engineering (Telco). competition between automakers has intensi fied markedly. with vehicles that have been taken off urban roads often being driven for longer in rural areas.000 inhabitan ts are even less widespread than in China with its very low figure of 21. Hyundai.000 cars each year (Germany: 5. PRAXIS BUSINESS SCHOOL | KOLKATA .4 million). India currently produces a total of 711. fast-growing middle class is a major factor. The cont inuing increase in incomes and low-cost financing facilities are boosting sales. uses the countr y as an export base for small cars.9|Page Booming automobile industry The automotive industry may consume a relatively sma ll proportion of steel output. However. The population’s steadily growing demand for mobility a nd sharply rising traffic volumes will continue to generate strong demand for ca rs in the future. The biggest are Maruti Udyog Ltd.7 Vehicle ownership (cars and trucks) in India at 11 per 1. it is not uncommon for cars to be used for 20 years (Western Europe: 1 2 years). and Ford manufactures vehicles there for Sou th Africa and other markets. The gr owth of the Indian automobile industry is being driven by healthy domestic deman d. The consumption minded. The Tata group is even trying to gain a foothold in t he European market with new models. Whereas in 1995 there were just five carmakers in India the figur e has now reached 10. In India a small but flourishing automob ile industry has now developed that sees its future primarily in the budget pric e segment and views the domestic market and other emerging nations as potential markets.

production volumes fell i n the US and the EU-25 by nearly 5% and roughly 4% respectively. By contrast.a. its3%-plus share of global steel output is still very low. China.10 | P a g e SUPPLY OF STEEL IN THE INDIAN MARKET Over the past ten years India’s crude steel output rose nearly 7%per year to 55. In the first fi ve months of 2006 Indian steel production continued to expand unabated.3 million tons .In 2005 India’s crude s teel output of 46.) Although India is the world’s eighth largest ste el producer. produces nearly ten times as much as India. The entire industry’s contribution to gross domestic produ ct PRAXIS BUSINESS SCHOOL | KOLKATA . We forecast a significant increase in output by the Indian steel industr y over the medium term. it is ro ughly the same as Ukraine’s share of world steel production. the world’s bigg est steelmaker.5 million tons was 8%higher than in 2004. while global crude steel output increased by 4% (Germany managed an increase of just under 1%p. only in China was th e growth rate considerably higher at 15%. rising 1 0% yoy.

81 34.91 GRAPHICAL REPRESENTATION OF SUPPLY OF INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA . between 2000 and 2005).96 41.70 38. YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 SUPPLY ( in m t) 32.11 | P a g e should rise in the coming years to more than 30% – compared to just under 27% at p resent.42 16. The growth drivers are the expanding client industries Automotive engine ering (production up 16% p.35 GROWTH IN % 5.29 4.). mechanical engineering (up 10% p.a.a.41 43.a.) and construction (up 6% p.492 54.51 7.23 6.76 12.278 46.

so importing steel should be far less problematic in future. steel consumptio n is rising very fast as a consequence of the prospective dynamic economic growt h. some 4. this improves the prospects for Western European exporters in the Ind ian market.7 million tons of steel were imported. Secondly.12 | P a g e SUPPLY DEMAND MISMATCH Even though India is now one of the world’s top ten steelmakers its domestic outpu t is insufficient to meet the demand in all segments. We do not expect India to be self-sufficient in many segments ove r the medium term. South Korea and China makes them important supp liers as well. These include products with surface finishing that helps them to be more durable and retain t heir value for longer. PRAXIS BUSINESS SCHOOL | KOLKATA . There are several reasons for this: firstly. compared with only 2. As a member of the WTO (since 1995) India is obliged to gradually ab olish import restrictions. In 2005. there is demand for high-quality products which India will not be a ble to supply in sufficient quantities for the foreseeable future.2 million ten years earlier (a n annual increase of 8%). The geographical proximity of Japan. the trend towards weight-optimized components persists. Low s teel prices smooth the way for imports from Russia. In general. Ukraine and Kazakhstan. The growth in Indian import demand in 2005 of around 2 million tons is roughly equivalent to the total annual output of Hungary.

13 | P a g e MARKET SHARE OF LEADING PLAYERS IN IRON AND STEEL INDUSTRY COMPA Y PRODUCTIO OF MARKET SHARE(I PERSTEEL (I MIL.5 30% TOTAL 45.ISPAT.CE TAGE TERMS) LIO TO ES) SAIL 13.5 32% TISCO 5.4 19% OTHERS 14.2 11% RNIL 3.5 8% ESSAR.1 100% PRAXIS BUSINESS SCHOOL | KOLKATA .JSWL 8.

JSW & Ispat 19% Tata steel 12% SOURCE: SAILS Annual report PRAXIS BUSINESS SCHOOL | KOLKATA .14 | P a g e Steel Production 2006-07 Others 31% RINL 8% Sail 30% Essar.

15 | P a g e COMPETITION ANALYSIS Concentration Ratio: In Economics the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. As such. In general. It is an economic concept b ut widely applied in competition law and antitrust. also known as Herfindahl-Hirschman Index or HHI. Major percentage of market output is generated by the 4 largest firms in the industry. Decreases in the Herfindahl index generally indicate a loss o f pricing power and an increase in competition. as a percentage. • The 4 firm concentration ratio of the Iron and Steel Industry is 71%. whereas increases imply the oppo site. Herfindahl Index: The Herfindahl index. is a measure of the size of firms in relationship to the industry and a n indicator of the amount of competition among them. One commonly used concentration ratio is the four-firm concentration ratio. PRAXIS BUSINESS SCHOOL | KOLKATA . which co nsists of the market share. of the four largest firms in the in dustry. • This implies that there is oligopo ly in the industry as it is dominated my few major players. it can range from 0 to 1 moving from a very large amount of very small firms to a single mono polistic producer. This may also assist in determining the market form of the industry. the N-firm concentration ratio is the percentage of market o utput generated by the N largest firms in the industry. It is defined as the sum of the squares of the market shares of each individual firm.

new technologies or patented products and a successful global supply netw ork. proven success in complementary ma rkets. rather than financially centered deals. whose combined output is almost 20 million tons. Consolidation among industry players would be driven by strategic fits between companies. One of these. A company can b e a good strategic fit for merger if it has.2470. for example. In so doing steelmakers are pursuing two main objecti ves: by purchasing additional production capacity they aim to both improve their cost structure and increase their market clout. attractive acce ss to raw materials. Consolidation among top steel companies would continue in 2008 since industry players are engaged in an unfettered rush for scale. have a market share of 51%. If it continues like this 35% of steel production confined in the top 10 companies within the ne xt five years. among other things.16 | P a g e • Value of Herfindahl index for Indian Steel Industry is . MERGERS AND ACQUISITIONS Active mergers and acquisitions (M&A s) among players were indicative of the con solidation dynamics within the steel industry globally. is PRAXIS BUSINESS SCHOOL | KOLKATA . Their domestic competitors are numerou s medium sized and smallish companies. The merger of the world’s two big gest steelmakers Mittal Steel (Netherlands) and Arcelor (Luxembourg) will create an industry giant whose output is nearly four times as much as that of the next biggest player (Nippon Steel) and eight times as much as SAIL’s. • It implies that th e competition in the steel industry is medium to high and high concentration. production capabilities. In India the three biggest steelmakers.

The expected growth of the major steel in Indian market is given by the following table.And this wil l further increase in a higher rate up to 2010. competition in the futu re will increase. More mergers can be expected between com panies of this size as these firms need to improve their position with regard to the powerful suppliers of raw materials. But till now there is no sign of acqui sition or mergers of Indian steel companies within India because most of the maj or producers are public. But if we see from the current position of the industry we can say that i n future Indian steel industry will remain oligopoly or can become a competitive one.17 | P a g e Ispat with an output of 2 million tons.In India the growth will be more prominent because of the growth in Real estate. Year 5000 2000 2000 300O 2010 2010 2007 2008 PRAXIS BUSINESS SCHOOL | KOLKATA . Manufacturing. As different major global steel producers like Arcelormittal. Aviation. INCREASE COMPANY NAME In “000”ton ARCELOR BAI BALAJI BHUSAN STEEL & STRIPS BHUSAN LT D. Automob ile sectors. EXPECTED GROWTH The International Iron and Steel Institute(IISI) has fore casted that the steel demand will go of from 1.12 billion ton to 1. In that case several mid-size domestic companies may go for me rgers.19 billion ton in 2008. Posco and others are setting up plants in India.

18 | P a g e ESSAR GUJURAT 1250 1500 2800 3000 2800 6000 4000 1450 15000 5000 1500 1600 2000 5100 62700 2006 2009 2010 2008 2010 2009 2010 2007 2010 2008 2010 2008 2007 2010 2006-2010 SOURCE WV STAHI INDIAN IRON & STEEL ISPAT INDUSTRIES JINDAL STEEL & POWER ISPAT INDUSTRIES MITTA L STEEL POSCO RASHTRIYA ISPAT NIGAM TATA STEEL VEDANT RESOURCES VISA INDUSTRIES VIZAG SAIL VISHAKHPATTANAM TOTAL PRAXIS BUSINESS SCHOOL | KOLKATA .

Indi a will rely squarely on nuclear energy for its future power generation requireme nts. In September 2005 the 15th and largest nuclear reactor to date went on-line . India’s hard coal deposits are of low quality.5 million tons of scrap have PRAXIS BUSINESS SCHOOL | KOLKATA . For example. Energy supply Power shortages hamper production at many locations. Almost half of this is coking coal (the remainder is power station coal). Investment in infrastructure is rising appreciably but remains well below the target levels set by the government due to financing prob lems.19 | P a g e FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY The growth of the Indian steel industry and its share of global crude steel prod uction could be even higher if they were not being held back by major deficienci es in fundamental areas. The nuclear share of the energy mix is likely to rise to roughly 25% by 2050. China and Japan. Overall. Since 2001 th e Indian government has been endeavoring to ensure that power is available natio nwide by 2012. The deficiencies have prompted many firms with heavier energy dem ands to opt for producing electricity with their own industrial generators. Some 3. India is the world’s sixth biggest co al importer. iron ore deposits are finite and there are problems in mining sufficient amounts of it. . Problems procuring raw material inputs Since domestic raw material sources are i nsufficient to supply the Indian steel industry. a considerable amount of raw ma terials has to be imported. India is likely to be the world’s fourth largest energy consumer by 2010 after the US. The rising output of electric steel is also leading to a sharp incr ease in demand for steel scrap. For this reason hard coal imports have increased in the last five years by a total of 40% to nearly 30 million tons.

insufficient freight capacity and a trans port infrastructure that has long been inadequate are becoming increasingly seri ous impediments to economic development. In the medium to long term this capital expenditure will lay the foundations for seamless freight transport. The story is roughly the s ame for port facilities and airports. In the coming years a total of USD 150 bn is to be invested in transport infrastructure. Although the country has one of the wor ld’s biggest transport networks – the rail network is twice as extensive as China’s – it s poor quality hinders the efficient supply of goods. compared with just 1 million tons in 2000. In the coming years imports are likely to continue to increase thanks to capacity incr eases. PRAXIS BUSINESS SCHOOL | KOLKATA . which offers huge potential for t he steel industry. Inefficient transport system In India.20 | P a g e already been imported in 2006.

Going forward. supported by strong demand from emerging economies amid further consolidation among players worldwi de. We can even see several large acquisitions of global steel companies like Corus by Indian s teel giants. PRAXIS BUSINESS SCHOOL | KOLKATA . The scenario is quite same for the Indian steelmakers. And to keep pace with the growing economy Indian companies will produced more and more steel.21 | P a g e OUTLOOK THE outlook for the global steel industry in 2008 is stable. The growth prospects of the client industries ar e also very good. The deployment of modern production systems is increasingly en abling India to improve the quality of its steel products and thus to enhance it s export prospects. India’s lower wages and favorable energy prices will c ontinue to promise substantial cost advantages compared to production facilities in (Western) Europe or the US.

22 | P a g e PRAXIS BUSINESS SCHOOL | KOLKATA .

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