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Industry Overview: The steel industry in India is concentrated in the east, south and west of the country. The integrated foundries are located in the east, while electric steel is produced predominantly in the south and west. In the future the east will see rapid expansion as more integrated capacities are being built in Orissa and other eastern states due to availability of raw materials. India is a 5th largest steel producer globally and China is at first position. Production wise India accounts 3.96% of total Steel production globally. Steel Industry contribution to GDP is 1.2%. The Indian steel industry comprises producers of finished steel, semi-finished steel, stainless steel and pig iron. The private sector controls almost two-thirds of the steel market, while the public sector producers have the remaining one-third market share. The steel industry is in the growth phase. India’s per capita steel consumption is low at 47 kg, compared to global standards for developed countries pegged at 400 to 500 kg. The demand expectations for steel products are rapidly growing for coming years. Their domestic competitors are numerous medium-sized and small companies and more mergers can be expected between these companies, as these firms need to improve their position with regard to the powerful suppliers of raw materials. India’s contribution to Global Production
Production (mn tonnes)
World share (%)
1 2 3 4 5 6
China Japan US Russia India South Korea
489 120 98 72 53 51
36.0% 9.0% 7.0% 5.0% 4.0% 3.5%
India’s Consumption of Steel Rank Country 1 2 3 4 5 6 China US Japan South Korea India Russia Consumption (mn tonnes) 408 108 80 55 51 40 World share (%) 36.0% 9.0% 6.7% 4.6% 4.2% 3.3% Source: JSW Steel AR FY08 India’s Sector wise Consumption of Steel
Industry Trend The index of basic metals and alloy industries recorded 11.17% growth in April 2010 compared with 4.71% increase in the same month last year. Among the major components in the index , production of bars and rods recorded 12.82% growth in
April 2010 compared with 3.05% growth in the same month last year. Production of carbon steel recorded 13.88% growth in April 2010 compared with 11.12% increase in the same month last year. Production of steel wires recorded 4.44% growth in April 2010 compared with 32.35% increase in the same month last year. Finished (carbon) Steel production (weight of 5.13% in the IIP) registered a growth of 2.5% in May 2010 compared to 2.8% (estimated) in May 2009. Finished (carbon) Steel production grew by 3.6% during April-May 2010-11 compared to an increase of 0.8% during the same period of 2009-10. Production Trend
PRODUCTS • Flat Products
Flat products include plates and hot rolled sheets such as coils and sheets. Flat products are derived from slabs. One of the major uses of steel plates is in ship building.
Long Products Long products include bars, rods, wires, ropes and piers. These are called long products due to their shapes. Long products are made from billets and blooms. Long products are mostly used in housing and construction and also in rail tracks.
VALUE CHAIN • • Integrated steel producers Secondary steel producers
COMPOSITION • • • Alloy Non Alloy
Pioneers of the Industry The leading firms of the industry, namely Steel Authority of India (SAIL), Tata Steel, ESSAR Steel, Rashtriya Ispat Nigam Ltd. (RINL) ISPAT and Jindal South West Limited (JSW).
In India the three biggest steel makers, whose combined output is almost 20 million tons, have a market share of 5o%. Biggest M&A deals in steel Industry since 1995
Mergers and acquisitions among players top steel companies would continue. The capacity expansion in the country was primarily through brown field expansions as it requires lower investments than a greenfield expansion. In so doing steel makers are pursuing two main objectives: by purchasing additional production capacity they aim to both improve their cost structure and increase their market clout. Consolidation among industry players would be driven by strategic fits between companies, rather than financially centered deals. A company can be a good strategic fit for merger if it has, among other things, attractive access to raw materials, production capabilities, proven success in complementary markets, new technologies or patented products and a successful global supply network. Their domestic competitors are numerous medium sized and smallish companies. More mergers can be expected between companies 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 acquisition or mergers of Indian steel companies within India because most of the major producers are public. As different major global steel producers like Arcelor-mittal, Posco and others are setting up plants in India, competition in the future will increase. In that case several mid-size domestic companies may go for mergers. But if we see from the current position of the industry we can say that in future Indian steel industry will remain oligopoly or can become a competitive one. Major Issues • Low R&D Expenditure
Even though India is now one of the world’s top ten steel makers its domestic output is insufficient to meet the demand in all segments. There are several reasons for this: firstly, steel consumption is rising very fast as a consequence of the prospective dynamic economic growth. Secondly, there is demand for highquality products which India will not be able to supply in sufficient quantities for the foreseeable future. These include products with surface finishing that helps them to be more durable and retain their value for longer.
Factors leading to gain edge in the steel industry 1. Length of production time i.e. technology used in production process. 2. The cost of production, especially since the steel market is highly pricesensitive. Low-cost, high-quality imports pose a significant threat to the domestic industry and hence, competitive pricing is essential to be ahead. 3. “Dependable delivery” i.e., lower delivery time to consumers.
Michael Porters Five Forces Analysis Barriers to entry: We believe that the barriers to entry are high. Following are the factors that justify our view. • Capital Requirement Steel industry is a capital intensive business. It is estimated that to set up 1 mtpa capacity of integrated steel plant, it requires between Rs 25 bn to Rs 30 bn depending upon the location of the plant and technology used. • Economies of scale The scale of operation does matter as benefits of economies of scale are derived in the form of lower costs, R& D expenses and better bargaining power while sourcing raw materials. It may be noted that those steel companies, which are integrated, have their own mines for key raw materials such as iron ore and coal and this protects them for the potential threat for new entrants to a significant extent.
Government Policy The government has a favourable policy for steel manufacturers. However, there are certain discrepancies involved in allocation of iron ore mines and land acquisitions. Furthermore, the regulatory clearances and other issues are some of the major problems for the new entrants.
Buyers’ Power • Increasing Demand for Steel The estimated urban consumption per capita per annum is around 77 kg in the country, expected to reach approximately 165 kg in 2019-20.
Low per capita consumption The present steel consumption per capita per annum is about 30 kg in India, compared to 150 kg in the world, and 350 kg in the developed world.
Bargaining power of buyers As major steel consumer like oil & gas ,automobiles, shipping, power generation have high bargaining power but small and retail consumers don’t. The steel companies either sell the steel directly to the user industries or through their own distribution networks. Some companies also do exports.
Suppliers’ Power • Bargaining power The bargaining power of suppliers is low for the fully integrated steel plants as they have their own mines of key raw material like iron ore coal for example Tata Steel. However, those who are non-integrated or semi integrated has to depend on suppliers. An example could be SAIL, which imports coking coal. • Labour union power Unionised labour leading to high bargaining power of labour supply. • Energy supply
Power shortages hamper production at many locations. Since 2001 the Indian government has been endeavoring to ensure that power is available nationwide by 2012. The deficiencies have prompted many firms with heavier energy demands to opt for producing electricity with their own industrial generators.
Intensity of Competition • Product differentiation In terms of product differentiation as it doesn’t fall into the luxury or specialty goods and thus does not have any substantial price difference. However, certain companies like Tata Steel still enjoy a premium for their products because of its quality and its brand value created more than 100 years back.
Competition from Foreign Players A threat from dumping of cheaper products does exist.
Threat of substitutes • Aluminium Steel has no strong substitute, but there is a threat of aluminium. Although usage of aluminium has been rising continuously in the automobile and consumer durables sectors, it still does not pose any significant threat to steel as the latter cannot be replaced completely and the cost is also very high. After understanding all the above view points and the current global scenario, we believe that the domestic steel industry will likely to maintain its momentum in the long term. Investors need to focus on companies that are integrated, have economies of scale and sell premium quality products. 1. PEST Analysis Political Factors • Currently 100% FDI allowed.
Full utilization of PPP (public, private, partnership) in development of infrastructure. Trade policy has been liberalized. National Steel Policy to Remove Bottlenecks.
• Govt. policy allows private capital in port development so that steel producers would be encouraged to develop port and berth facilities so as to improve steel productivity. Economic Factors Excise duty cuts to 8 %, Import duty cuts to 5% • . • • Steel industry contribution to GDP is 1.2%. Advance Licensing Scheme allows duty free import of raw materials for exports.
Social Factors • Development in the rural areas.
Technological Factors • The main technologies which are used in the production of steel are Basic Arc furnace, Induction furnace and Electric Arc Furnace. SAIL setting up with Posco for using latest technology named Finex.
SWOT Analysis of Indian Steel Industry Strengths: 1.The government offers a wide range of concessions to investors in India, engaged in steel industry. The main concessions include, inter alia: * Steel in specified backward districts is eligible for a complete tax holiday for a period of 5 years from commencement of production and a 30 percent tax holiday for
5 years thereafter. * Environment protection equipment, pollution control equipment, energy saving equipment and certain other equipment eligible for 100 percent depreciation. * One tenth of the expenditure on prospecting or extracting or production of certain minerals during five years ending with the first year of commercial production is allowed as a deduction from the total income. * Export profits from specified minerals and ores are eligible for certain concessions under the Income tax Act. * Minerals in their finished form exempt from excise duty. * Low customs duty on capital equipment used for minerals; on nickel, tin, pig iron, unwrought aluminium. * Capital goods imported for steel under EPCG scheme qualify for concessional customs duty subject to certain export obligation. 2. World's largest producer of mica; third largest producer of coal and lignite & barites; ranks among the top producers of iron ore, bauxite, manganese ore and aluminium. 3. Labours easily available 4. Low labour and conversion costs. 5. Large quantity of high quality reserves. 6. Exports iron-ore to China and Japan on a large scale 7. Strategic location: Proximity to the developed European markets and fastdeveloping Asian markets for export of Steel, Aluminium
Weakness: • Coal steel in India is associated with poor employee productivity. The output per miner per annum in India varies from 150 to 2,650 tonnes compared to an average of around 12,000 tonnes in the U.S. and Australia; and
• • • • • • • • • • • •
Historically, opencast steel has been favoured over underground steel. This has led to land degradation, environmental pollution and reduced quality of coal as it tends to get mixed with other matter; India has still not been able to develop a comprehensive solution to deal with the fly ash generated at coal power stations through use of Indian coal. Clean coal technologies, such as Integrated Gasification Combined Cycle, where the coal is converted to gas, are available, but these are expensive and need modification to suit Indian coal specifications. Poor infrastructure facilities Steel technology is outdated Low innovation capabilities Labour force is highly un-skilled and inexperienced High rate of accidents Lack of R&D programs and training and development Most of the Indian steel companies do not have access to Indian capital market There is a lack of respect for the steel industry and it suffers from the incorrect perception that ore deposits are depleted. There is limited access to capital, and mines are increasingly more costly to find, acquire, develop and produce. There are long lead times on production decisions. The Indian steel industry suffers from an out-dated, unattractive approach to steel education that is partly to blame for insufficient human resources. Improvement in operational efficiency of the steel companies - Steel companies are in need of an organizational transformation to gradually align its operating costs to international standards. Steel costs of Indian companies are at least 35 percent higher than those of leading coal exporting countries such as Australia, Indonesia, and South Africa. To match productivity, they will need to invest in new technologies, improve processes in planning and execution of projects, and institutionalize a comprehensive risk management framework. Steel operations are not environment friendly. Least importance is given to environment concerns. High rate of illegal steel
Opportunities: India has an estimated 85 billion tonnes of mineral reserves remaining to be exploited. Besides coal, oil and gas reserves, the mineral inventory in India includes 13,000 deposits/ prospects of 61 non-fuel minerals. Expenditure outlay on steel is a meagre
sum when compared to other competing emerging steel markets and the investment gap is most likely to be covered by the private sector. India welcomes joint ventures between foreign and domestic partners to mobilise finances and technology and secure access to global markets. • Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, nickel, cobalt, molybdenum, lithium, tin, tungsten, silver, platinum group of metals and other rare metals, chromate and manganese ore, and fertiliser minerals. • The main opportunities in the steel sector (excluding coal and industrial minerals) are in the development and production of surplus commodities such as iron ore and bauxite, mica, potash, few low-grade ores, steel of small gold deposits, development of placer gold resources located on the frontal belt of the Himalayas, steel known deposits of economic and marginal categories such as base metals in Bihar and Rajasthan and exploitation of lacerate for nickels in Orissa, molybdenum in Tamil Nadu and tin in Haryana. • Considerable potential exists for setting up manufacturing units for value added products. • There exists considerable opportunities for future discoveries of sub-surface deposits with the application of modern techniques. • Current economic steel practices are generally limited to depths of 300 meters and 25 percent of the reserves of the country are beyond this depth • Strengthening of logistics in coal distribution - In India, the logistics infrastructure such as ports and railways are overburdened and costly and act as bottlenecks in development of free market. Privatization of ports may bring the needed efficiencies and capacities. In addition, capacity addition by the Indian Railways is necessary to increase freight capacity from the coal producing regions to demand centres in the northern and central parts of the country. On the Indian rail network, freight trains get a lower priority than passenger trains, a problem that promotes delays and inefficiency. Special freight corridors would raise speeds, cut costs, and increase the system's reliability. • Focusing on technology for future - India's numerous technology research institutes are working on energy related R&D. However, there is a possibility that they are operating in a fragmented fashion. The Government may get improved recoveries on its investment by concentrating on few important technology areas. To start with focus may be applied for tighter emission standards and development of inexpensive clean-coal technologies viz. extraction of methane from coal deposits. • Estimated 82 billion tonnes of reserves of various metals yet to be tapped
While India has 7.5% of the world's total bauxite deposits, aluminium production capacity is only 3% of world capacity, indicating the scope and need for new capacities
Threats: • Foreign Investment in the Steel Sector During 1999, the Government had cleared 7 more proposals of leading international steel companies for prospecting and exploration in the mineral sector to the tune of US$ 62.5 million. 65 licenses have been issued till date for prospecting an area of around 90,142 skims in the states of Rajasthan, Maharashtra, Gujarat, Bihar, Haryana and Madhya Pradesh. Prospecting licenses have been granted in favour of Indian subsidiaries of well-known steel companies... • Large integrated international metal manufacturers including POSCO, Mittal Steel and Alcan have announced plans for expansion in India • Steel companies and equipment suppliers are under the constant threat of being taken over by foreign companies. • A heavy tax burden discourages further investment. Politicians undervalue the industry's contributions to the economy 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. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry. The 4 firm concentration ratio of the Iron and Steel Industry is 71%. This implies that there is oligopoly in the industry as it is dominated my few major players. Major percentage of market output is generated by the 4 largest firms in the industry.
Herfindahl Index: The Herfindahl index, also known as Herfindahl-Hirschman Index or HHI, is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. It is an economic concept but widely applied in competition law and antitrust. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 1 moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the
Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite. Value of Herfindahl index for Indian Steel Industry is .2470. It implies that the competition in the steel industry is medium to high and high concentration.
Company TATA STEEL SAIL ISPAT JSW BHUSHAN BSL LTD. STEEL CO OF GUJRAT JSPL TOTAL
Net sales 253950 100391 20480 47565 12985 546.4 1142.8 24453 461512
Market shar e 55.03 21.75 4.44 10.31 2.81 0.12 0.25 5.30
Index value 3027.828 473.172 19.691 106.221 7.916 0.014 0.061 28.073 3662.97 6
Use either one
Net sale s (RS lakh s) 630748 969714 210470 516707 142900 5169 2475 708
Company TATA STEEL SAIL ISPAT JSW BHUSHAN BSL LTD. TOTAL
Market share (%) 25.47748 39.16916 8.501406 20.87108 5.772086 0.208789
Index value 649.102 1534.223 72.27391 435.602 33.31698 0.043593 2724.561
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