10/13/2013

Competition & Strategy

Mid Term Report on
Steel Industry
Submitted to Prof. Rishikesh T. Krishnan

Competition & Strategy Report - SAIL

Group 12:
DHIVYA LAKSHMAN (1311086)

AKASH DAS (1311076)

TABISH IMAM (1311130)

SATHYANARAYANAN R (1311120)

VIVEK VINEET (1311138)

 Competition & Strategy Report - SAIL

Contents

1. Introduction .............................................................................................................. 2

2. Evolution of Steel Industry ....................................................................................... 2

3. Industry and Company overview .............................................................................. 3

3.1 Global perspective – Steel Industry ........................................................................... 3

3.2 Steel Industry in India – Indian perspective ............................................................ 4

4. Industry Analysis and Porter’s Five Forces .............................................................. 6

a. Barriers to Entry........................................................................................................ 6

b. Barriers to exit ........................................................................................................... 7

c. Competitive Rivalry................................................................................................... 8

d. Bargaining Power of Buyers ...................................................................................... 8

e. Bargaining Power of Suppliers ................................................................................. 9

f. Threat of Substitutes ............................................................................................... 10

g. Government Actions ................................................................................................ 11

Porter’s Five Forces ....................................................................................................... 12

5. PEST Analysis of Steel Industry ............................................................................. 13

5.1 Political Factors: .................................................................................................. 13

5.2 Economic Factors ................................................................................................ 13

5.3 Social Factors ....................................................................................................... 13

5.4 Technological factors ........................................................................................... 13

6. Conclusion ............................................................................................................... 14

Appendix............................................................................................................................ 14

1
Competition & Strategy Report - SAIL

1. Introduction
The objective of this study is to analyze the Steel Industry from the perspective of Steel Authority of
India Limited, one of the largest state owned player in steel industry and one of the top players in
International market as well. SAIL stands as the 14th largest steel producer in the world with a turnover
of Rs.486.81 billion. As part of this analysis, steel industry as such will be analyzed identifying its
history, evolution, growth trends, opportunities and top players. SAIL will be scrutinized in a later part
of this study, along with a competitor of similar heights to bring out the strategic differences.

2. Evolution of Steel Industry

The Indian Steel industry is almost 150 years old with Tata Steel as the first integrated plant to be set
up in 1907. Post-independence, achievement of economic self-reliance was the major cause for the
development of core industries like steel. Hence the industry was dominated by several government
regulations and control measures. The excessive regulations reduced the domestic productivity as
compared to international standards.

Post liberalization in 1991, the steel industry was freed from the licensing regime and the distribution
and price controls were removed. The streamlining of import-export procedure and discontinuation of
freight equalization scheme improved competition and hence encouraged private participation. The
improvement in material and energy consumption ratios became the major focus area.

With the expectation of surge in demand for steel products, several projects were launched which were
commissioned between 1996 and 2001. But the period saw the fall in demand and hence caused the
oversupply of product worsening the environment for steel sector. The rising supply and falling demand
increased the volatility of price thereby resulting in continuous losses from 1997-2001.

The Indian steel industry recovered in 2002 due to rise in global demand for steel accompanied by the
economic growth in India. Total steel exports grew at a CAGR of 24% from 2001-2003 driven by the
higher demand of steel from China and Russia. The growth story includes the increase in steel
consumption by the end-user segments from 2006-2011.

The global economic crisis in 2008-09 hit the steel industry which again recovered in 2010-11 with
increase in global steel price and recovery in demand.

2
 Competition & Strategy Report - SAIL

The Indian Steel industry has been put to world map with the soaring demand by sectors like
Infrastructure, real estate and automobiles. Currently India is world’s fourth largest producer of crude
steel after China, Japan and US. The steel production is expected to reach 200 MT by 2020 from 71
MT recorded last year.

Major steel companies like Arcelor Mittal and Korean steel giant POSCO are supposed to invest more
than Rs.1 lakh crore in setting up one of the biggest steel plants in India. The demand for steel which
is currently 8.4% is expected to increase a little over 10% in the next 5 years against the global average
of 5-6% owing to its strong domestic economy and massive infrastructure needs (Golden Quadrilateral,
Freight Corridor, up-gradation of existing Airport) and expansion of industrial production.

3. Industry and Company overview

Steel can be considered as the backbone of human civilization itself being an all essential building block
of a modern civilization. The industry has its demand from other sectors such as construction, aviation,
infrastructure, pipes and tubes, engineering etc. Being a central point of supplier for numerous other
industries makes steel industry an integral part of focus for the government.

Steel’s crucial components are iron and recycled steel. One of the main advantages of steel is it is 100%
recyclable making its lifetime practically infinite. This definitely does put steel in a unique and valuable
competitive space. Steel touches every level of one’s life being central to transportation, housing
infrastructure, agriculture and energy.

3.1 Global perspective – Steel Industry

3
Competition & Strategy Report - SAIL

The world steel production in 2012 was 1.5 billion tonnes and is expected to grow judging by its per
capita consumption which grew in 2012
compared to 2011. Per capita consumption Fig1. Steel growth
in 2012 was 216.9kgs compared to the 2000

consumption in 2011 – 215.7kgs. This 1500

industry is a direct source of employment
1000
for more than 2 million people worldwide.
500
When the supporting industries of
0
construction transport and energy are taken
into account, steel industry employs
around 50 million people worldwide. Steel growth

The steel production growth over the decades are shown in figure 1. The 1.5 billion tons of steel
production comes mostly from China which contributes almost half to the global production. The split
up among various countries in steel production is shown in figure 2. The major players at the global
level are Arcelor Mittal, Hebei Group, Baosteel Group, POSCO, Wuhan Group, Nippon Steel, Shagang
group, Shougang Group, JFE, Ansteel Group.

3.2 Steel Industry in India – Indian perspective

The economic growth of India is closely correlated to the growth of steel industry in India. Contribution
by Indian steel market to the global market FIG 2. CRUDE STEEL PRODUCTION -
is shown in Figure 2. WORLD TOTAL - 1547 MT

The Indian steel sector started its journey

Japan
with the inauguration of Tata Steel in 1907 NAFTA
making it a little more than a century old. CIS
As a tribute to the long years India stands China Other
Europe
as fourth largest producer of crude steel and
EU-27
is projected to surpass its competitors in Others
India Other
near future. The Indian steel industry Asia
accounts for about 5% of the world’s total
production of steel. The working group on

4
 Competition & Strategy Report - SAIL

steel for the 12th plan has projected that the steel capacity in India will be 140 million tonne by 2016-
17.

A table of the steel production in India for the past 5 years will show a trend of its growing potential.

Indian steel industry : Annual Production for Sale (in million tonnes)
Category 2007-08 2008-09 2009-10 2010-11 2011-12*
Pig Iron 5.28 6.21 5.88 5.68 5.78
Sponge Iron 20.37 21.09 24.33 25.08 20.37
Total Finished Steel (alloy + non alloy) 56.07 57.16 60.62 68.62 73.42
Source: Joint Plant Committee; *provisional

India’s per capita consumption of steel is 57kg compared to the global average of 215 kg. This in itself
shows the wide opportunity gap that can be filled. Raw materials such as iron ore and cheap workforce
made the Indian steel industry highly competitive. Importing of coking coal, slow development of
technological advances and adaptation regulations approvals and slow clearance of rules hinder the
growth to a certain extent.

The major players in Indian scenario are given below. The table gives the crude steel production share
of major companies from 2007 to 2011. The figures are all in metric tonnes.

Producer 2007 2008 2009 2010 2011

SAIL 13.51 13.96 13.41 13.51 13.76
RINL 3.5 3.13 2.96 3.21 3.24
Tata Steel 5.17 5.01 5.65 6.56 6.86
JSW 2.64 3.15 3.22 5.26 5.85
ISPAT 2.76 2.83 2.2 2.69 2.38
ESSAR 3.01 3.56 3.34 3.47 3.37
JSPL 0 0 1.46 1.96 2.27
Others-1 4.84 5.28 8.15 9.36 9.79
Others-2 15.39 16.93 18.05 19.82 22.07
Total 50.82 53.85 58.44 65.84 69.59

5
Competition & Strategy Report - SAIL

Others-1: Includes production from EAF Units/ COREX-BOF

Others-2: Includes production from induction furnace

4. Industry Analysis and Porter’s Five Forces

The steel industry has registered tremendous growth rates over the past few years. The Indian players
have also ramped up production and invested in large greenfield projects in the same timeframe.
However, the slowing down of the economy and the increasing cost of raw materials and logistics, have
affected the market demand for steel and profitability of steel producers. We have tried to derive the
attractiveness of the sector by using the industry analysis template and modelling the Porter’s Five
Forces for the Indian Steel industry.

a. Barriers to Entry
We believe that the barriers to entry in the Steel industry to be moderate to high in nature
(Attractiveness score: 3.78, Refer Table 1 in Appendix for item level attractiveness score).

Steel industry is a capital intensive industry and requires anything between Rs. 25-30 billion for setting
up a plant capacity of 1 MTPA1. Also, factors such as Economies of Scale through larger investments
leading to lower costs, bargaining power and R&D expenditures for existing players serve to raise the
Barrier to entry for newer players. Thereby making the industry more attractive. However, product
differentiation is low thereby making the industry less attractive for an incumbent player. Exception to
product differentiation may be Tata Steel which command a high premium on the back of quality
products and long established brand value.

1 Source: www.equitymaster.com

6
 Competition & Strategy Report - SAIL

Figure: Barriers to Entry as a measure of Steel Industry Attractiveness

b. Barriers to exit

In terms of barriers to exit with respect to asset specialization, cost of exit and government
restrictions, the industry attractiveness is pretty low ( Attractiveness score: 2)

Figure: Barriers to Exit as a measure of Steel Industry Attractiveness

7
Competition & Strategy Report - SAIL

c. Competitive Rivalry

Although there are numerous small players at various levels of the value chain in the Steel industry,
the major players are only a handful in number. The competition is not so intense also as the demand
still exceeds the capacity of domestic players. India is a net importer of steel. Therefore, on the
parameters of No. of (major) competitors (low) and excess capacity (capacity < demand), the Steel
industry is pretty attractive. However, having a high fixed costs brings down the attractiveness of
the industry. The overall attractiveness score of the industry with respect to Competitive rivalry
was found to be moderate (Attractiveness score: 3.375)

Figure: Competitive Rivalry as a measure of Steel Industry Attractiveness

d. Bargaining Power of Buyers

The number of Buyers of Steel, Auto-manufacturers, construction companies, distributors, end
consumers, etc. are many in number. Therefore, do not exert too much power collectively. Also,
all buyers except auto manufacturers do not normally add on to the cost/value of the end product.
Industry’s tendency for forward integration is at moderate levels. Also, buyer’s threat or tendency

8
 Competition & Strategy Report - SAIL

to integrate backwards relatively low. Also, there are few substitutes available within India that can
provide the utility of Steel across multiple applications. All the aforementioned factors lead to low
bargaining power of buyers, thereby making the Steel Industry attractive (Attractiveness score:
4).

Figure: Bargaining Power of Buyers as a measure of Steel Industry Attractiveness

e. Bargaining Power of Suppliers

The bargaining power of suppliers to the steel industry is relatively low due to presence captive
raw material mines (iron ore, coal mines, etc) with the major players in the industry. Hence, the
steel industry is quite attractive in terms of the bargaining power of suppliers as the dependency
on external suppliers is extremely low for the primary raw materials. The attractiveness score
for the steel industry along this parameter is 3.5

9
Competition & Strategy Report - SAIL

Figure: Bargaining Power of Suppliers as a measure of Steel Industry Attractiveness

f. Threat of Substitutes
Substitutes for Steel include aluminum, cement, etc. Through increasing utilization of substitutes
in automotive, construction and consumer durables segment, the substitutes pose a moderate threat
to the Steel industry as their profitability isn’t very high and the volumes generated are not
comparable. And the substitutes do not provide the same utility as Steel. This attribute of substitutes
manifests itself in a moderate attractiveness score of 2.75 for the Steel Industry with respect to
threat of substitutes.

10 
 Competition & Strategy Report - SAIL

Figure: Threat from substitutes as a measure of Steel Industry Attractiveness

g. Government Actions
Government of India has a quite favourable policy towards the Steel industry. This is manifested
the National Steel Policy, 20052. The policy aims to cater to the domestic steel demand of nearly
100 MTPA by 2020. There are limited restrictions on import or export of Steel imposed by the
Government of India. However, there are industry regulations related to environment protection
and pollution control norms along with restrictive land acquisition and mining regulations

2 http://steel.nic.in/nspolicy2005.pdf

11 
Competition & Strategy Report - SAIL

Figure: Government Actions as a measure of Steel Industry Attractiveness

Porter’s Five Forces

Based on the above Industry Analysis, one can illustrate the effect of Porter’s five forces on the
Steel Industry in the following manner:

Figure: Porters’s Five Forces Model for Indian Steel Industry

12 
 Competition & Strategy Report - SAIL

The overall attractiveness of the industry may thus be derived by assigning relative weights to the
factors a to g mentioned above. Thus, we get an overall attractiveness score of 3.4 for the Steel
Industry. The relative weightages have been mentioned in Table 8 of the Appendix section.
Hence, we may say that the industry is quite attractive in the long run. In the short run, attractiveness
is tempered by slow economic growth, inflation and increase in logistics and raw material costs.

5. PEST Analysis of Steel Industry

5.1 Political Factors:
The political factors concerning steel industry will include the government regulations, industrial
policies, mineral and trade policies, environmental policies etc. Government ownerships and the
associated power play, legislations and licenses are also considered here. The National Steel
Policy approved by the Government in November 2005 has its objective as to have a modern and
efficient steel industry of world standards. The policy aims to increase CAGR of 7.3% to 110mt
by 2019-20 of the steel production. The share of exports is expected to increase to 25% from
10%. 100% Price regulation of steel was abolished in 1992 and since then market forces
determine its prices. FDI is allowed since it comes under metallurgy and processing of all metals.

5.2 Economic Factors

As inflation is high and rising, the production costs have increased contributing to decrease in
profits. Currently inflation in India is 6.10% as of August 2013. The drastic increase in value of
dollar and currency fluctuations are detrimental to the industry due to the high exchange rates
and rise in price of oil. Due to high inflation rate the consumers buying power is also greatly
reduced. It should also be noted that growth of steel industry is positively correlated with GDP.

5.3 Social Factors

The shift in the mindset and the culture of the employees and general public, which places more
importance on green initiatives and cleaner environment influences the industry. There are
number of safety regulation rules that were put up in the industries as a direct implication of
these concerns.

5.4 Technological factors

New patents and innovations for extraction and processing of ore is a must to speed up the pace
of production and meeting the growing demand both inside and for exports. India is lagging
behind in the adoption of many technologies. The current level of investment in R&D of steel
industry is less than 0.24% of the turnover.

13 
Competition & Strategy Report - SAIL

6. Conclusion

Therefore, we may conclude that the Steel Industry with favourable government policy, high projected
demands and availability of captive raw material sources for Indian players favours the Steel industry and
has tremendous growth opportunities in the long run. Therefore, many greenfield projects are in the pipeline
as well. In the short run, the demand and profitability are impacted by slowing of economy and rising raw
material costs.

Overall, the industry may be considered as pretty attractive.

Appendix

Table 1: Attractiveness of the Steel Industry with respect to Barriers to Entry

Barriers to entry
Economies of scale
Product differentiation
Brand identity
Switching Cost
Access to channels of distribution
Capital requirement
Access to technology
Access to raw material
Government protection
Overall Score
Attractiveness
score
5 Large is better
2 High is better
3 High is better
3 High is better
4 Limited is better
5 Large is better
3 Restricted is better
5 Restricted is better
4 Substantial is better
3.78

High barriers to entry implies high attractiveness of the industry for the incumbent

Table 2: Attractiveness of the Steel Industry with respect to Barriers to Exit

Attractiveness
Barriers to Entry Score
Assets specialization 1 Small is better
Cost of Exit 1 Low is better

14 
 Competition & Strategy Report - SAIL

Government restrictions 4 Low is better

Overall Score 2

High barriers to exit implies low attractiveness score of the industry for an incumbent firm

Table 3: Attractiveness of the Steel Industry with respect to Competitive Rivalry

Rivalry Among Attractiveness

Competitors Score
No. of Competitors 5 Less is better
Industry Growth 3 Fast is better
Fixed Cost 1 Low is better
Differentiation 3 High is better
Switching Cost 3 High is better
Openness of Terms of Sales 4 Open is better
Excess Capacity 5 Small is better
Strategic stakes 3 Low is better
Overall Score 3.375

High rivalry implies low attractiveness score of the industry for an incumbent firm

Table 4: Attractiveness of the Steel Industry with respect to bargaining power of Buyers

Attractiveness
Bargaining Power of Buyers
score
No. of Buyers 5 Large is better
Availability of substitutes 2 Few is better
Switching Costs 3 High is better
Buyer's threat of backward integration 5 Low is better
Industry's threat of forward
3
integration High is better
Contribution to quality 3 High is better
Contribution to cost 5 Low is better

15 
Competition & Strategy Report - SAIL

Buyer's profitability 4 High is better

Overall Score 3.75

High bargaining power of buyers implies low attractiveness of the industry for the incumbent firm

Table 5: Attractiveness of the Steel Industry with respect to bargaining power of

Suppliers

Attractiveness
Bargaining power of suppliers
score
No. of suppliers 1 Large is better
Availability of substitutes 2 Many are better
Switching Costs 2 Low is better
Supplier's threat of forward integration 5 Low is better
Industry's threat of backward
integration 5 High is better
Contribution to quality 3 Low is better
Contribution to cost 5 Low is better
Industry's importance to supplier 5 High is better
Overall Score 3.5

High bargaining power of suppliers implies low attractiveness of the industry for the incumbent firm

Table 6: Attractiveness of the Steel Industry with respect to Threat from Substitutes

Attractiveness
Barriers to entry
score
Availability of close substitutes 3 Low is better
Switching Cost 2 High is better
Worse is
Substitute's price-value 4 better
Profitability of the producers of substitutes 2 Low is better
Overall score 2.75
High threat of substitutes implies low attractiveness of the industry for the incumbent

Table 7: Attractiveness of the Steel Industry with respect to Government Actions

16 
 Competition & Strategy Report - SAIL

Attractiveness
Government Actions
Score
Industry protection 4 High is better
Industry regulation (pollution, etc.) 2 Low is better
Customs and tariff restrictions abroad 5 Low is better
Overall Score 3.67

Government actions may make the industry more or less attractive for incumbents

Table 7: Overall Attractiveness of the Steel Industry

Attractiveness Relative
Overall Assessment
score Weights
Barriers to entry 3.78 0.20
Rivalry among
3.38 0.20
competitors
Barriers to exit 2.00 0.10
Power of Buyers 4.00 0.15
Power of Suppliers 3.50 0.15
Threat of substitutes 2.75 0.10
Government action 3.67 0.10
Overall attractiveness 3.40

17 
Competition & Strategy Report - SAIL

References

1. http://www.ibef.org/industry/steel.aspx
2. http://steel.gov.in/overview.htm
3. http://www.worldsteel.org/dms/internetDocumentList/bookshop/Word-Steel-in-Figures-
2013/document/World%20Steel%20in%20Figures%202013.pdf
4. http://www.cptgl.com/steel-industry-in-india-2013-report.pdf
5. http://www.sail.co.in/financial-list/103
6. http://www.sail.co.in/learnings_centres/home.html
7. http://en.wikipedia.org/wiki/Main_Page
8. http://www.crisilresearch.com
9. http://equitymaster.com
10. SAIL Annual Report 2012-13

18 