REPORT ON STEEL INDUSTRY

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

Rank Country Production (mn tonnes) World share (%)

1 China 489 36.0%

2 Japan 120 9.0%

3 US 98 7.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%

India’s Consumption of Steel

Rank Country Consumption (mn tonnes) World share (%)

1 China 408 36.0%

2 US 108 9.0%

3 Japan 80 6.7%

4 South Korea 55 4.6%

5 India 51 4.2%

6 Russia 40 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

Demand-Supply Gap

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 high-

quality 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 price-

sensitive. 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 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 steelwould be encouraged to develop port and berth facilities so as to improve steel

productivity.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

IndustryStrengths:

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 fast-

developing Asian markets for export of Steel, AluminiumWeakness: 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.

Use either one

Company Net sales

Market share Index value

TATA STEEL 253950 55.03 3027.828

SAIL 100391 21.75 473.172

ISPAT 20480 4.44 19.691

JSW 47565 10.31 106.221

BHUSHAN 12985 2.81 7.916

BSL LTD. 546.4 0.12 0.014

STEEL CO OF GUJRAT 1142.8 0.25 0.061

JSPL 24453 5.30 28.073

TOTAL 461512  

3662.976

Company

Net sales (RS lakhs)

Market share (%)

Index value

TATA STEEL 630748 25.47748 649.102

SAIL 969714 39.16916 1534.223

ISPAT 210470 8.501406 72.27391

JSW 516707 20.87108 435.602

BHUSHAN 142900 5.772086 33.31698

BSL LTD. 5169 0.208789 0.043593

TOTAL

2475708 2724.561