AN ASSIGNMENT

ON

BUSINESS POLICY & STRATEGIC MANAGEMENT

SUBMITTED TO: SUBMITTED BY: Dr.FRANCIS CHERUNILAM LINO LAWRENCE

S4 MBA AIM

INTRODUCTION

Steel is crucial to the development of any modern economy and is considered to be the

backbone of human civilisation. The level of per capita consumption of steel is treated as

an important index of the level of socioeconomic development and living standards of the

people in any country. It is a product of a large and technologically complex industry

having strong forward and backward linkages in terms of material flows and income

generation. All major industrial economies are characterised by the existence of a strong

steel industry and the growth of many of these economies has been largely shaped by the

strength of their steel industries in their initial stages of development.

Steel industry was in the vanguard in the liberalisation of the industrial sector and has

made rapid strides since then. The new Greenfield plants represent the latest in

technology. Output has increased, the industry has moved up i n the value chain and

exports have raised consequent to a greater integration with the global economy. The new

plants have also brought about a greater regional dispersion easing the domestic supply

position notably in the western region. At the same time, the domestic steel industry faces

new challenges. Some of these relate to the trade barriers in developed markets and

certain structural problems of the domestic industry notably due to the high cost of

commissioning of new projects. The domestic demand too has not improved to

significant levels. The litmus test of the steel industry will be to surmount these

difficulties and remain globally competitive.

It has been observed that steel industry has grown tremendously in the last one and a half

decade with a strong financial condition. The increasing need of steel by the developing

countries for its infrastructural projects has pushed the companies in this industry near

their operative capacity.

INDUSTRY OVERVIEW

Steel is the world’s third largest commodity market with a dollar value in excess of $700

billion. In recent years, the industry has undergone radical restructuring and has become

more global, more efficient and more financially viable. Events have resulted in high

prices, supply disruptions and increased volatility, all elements which the existence of

futures contracts can help the industry to manage.

Exceptional growth continues to be seen in the global consumption of finished steel

products. Growth in steel demand is highest in the developing world. China has increased

its domestic consumption from 53 million tonnes in 1990 to nearly 350 million tonnes in

2005.

Economic growth in the developing world tends to be more steel intensive than growth in

developed nations. As a result, steel plays a vital role in these new economies.

World steel trade has expanded as global consumption has increased. In 1990

international steel trade was 167 million tonnes and is forecast to grow to 353 million in

2015.Global steel production has continued to increase but, at a lesser rate to previous

years. In 2005, the total world crude steel production was 1,107.2 million metric tons

and was valued at over $700 billion. This growth is estimated to continue until 2015 at a

rate of approximately 4% per year. Previously from 1990 to 2000, the growth rate was

only 1.6% per year.

THE GLOBAL STEEL INDUSTRY

The current global steel industry is in its best position in comparing to last decades. The

price has been rising continuously. The demand expectations for steel products are

rapidly growing for coming years. The shares of steel industries are also in a high pace.

The steel industry is enjoying its 6th consecutive years of growth in supply and demand.

And there is many more merger and acquisitions which overall buoyed the industry and

showed some good results. The subprime crisis has lead to the recession in economy of

different countries, which may lead to have a negative effect on whole steel industry in

coming years. However steel production and consumption will be supported by

continuous economic growth.

The most significant growth that can be seen in the steel industry has been observed

during the two decades that is 1960s and 1970s, when the consumption of steel around

the whole world doubled. Between these years, the rate at which the steel industry grew

has been recorded to be 5.5 %. In late 70s the industry showed a deceleration in growth.

After this period, the continuous fall slowed down and again started its upward

movement from the early 1990s.

New innovations are also taking place in Steel Industry for cost minimization and at the

same time production maximization. Some of the cutting edge technologies that are being

implemented in this industry are thin-slab casting, making of steel through the use of

electric furnace, vacuum degassing, etc.

INDIAN STEEL INDUSTRY

Steel Industry in India is on an upswing because of the strong global and domestic

demand. India's rapid economic growth and soaring demand by sectors like

infrastructure, real estate and automobiles, at home and abroad, has put Indian steel

industry on the global map.

The finished steel production in India has grown from a mere 1.1 million tonnes in 1951

to 36.957 million tonnes in 2003-04. During the first two decades of planned economic

development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel

production exceeded 8%. However, this growth rate could not be maintained in the

decades that followed. During 1970-80, the growth rate in steel production came down to

5.7% per annum and picked up marginally to 6.4% per annum during 1980-90.

The production during the last decade has doubled. Though India started steel production

in 1911, steel exports from India began only in 1964. Exports in the first five years were

mainly due to recession in the domestic iron and steel market. Upon revival of the

domestic demand there was a decline in exports.

India once again started exporting steel only in 1975 touching a figure of 1 million tonnes

of pig iron export and 1.40 million tonnes of steel export in 1976-77. Thereafter, exports

again fell rapidly to meet rising domestic demand. It was only after liberalisation of the

steel sector that the exports of iron and steel have once again started increasing.

Transformation of Indian steel industry after liberalisation

India's Steel Industry is more than a century old. Before the economic reforms of the

early 1990s the Indian steel industry was a predominantly regulated one with the public

sector dominating the industry. Tata Steel was the only major private sector company

involved the production of steel in India. Sail and Tata Steel have traditionally been the

major steel producers of India. In 1992, the liberalization of the India economy led to the

opening up of various industries including the steel industry. This led to the increase in

the number of producers, increased investments in the steel industry and increased

production capacity. Since 1990, more than Rs 19,000 crores (US$ 4470.58 million) has

been invested in the steel industry of India.

India's steel industry went through a rough phase between 1997 and 2001 when the

overall global steel was facing a downturn and recovered after 2002. The major factors

that led to the revival of the steel industry in India after 2002 was the rise in global

demand for steel and the domestic economic growth in India.

India has now emerged as the eighth largest producer of steel in the world with a

production capacity of 35MT. Almost all varieties of steel is now produced in India. India

has also emerged as a net exporter of steel which shows that Indian steel is being

increasingly accepted in the global market.

The growth of the steel industry in India is also dependent, to a large extent, on the level

of consumption of steel in the domestic market. Steel consumption is significant in

housing and infrastructure. In recent years the surge in housing industry of India has led

to increase in the domestic demand for steel.

Policy changes

The important policy measures, which have been taken for the growth and development

of the Indian iron and steel sector, are as under:

In the new industrial policy announced in July, 1991, iron and steel industry among

others, was removed from the list of industries reserved for the public sector and

also exempted from the provisions of compulsory licensing under the Industries

(Development and Regulation) Act, 1951.

With effect from 24.5.92, iron and steel industry was included in the list of ‘high

priority’ industries for automatic approval for foreign equity investment upto 51%.

This limit has since been increased to 100%.

Pricing and distribution of steel were deregulated from January, 1992. At the same

time, it was ensured that priority continued to be accorded for meeting the

requirements of small scale industries, exporters of engineering goods and North

Eastern Region, besides strategic sectors such as Defence and Railways.

The import regime for iron and steel has undergone major liberalisation moving

gradually from a controlled import by way of import licensing, foreign exchange

release, canalisation and high import tariffs to total freeing of iron and steel imports

from licensing, canalisation and lowering of import duty levels. Export of iron and

steel items has also been freely allowed.

Import duty on capital goods was reduced from 55% to 25%. Duties on raw

materials for steel production were reduced. These measures reduced the capital

costs and production costs of steel plants.

Freight equalisation scheme was withdrawn in January 1992. However, with the

coming up of new steel plants in different parts of the country, iron and steel

materials are freely available in the domestic market.

Levy on account of Steel Development Fund was discontinued from April, 1994

thereby providing greater flexibility to main producers to respond to market forces

Industrial and Trade Policy Resolutions in 1991 with regard to the Steel industry

– Exempted from industrial license system

– Abolition of price controls

– Liberalising conditions for FDIs

– Liberalisation of imports and exports

– Lowering tariff level

Changes after the economic liberalisation

• Steel production and export increased much faster than before

• This increase attributable to new comers

• Technology catching up rapidly

• New type of steel firms appeared

• Flat products imported and exported

Emerging trends in steel industry

An increasing investment in infrastructure, construction and urbanisation as well as

growth in automobile, white goods and industrial sector is a further boost to the optimism

within the domestic steel industry.

Power: Addition of 41,000 MW of power generating capacity between 2002 and 2007

and about 61,000 MW between 2007 and 2012 should drive steel off take, leading to an

incremental consumption of 0.4 million tones in FY2006 itself.

Roads: The government intends to embark on the construction of 48 new projects with a

view to four lane about10,000 kms of roads in addition to the existing ongoing

programme of National Highway Authority of India.With steel intensity in the roads

under construction being considerably higher than the legacy infrastructure, the outlook

for increased steel consumption on this count appears to be brighter.

Housing: Low interest rates and easy availability of housing finance has resulted in a

housing boom; the Housing and Urban Development Corporation intends to add two

million houses every year (35 per cent in urban areas), estimated to create an additional

annual demand of 0.6 to 0.8 mtpa of steel.

Malls: From 25 malls in 2003, India expects to commission more than 220 malls by 2006

(estimated 40 million sq ft) and 600 malls by 2010 (100 million sq ft).

Automobile and ancillaries: In 2004-5, India’s auto industry consumed about 2.8 mt of

steel (about 8 per cent of India’s steel consumption). This is expected to grow at 11-12

per cent over the next three years following India’s emergence as a global outsourcing

hub for the auto industry.

White goods: Rising income and the easy availability of low cost finance has started a

white goods (refrigerators, air conditioners and washing machines) revolution in India,

leading to an increased consumption of steel.

Industrial Projects: India’s industrial growth is encouraging a number of companies to

reinvest leading to an increased consumption of steel, the steel industry is expected to

emerge as a major steel consumer itself.

The positive outlook for increasing steel demand in India along with the strategic

advantages offered have resulted in a keen interest from domestic and international steel

majors for setting up steel projects in India.

JSW Steel Ltd

JSW Steel Ltd. is one among the largest Indian Steel Companies in India today. India’s

third largest steelmaker, JSW Steel Ltd. consists of the most modern, eco-friendly steel

plants with the latest technologies for both upstream & downstream processes.

We are among the largest integrated steel companies in India, having established

production facilities at close proximity to the mineral resources as well as to the market

for its products. Our cost of production is among the lowest in the country due to

locational advantages, strong leadership, and committed work force.

The integrated steel plant at Toranagallu in Bellary District of Karnataka produces hot

rolled coils of various Carbon and Low Alloy grades of steel for wide application ranging

white goods, automotive, line-pipe, railway wagons etc. We have adopted the technology

of iron making using pellets through the novel Corex process as well as in the

conventional Blast Furnace route. We are among the few plants in the world to adopt and

successfully operate Vibro-compacted non-recovery coke-oven, utilizing the heat of the

flue gases for power generation.

Competitive Strengths

• Location: Upstream facility is located in the Iron Ore rich belt of Bellary- Hospet region

of Karnataka. The strategic location of the manufacturing units with respect to

established ports and well connected rail and road networks ensures reliable and cost

efficient receipt of raw materials and dispatch of finished steel.

• Technology: In order to maintain quality and cost of products they have adopted

technologies such as Vibro compacting non-recovery Coke Ovens, the novel Corex

Process as well as the conventional Blast Furnace route of Iron Making.

• Integrated operations: They have a vertically integrated company with operations

spanning across iron ore mining to manufacture of value added galvanized and colour

coated products. For preserving competitive advantage, they focus on developing

advanced skill sets within the organization through internal research and development

efforts as well as tie up with leading companies.

• Marketing: Having one of the largest galvanising capacities in the country, JSW is one

of the largest exporters of galvanized products to over 50 countries in five continents.

Professional Management: As part of corporate governance practices, they have a

qualified and experienced management in addition to a diversified independent board.

Business Strategy

Capacity enhancement: They intend to leverage proximity to iron ore reserves and

the existing infrastructure to expand capacities at low specific investment cost per

ton..

Increase vertical integration: Their impetus has been to increase the vertical

integration through strategic tie up, long-term linkages and acquisitions aimed at

ensuring availability of critical raw materials at low cost.

Improve product profile: They intend to improve the value added products in

product mix to withstand the vagaries of price volatilities besides being able to

offer suite of products to meet the growing requirements of the customers.

Aligned to this strategy, they had merged the steel business of JISCO, which was

into manufacture of value added products – HR Plates, Cold Rolled and

Galvanised.We are modernizing hot strip mill to increase hot rolled product

capacities while also setting up a 1 mtpa CRM complex to meet the growing

demand for value added products.

Improve financial profile: Being part of a capital-intensive industry with high

volatility in the product prices, they need to maintain a healthy financial profile.

They have accordingly reduced debt significantly over the last couple of years

bringing down the gearing levels and also intent to maintain low gearing ratio and

propose to reduce debt levels going forward to make resilient to any downward

pressure of steel prices and continue smooth operations.

Investing in technology to improve productivity and reduce wastage: they have

invested in latest technologies for efficient operations and are continuing to

improve to ensure that best operating practices are followed.

The initiatives are adopted across company including areas related to coal

distribution, refractory relining file and plant availability enabling to improve

efficiencies resulting in reduced costs.

Swot Analysis

Strengths

• They are one of the major players in the steel sector and have a diversified client base.

They have adequate experience and expertise as an integrated steel producer and have

withstood the cyclic fluctuations that have characterized the steel industry in the past.

• They are one of the low cost producers of Hot Rolled coils, which forms a key input

for their CRM project. They also use the Corex-BOF route for making steel, which

requires less amount of coke.

• They have sourcing arrangements with suppliers of power and oxygen which reduces

vulnerability to fluctuations in the prices of these raw materials.

Weaknesses

• The debt / equity ratio or gearing is relatively high compared to some of the other

integrated steel producers in India. They are actively taking steps to rationalize further

high cost debt to reduce interest burden.

• The profitability of the Company is dependent on prices of key inputs such as iron ore,

coal and zinc. Though the Company mitigates these risks by entering into strategic tie-

ups / sourcing contracts with raw material suppliers, any adverse fluctuations in the input

costs would affect the margins of the Company.

Opportunities

• Compared to the global per capita steel consumption average and the steel

consumption average for developed world, India’s per capita consumption of steel is

extremely low. To address this low consumption of steel the National Steel Policy 2005

envisages steel production to grow at 7.3% CAGR to 110 Mtpa from the present levels of

finished steel production at 38 Mtpa. It also envisages steel imports growing at 7.1%

CAGR (Compound Annual Growth Rate) from the present level of 2 Mtpa to 6 Mtpa and

steel exports to grow at 13.3% CAGR from the prevailing 4 Mtpa (Metric Tons Per

Annum) to 26 Mtpa leading to a healthy apparent steel consumption of 90 Mtpa by the

F.Y. 2019- 20, a 6.9% CAGR growth. Several initiatives taken by the Government of

India in the form of infrastructural development programs such as the National Highway

Development Programme, the Indira Awas Yojna and the National Urban Renewal

Programme are expected to have a beneficial impact on the demand for steel.

Demand for Hot Rolled, Cold Rolled and Hot Dipped Galvanized Steel products –

forming the steel-valuechain for the Company is expected to substantially benefit from

the positive impact of these initiatives.

• The Cold rolled products are used in the automobile sector. There is a major

opportunity for them to market their products on a large scale to the automobile sector

resulting from robust growth in the demand for automobiles combined with stringent

regulations on pollution control pertaining to old vehicles.

• India is perceived to be one of the manufacturing destinations for steel making globally

and this may propel to meet the demand not only domestically but also internationally.

Threats

• The steel industry is characterized by cyclical fluctuations in prices of finished steel

products as well as those of the key inputs. Any downward cyclical movement in the steel

sector could reduce the demand for steel and reduce profitability.

• Operating margins could come under pressure if there is a fall in the demand for steel

and increase in input costs. However, since JSW is one of the lowest cost producers in the

market, they may still be able to maintain reasonable operating margins for their

products.

• The Indian steel industry is highly competitive. They face substantial competition in

the steel industry, both from Indian and international companies. Domestic as well as

international steel majors like Tata Steel, POSCO and Mittal Steel have announced plans

to set up manufacturing facilities in India. This could lead to excess capacity and

consequently downward pressure on the prices of finished steel products.