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A STUDY ON:FACTORS LEADING TO THE

RISE IN THE PRICE OF STEEL AND ITS IMPACT ON

THE SHARE PRICES OF RELATED SECTORS IN

INDIA.VEDANT MIMANIVEDANT MIMANIROLL NO:373, ROLL NO:373, ROOM NO:12, ROOM NO:12, SEM-VI.SEM-VI.

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INTRODUCTION

The Indian Steel Industry today is facing a threat of rising steel prices.

Thus the objective of this research is to identify the reason behind such rise. This rise in price effects the business decisions and the industry as a whole. This research throws light on the factors which are responsible for such rise in price.

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OBJECTIVEAs the Indian Steel Industry is one of the main industries in India looking into its problem of rising prices will fix or reduce the problems faced by the stakeholders and companies of this Industry.

The rise in the steel price has direct correlation with industries such as automobile, construction, infrastructure, consumer goods such as pipes, furniture & fittings etc. The rise in the price of steel, which is one the important raw material in the mentioned industries, has a certain impact on their share price including the price of steel stocks as well.

This research aims to identify the factors that are leading to the rise in price of steel and the effect of this price rise on the share price of steel stocks and related industry stocks.

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HOW IS STEEL MADE?

Most steel is made via one of two basic routes:1. Integrated (blast furnace and basic oxygen furnace).

The integrated route uses raw materials that is, iron ore, limestone and coke along with scrap to create steel.

2. Electric arc furnace (EAF).The EAF method uses scrap as its principal input. The EAF method is much easier and faster since it only requires scrap steel. Recycled steel is introduced into a furnace and re-melted along with some other additions to produce the end product. Steel can be produced by other methods such as open hearth. However, the amount of steel produced by these methods decreases every year.

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THE INDIAN STEEL INDUSTRY

The roots of the Indian Steel industry in modern times can be traced to the year 1874, when a company called Bengal Iron works at Kulti near Asansol in West Bengal produced iron. One of the most important landmarks in the history of Indian steel industry was the commencement of the Tata Iron and Steel Company at Jamshedpur in the state of Bihar in 1907. The other prominent steel manufacturers before independence were Indian Iron and Steel Company (1922), Mysore Iron and Steel Works (1923) and Steel Corporation of Bengal (1937).

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THE POST LIBERALIZATION SCENARIO

India found it difficult to sustain development in steel sector after independence on its own due to the lack of technological development. The high cost of developing technology in this sector proved to be a major hindrance. The post liberalization scenario in the Indian Steel industry has witnessed a monumental shift. Some of the salient features are:

• The need for license for increasing capacity has been abolished.

• Steel industry has been removed from the list of Industries under the control of state sector.

• Foreign equity investment in steel has gone up to 74%.

• In January 1992 the price and distribution controls were removed.

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THE POST LIBERALIZATION SCENARIO

Policies like convertibility of rupee on trade account, freedom to mobilize resources from overseas financial markets and restructuring of existing tax structure have immensely benefited the industry.

The size of India's steel industry has increased considerably in recent years. According to latest available estimates, India ranks eighth among the top steel producers of the world with a production capacity of 35 MT.

The steel industry of India has capital investments of more than Rs 1,00,000 crores. The total employment in the industry is more than two million (including direct and indirect employment).

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ROLE OF IRON AND STEEL INDUSTRY IN INDIA’S GDP FACTS.

The Iron and Steel Industry in India is one of the fastest growing sectors

The demand drivers for the Indian Iron and Steel industry are increase in the activities of the automobiles industry, real estates industry, transportation system, aircraft industry, ship building industry, etc.

India ranks 5th in the world in terms of production of steel

The domestic consumption of steel has grown by12.5% in the past three years

The construction projects all over India are major consumer of steel

The per capita consumption of steel in India is 35kgs

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As the per capita consumption of steel is lower than other countries, so the steel industry has huge opportunities in the future.

India's ranks among the world's top 10 steel producers with a grand total production of over 18.5 million tons per annum (TPA) of steel.

India has seven large integrated iron and steel plants, of which six are owned by the public sector Steel Authority of India Limited (SAIL) and one by the private sector, Tata Iron and Steel Company Limited (TISCO).

All the seven integrated plants use the Blast-Furnace and L.D./Basic-Oxygen Furnace (BF-LD/BOF) process and all combined produces about 11.5 million TPA of steel

ROLE OF IRON AND STEEL INDUSTRY IN INDIA’S GDP FACTS.

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FACTORS LEADING TO THE RISE IN PRICE OF STEEL

Cause 1: Chinese ConsumptionCause 2: Raw MaterialsCause 3: ShippingCause 4: Global PressureCause 5: Rise in demand for

AutomobileCause 6: Infrastructural Growth

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Cause 1: Chinese Consumption

The world's increase in consumption has occurred in China; for the rest of the world, steel consumption has been flat.

At the same time China's steel making capacity has also increased, but not as fast as the increase in consumption

In recent years, China became the world’s largest steel producer and, at the same time, the largest importer.

In 2006 a report sponsored by all the major U.S. steel producer organizations claimed that Chinese steelmakers are unfairly aided by a wide range of government measures. Entitled the “China Syndrome” the report stated that the Chinese approach includes high levels of continued government ownership, subsidization through loans from state-owned banks at less than commercial rates, debt write offs, assistance with raw material input costs, and maintenance of an artificially low currency exchange rate. 

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Cause 2: Raw Materials

Scrap is being consumed at a rate that is faster than it is being created.

Newly developing countries do not have old scrap. Most countries in the world simply do not consume enough steel objects to generate significant quantities of scrap.

`The result of this shortage in scrap has been an unprecedented run-up in scrap prices. Scrap prices have always been volatile, but the variation has been around a much lower price trend.

The imbalance between production from the basic oxygen furnace and electric furnace production is going to continue to put pressure on the scrap supply.

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Cause 3: Shipping

Other industries also are experiencing a problem with shipping capacity. One of the reasons international trade grew so much over the past decade is that shipping costs went down.

However, trade has grown so much that there is now a shortage of shipping. The higher cost of shipping is keeping some steel from being exported to the U.S. and is hampering the movement of raw materials around the globe.

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Cause 4: Global Pressure

Our discussion of shortages has been to highlight the fact that the increase in steel demand in China has put pressure on the global infrastructure for steel. This infrastructure includes more than just steel making capacity and rolling mill capacity.

It is true that China is planning to increase its own steel making capacity. The Chinese government recently announced that it plans to add 120 million tons of steel making capacity in the next few years.

The key point is that even if it adds the capacity it will not solve the problem. There are not enough raw materials to go around; therefore, additional capacity will only add to the problem, not solve it. The Chinese impact on supply and demand is likely to last for several years to come.

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Cause 5: Rise in demand for Automobile

There has been very high growth in the demand of the passenger cars and other vehicles over the years and this growth in the automobile sector has created a demand for steel enormously over the years. Thus such high leaps in the demand for steel has affected the price of steel and has caused it to rise globally.

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Cause 6: Infrastructural Growth

In the last decade or so, India Infrastructure Growth has been propelled specially in transport sector with adequate intervention of Central and State Governments aided by a host of private investments from within and outside the country. 

Development of Urban Infrastructure in India has been fairly insignificant in the last few decades barring a few large projects in a handful of cities. According the India Infrastructure Report 2006, prepared by Mr. Anupam Rastogi of 3iNetwork (IDFC, IIM, Ahmedabad and IIT, Kanpur) it has created a major demand for steel in the country thus drastically leading to the rise in price of steel.

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RESEARCH METHODOLOGY

As stated by Bruce W. Tuckman (1978), research is a systematic attempt to provide answers to the questions. Research is the original contribution to existing stock of knowledge for its advancement.It is a systematic method consisting of enunciating the problem, formulating a hypothesis, collecting of factors or data and reaching to certain findings and conclusion. It is more of a formal, systematic and intensive procedure being carried on the scientific method of analysis.

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SCOPE & OBJECTIVES OF THE STUDY

The scope of the study is to understand the factors that are leading to the rise in the price of steel and analyze the various impact on the share price of the related sectors. This study is based on the existing marketing situation and current stock prices. Identifying factors leading to the price of steel

Analyzing the factors responsible for price hikeEstablish the impact of rise of steel price

on share prices of top steel companiesImpact on the rise in price on related sectors share prices; automobile and infrastructure.To conclude with the performance of

the related sectors due to fluctuation in steel price.

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LIMITATIONS OF THE STUDY

1) The main data collection is through secondary data.

2) Limited access to information regarding the prices of stocks and commodities.

3) Market dynamics are assumed to be constant. The sole consideration for comparison is the steel price.

4) Due to the limited time frame, not enough data could be collected.

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DATA ANALYSIS AND INTERPRETATION The data analysis is done in two parts. The factors affecting steel prices are analyzed and the reasons for the price hike are established. Then to study the impact of this rise in price the of stock prices of steel and related industries are compared with steel index price. A correlation is sought to be established with the stock price and the steel index price over 10 years time to analyze the direct impact of the fluctuation in steel price with the stock prices. This helps us to conclude the likely impact steel price rise has on performance of the company and the financial market overall. The formulae used to calculate correlation is:

Where: x and y are the sample means of X and Y sx and sy are the sample standard deviations of X and Y.

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SUMMARY OF FINDINGS

Amongst the nine factors that have been considered in this project six of them can be held considerably correlated to the rise in the steel price whereas the other four do not seem to be contributing much to the problem of rise in the price of steel.

The six factors that can be held highly responsible are:1) Production of Sponge iron, which is correlated to steel price by 12) Pig Iron Price, which is correlated to steel price by 0.68 3) Iron Ore Price, which is correlated to steel price by 0.964) Furnace Oil prices which is correlated to steel price by 0.975) Coke Price which is correlated to steel price by 0.986) Shipping.

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Rest three factors that cannot be held responsible confidently are:1) Import of scrap is correlated to steel price by 0.252) Export of steel is correlated to steel price by 0.233) Pig iron Production is correlated to steel price by 0.45

Steel price fluctuation has had the most impact on the share prices of the:1)Steel industry 2)Automobile industry3)Construction industry

Steel price fluctuation has had fairly low impact on the share prices of the Consumer Goods industry.

SUMMARY OF FINDINGS

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CONCLUSION In conclusion, it can be said through research that the price of steel has been gradually rising over the years and a number of factors can be held responsible for it. From this study we can conclude that of the nine factors considered for the rise in steel price only six have a considerable impact on it. Also, share price are directly correlated with the steel price, which is a leading raw material in many sectors. Steel share, automobile shares and real estate share are the most affected by this price fluctuation.

Steel prices are likely to go up further in the coming months on the back of higher prices of coking coal and iron ore that mining companies are now demanding. As a result, the government is reported to be considering imposing a provisional safeguard duty on some of these items after it is established that the value of these goods is lower than the normal parameter and is harming Indian industry.

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RECOMMENDATION

Sponge and pig iron are a major material for the production of steel and the raw materials are abundantly present in India, but there is a major problem in the mining of such raw materials due to the bureaucracy and corruption present in India. The industrialists in India have to comply with a lot of legal formalities and compliances of the Government which takes a huge amount of time for the mines to operate.

India being a mineral rich country all the minerals are present in India in large resources. If Government helps in mining all the minerals which will help in the increase of production and ultimately it will help in controlling the rising price of steel due to low production and high raw

material prices

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Government should provide subsidiaries to Industries for optimum consumption of raw materials and hence optimum production of sponge iron which in turn will increase the domestic supply in India, hence, controlling the effect of inflation which can also be cited as one of the reasons behind the rise in price of steel.

RECOMMENDATION

Government should keep a tab on the demand of Infrastructure and automobile and then accordingly look into optimum production of raw materials of steel according to the demand.

This will also help India to earn foreign exchange by cutting on its imports from the other part of the world thus increasing domestic production and controlling the price of the raw materials.

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THANK YOU