AN ANALYSIS OF THE INDIAN STEEL INDUSTRY

PRESENTED TO PROF. SANDEEP HEGDEBY:

NITIN JAISINGHANI - 37PRAJAKTA SHIKARKHANE - 42

SMRITI AGRAWAL - 49VIJAY SINGH - 55

ABHIMANYU PARIKH – 61

BUSINESS ENVIRONMENT

HISTORY OF STEEL

•Steel was discovered by the Chinese in 202 BC.

•Around 9th century AD, the smiths in the Middle East developed techniques to produce sharp and flexible steel blades.

•In the 17th century, smiths in Europe came to know about a new process of cementation to produce steel.

USES OF STEEL

Iron and steel are used widely in the construction of roads, railways, infrastructure, and buildings. Most large modern structures, such as stadiums and skyscrapers, bridges, and airports, are supported by a steel skeleton. Even those with a concrete structure will employ steel for reinforcing. In addition to widespread use in major appliances and cars (Despite growth in usage of aluminium, it is still the main material for car bodies.), steel is used in a variety of other construction-related applications, such as bolts, nails, and screws. Other common applications include shipbuilding, pipeline transport, mining, offshore construction, pipeline transport, aerospace, white goods (e.g. washing machines), heavy equipment (e.g. bulldozers), office furniture, steel wool, tools, and armour in the form of personal vests or vehicle armour (better known as rolled homogeneous armour in this role).

WORLD STEEL PRODUCERS

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

The demand expectations for steel products are rapidly growing for coming years.

The subprime crisis has lead to the recession in economy of different countries

The countries like China, Japan, India and South Korea are at the forefront in steel production in Asian countries.

GLOBAL STEEL PRODUCTION

Steel has been the key material with which the world has reached to a developed position

The steel long products are required to produce concrete, blocks, bars, tools, gears and engineering products.

In Financial Year 1991, the six major plants, of which five were in the public sector, produced 10 million tons

At the time of Independence in 1947 India's steel production was only 1.25 Mt of crude steel

STEEL INDUSTRY IN INDIA

DEMAND OF STEEL IN INDIA

Consumption of steel grown by 16%Per capita steel consumption.Growth rate of net sales, net profit and

operating profit.Strong growth in demand expected.Infrastructure, real estate and automobiles.

DEMAND OF STEEL IN INDIA

SUPPLY OF STEEL IN INDIA

8th largest steel producer.Contribution to GDP.Client industries.

SUPPLY OF STEEL IN INDIA

DEMAND – SUPPLY MISMATCH

Annual increase of 8% in Indian import of steel.

Low steel prices.Geographical proximities.Prospective dynamic economic growth.Demand for high quality products.

MAJOR PLAYERSPublic Sector

STEEL AUTHORITY OF INDIA

RASHTRIYA ISPAT NIGAM LTD. (RINL)

HINDUSTAN STEELWORKS CONSTRUCTION LTD. (HSCL)

MECON LTD.

Private Sector

TATA STEEL LTD.

ESSAR STEEL LTD. (ESL)

JSW STEEL LTD.

ISPAT INDUSTRIES LTD. (IIL)

COMPANY PRODUCTION IN STEEL

MARKET SHARE

SAIL 13.5 32%

TISCO 5.2 11%

RNIL 3.5 8%

ESSAR 8.4 19%

OTHERS 14.5 30%

TOTAL 45.1 100%

Growth in key sectors will drive major demand

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Countries

Key Sectors driving growth

• Infrastructure development

• Housing and urban

development

• High degree of urbanizations

• High demand in the auto

sector

• Capacity building in steel

making

FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY

Energy Supply

Problems procuring raw material inputs

Inefficient transport system

Recent financial crisis

SWOT ANALYSIS

STRENGTHS

Availability of raw material

Low cost of labour

Lower transportation cost

Thermal coal availability at low cost

WEAKNESSESS

Endemic defeciencies

High cost of capital

Low labour productivity

High cost of basic inputs and services

OPPORTUNITIES

Unexplored rural market

Consolidation

Export market penetration

Other sectors

Huge infrasructure demand

THREATS

China becoming net exporter

Slow industry growth

Threat of substitutes

Technological change

Price sensitivity

Strengths

1. Availability of iron ore and coal 2. Low labour wage rates 3. Abundance of quality manpower 4. Mature production base

Weaknesses 1. Unscientific mining 2. Low productivity 3. Coking coal import dependence 4. Low R&D investments 5. High cost of debt 6. Inadequate infrastructure

Opportunities

1. Unexplored rural market 2. Growing domestic demand 3. Exports 4. Consolidation

Threats

1. China becoming net exporter 2. Protectionism in the West

PESTLE ANALYSIS

POLITICAL FACTORS

Intervention by government

Growth in protected and controlled environment

Decline in government protection since late 80’s

ECONOMIC FACTORS

Dip in production of steel as investment falls due to global economic recession.

Major historical events also affect steel production. The two world wars for example represented a peak in production. This was then immediately followed by a dip then a strong climb in production as economies recovered from the war and entered a period of prosperity and growth.

Steel is a strategic industry. Every country wants its own steel industry to help give it

economic independence and no country wants to rely on others for its steel supply.

Since steel is such an important product, many countries protect their local steel industry but on a global scale, this has led to excess productive capacity, lower prices and poor profitability.

SOCIAL FACTORS

Employment is expected to continue to decline due to consolidation and further automation of the steelmaking process.

The advent of technology too has shown a trend that reduces the need to employ human labour in the industry, thus automation of manufacture processes.

Many countries are proposing temporary reduction of days in a work week.

Steel is no more the labour-intensive industry it used to be. Earlier, it was often associated with the image of huge work force living in a captive township. modern steel plant employs very few people.

TECHNOLOGICAL FACTORS

New technologies relate to environmental protection, production techniques, product quality and the development of new products. Some current examples include:

1. Production techniques: direct reduction iron technology; electric furnace operation; use of artificial intelligence in operations

2. Product quality: consistency in physical properties of steel; variations in strength, hardness, and bending properties

3. New products: new types of steel alloys; building and construction products.

LEGAL FACTORS

In a move to control rising prices, the Indian government last year, under the premise of the steel minister, Shri Ram Vilas Paswan put forward the need to control rising steel prices so as to stabilize fluctuations therein.

A ruling by a WTO appellate body that the US had acted illegally in increasing duties on Japanese steel imports should be seen as a shot in the arm for a host of steel exporters penalized in recent times by the US Administration on dumping grounds.

In another case (in which India is a complainant along with other countries, including the EU), the US has acted to block investigations by the Geneva body into what has come to be known as the Byrd Amendment, which is actually not much more than a holding operation because such a blockage can be applied only once under WTO rules, leaving the Geneva body free to appoint a panel.

ENVIRONMENTAL FACTORS

The manufacturing process creates significant air, water and noise pollution while mining raw materials and the high-energy demands of steel making also contribute greatly to pollution of the environment.

It is estimated that in the last decade, close to US$2000 billion or over 10% of total steel industry expenditure has been on environmental control and protection.

Steel uses less energy per ton to produce than many similar competitive materials.

Steel has become a major input in the construction of various environmental protection systems, e.g. industrial pollution filters; solar and wind power

MICHAEL PORTER’S FIVE FORCES

PORTER’S 5 FORCES ANALYSIS

BARRIERS TO ENTRY : HIGH

Capital requirement

Economies of scale

Government policy

Product differentiation

COMPETITION : HIGH

Truly global in terms of competition

Branding is not common

No differentiation

Demand exceeds supply

BARGAINING POWER OF SUPPLIER

Bargaining power of suppliers is low

Steel producers have own mines

Non integrated or semi-integrated depend on suppliers

High bargaining power and favorable deals

Small consumers do not enjoy these benefits

BARGAINING POWER OF CUSTOMER

THREAT OF SUBSTITUTES : LOW

Use of substitutes like plastic and aluminium

DRIVING FORCES RESTAINING FORCES

Huge Infrastructure Demand-4

Increasing Consumption of steel in other sectors like automobiles, packaging and engineering industries-3

Untapped rural markets-4

Lower cost of steel production as compared to other countries-3

Export market penetration-3

Lack of research and development-2

China having very heavy influence on the global steel industry-5

Threat of substitutes like alumimnium-2

Global slowdown-3

High level taxation compared to other countries-3

FORCE FIELD ANALYSIS

TOTAL:15TOTAL:17

In the above analysis the driving forces are higher than the restraining forces.

This shows a positive outcome in the steel sector.

Expansion in the steel sector is possible since the driving forces are higher than the restraining forces however certain restraining forces have to be taken care of to ensure future growth.

GLOBAL MERGERS AND ACQUISITIONS

Arcelor SA accepted India-born L N Mittal group's takeover bid with improved quoting by 10% to 25.9 billion Euros ($32.4 billion), thus creating the world's largest steel entity. This acquisition positioned Mittal Steel as the largest steel producer in the world with about 10 per cent of total steel production worldwide. Arcelor had entered into a strategic tie up Severstal which was perceived to be as a last ditch effort to thwart Mittal's bid, which ultimately proved unsuccessful. The final decision preferring Mittal to Russian steel giant Severstal was taken after a marathon meeting of the Board at the company's headquarters. The merger created the world's largest steelmaker, to be called Arcelor-Mittal, with annual production capacity of more than 110 million tons per annum.

Jindal Vijayanagar Steel (JVSL) acquired Euro Coke and Energy Pvt Ltd, Euro Ikon Iron & Steel Pvt Ltd and JSW Power Ltd (JPL) by way of a merger between the companies. JVSL, the country's third largest integrated steel plant, has also expanded its board by inducting three additional directors.The acquisition of the three companies was based on the recommendations JVSL's consultants, RSM & Co and ICICI Securities. The company is in the process of expanding its capacity to 3.8 MTPA from 2.5 MTPA by March 2006 and the merger is in line with this strategy.

The deal is the largest Indian takeover of a foreign company and will create the world's fifth-largest steel group.In 2005, Tata Steel was only the world's 56th biggest steel producer and its takeover of Corus represents its first expansion outside Asia.The deal would also catapult the combined entity to among the world's largest steel companies with a total capacity of about 24 million tonnes per year.The London-based Corus Group is one of the world's largest producers of steel and aluminium. Corus was formed in 1999 following the merger of Dutch group Koninklijke Hoogovens N.V. with the UK's British Steel Plc on October 6, 1999.

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