Analysis On Indian Steel Industry

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PRAXIS BUSINESS SCHOOL MANAGERIAL ECONOMICS PRESENTED TO:-

SUMA DAMODARAN BY:-

NABENDU KAR (B08017) SUMANTA KUMAR SAMANTARAY (B08035)

INDUSTRY: INDIAN STEEL INDUSTRY

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CONTENTS Page

THE GLOBAL STEEL INDUSTRY

3

THE STRUCTURE OF INDIAN STEEL INDUSTRY

4

CONSUMPTION OF STEEL INDIA

5

SUPPLY OF STEEL IN INDIAN MARKET

11

SUPPLY DEMAND MISMATCH

12

MARKET SHARE OF DIFFERENT

13

COMPETETION ANALYSIS

15

MERGERS AND ACQUISITIONS

16

EXPECTED GROWTH

17

FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY

19

OUTLOOK

21

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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.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

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The countries like China, Japan, India and South Korea are in the top of the above in steel production in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan accounts for 9% i.e. 118m ton, India accounts for 53m ton and South Korea is accounted for 49m ton, which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth.

STRUCTURE OF INDIAN STEEL INDUSTRY 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 its raw materials. Although India is now one of the worlds top ten steel producers, its domestic output is insufficient to meet the demand in all segments. Imports increased in 2005 by 8% and it is likely that India will continue to import in many segments over the medium term. According to Deutsche Bank Research,1 the three biggest steelmakers in India have a combined output of almost 20 million tons and have a domestic market share of 51%. Their domestic competitors are numerous medium-sized and smallish 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.

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CONSUMPSION OF STEEL IN INDIA Driven a booming economy and concomitant demand levels, consumption of steel has grown by 12.5 per cent during the last three years, well above the 6.9 percent envisaged in the National Steel Policy. Steel consumption amounted to 58.45 mt in 2006-07 compared to 50.27 mt in 2005-06, recording a growth rate of 16.3 per cent, which is higher than the world average. During the first half of the current year, steel consumption has grown by 16 per cent. A study done by the Credit Suisse Group says that India's steel consumption will continue to grow by 17 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. The scope for raising the total consumption of steel in the country is huge, as the per capita steel consumption is only 35 kgs compared to 150 kg in the world and 250 kg in China. With this surge in demand level, steel producers have been reporting encouraging results. For example, the top six companies, which account for 70 per cent of the total production capacity, have recorded a year-on-year growth rate of 13.4 per cent, 15.7 per cent and 11.7 per cent in net sales, operating profit and net profit, respectively, during the second quarter of 2007-08 We expect strong demand growth in India over the next five years, driven by a boom in construction (43%-plus of steel demand in India). Soaring demand by sectors like infrastructure, real estate and automobiles, at home and abroad, has put India's steel industry on the world steel map.

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YEAR WISE DEMAND OF INDIAN STEEL INDUSTRY

YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

DEMAND (in m t) 34.444 36.037 40.471 43.O62 45.387 50.257 58.45

GROWTH IN % 4.625 12.32 6.4 5.4 10.73 16.3

GRAPHICAL REPRESENTATION OF GROWTH AND DEMAND OF INDIAN STEEL INDUSTRY

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MAJOR CONSUMERS OF INDIAN STEEL INDUSTRY Support from dynamic economy India is the economic region that has enjoyed the world’s most sustained boom. The Deutsche Bank Research Formel-G econometric model forecasts average real GDP growth of 5.5% p.a. for India between 2006 and 2020 O followed by Malaysia (5.4%) and China (5.2%). In all, the analysis covered 34 economies that generate some 85% of global GDP. The growth drivers are population growth, human capital, opening of the economy and rising investment. Despite the sharp increase in India’s population, per-capita GDP – in purchasing power parity terms – should rise by nearly 4% per year until 2020. Since the model does not take sufficient account of the country’s major initiatives in the infrastructure area, average growth until 2020 might turn out to be even closer to 6%. In fact, by the end of the decade India could replace Japan as the world’s third biggest economy after the US and China

Positive stimuli from construction industry The steel companies are pinning their hopes largely on the expanding construction industry. The industry is one of the key drivers of India’s economic growth. Up to 10 million new homes need to be built each year until 2030. Strong population growth, rising incomes and decreasing household sizes are forcing comprehensive measures to be taken in the housing sector. The pent-up demand for housing is estimated at around 20 million units by the Indian Construction Association; the Ministry for Urban Development and Poverty Alleviation claims that no less than 31 million dwellings are needed. The hosting of the Commonwealth Games in New Delhi in 2010 should generate additional stimulus for the construction industry and thus boost demand for steel. In addition to the sports facilities, accommodation for competitors and visitors is planned. The government has announced that some 40 hotels with a total of 15,000 beds are to be built. The Indian office market is benefiting from the ongoing off PRAXIS BUSINESS SCHOOL | KOLKATA

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shoring activities of industrial nations. Indian insurers are concentrated in the software development and software product segments. Their second main business area is assuming the responsibility for entire support processes, or business process outsourcing (BPO). These segments still look set for growth.6 Furthermore, the construction sector is benefiting from major infrastructure projects. Capital expenditure is to be focused on road building and the rail network, as well as on the construction and expansion of ports and airports Strong growth in mechanical engineering Mechanical engineering output has increased some 10% p.a. over the past five years. Thanks to the march of technological progress the prospects for domestic suppliers should improve going forward, while import growth is slightly crimped. Demand is greatest for building machinery and plastic-moulding machines as well as machine tools and textile machinery. Since the domestic textile and apparel industry, for example, is focusing further up the value chain, firms have to make numerous investments in modernising and expanding their machinery portfolios Makers of building machinery are benefiting from the large-scale infrastructure projects planned by the Indian government, while machine-tool makers are being buoyed by the upturn in the automobile and auto parts industries for example. Exports by the Indian mechanical engineering industry rose recently by nearly 30% to USD 10 bn. By comparison, German mechanical engineering firms exported products worth close to USD 117 bn, including machinery to the value of about USD 1 bn to India. Germany claims a particularly large share of Indian imports of Woodworking machinery and machine tools as well as pumps and compressors. The demand for foreign machinery comes from customers requiring especially high standards of performance and precision. The Engineering Exports Promotion Council (EEPC) forecasts that Indian exports will be worth USD 30 bn (+32% p.a.) by 2008; nevertheless the volume is still very low by international standards.

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Booming automobile industry The automotive industry may consume a relatively small proportion of steel output, but its growth rate is the highest of the most important clients for the steel industry. In India a small but flourishing automobile industry has now developed that sees its future primarily in the budget price segment and views the domestic market and other emerging nations as potential markets.7 Vehicle ownership (cars and trucks) in India at 11 per 1,000 inhabitants are even less widespread than in China with its very low figure of 21. The growth of the Indian automobile industry is being driven by healthy domestic demand. The consumption minded, fast-growing middle class is a major factor. The continuing increase in incomes and low-cost financing facilities are boosting sales. However, it is not uncommon for cars to be used for 20 years (Western Europe: 12 years), with vehicles that have been taken off urban roads often being driven for longer in rural areas. The population’s steadily growing demand for mobility and sharply rising traffic volumes will continue to generate strong demand for cars in the future. At the same time India’s automobile sector is establishing itself as an exporter to international markets. Hyundai, for example, uses the country as an export base for small cars, and Ford manufactures vehicles there for South Africa and other markets. However, competition between automakers has intensified markedly. Whereas in 1995 there were just five carmakers in India the figure has now reached 10. The biggest are Maruti Udyog Ltd., Hyundai Motor India and Tata Engineering (Telco). The Tata group is even trying to gain a foothold in the European market with new models. India currently produces a total of 711,000 cars each year (Germany: 5.4 million).

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SUPPLY OF STEEL IN THE INDIAN MARKET Over the past ten years India’s crude steel output rose nearly 7%per year to 55.3 million tons , while global crude steel output increased by 4% (Germany managed an increase of just under 1%p.a.) Although India is the world’s eighth largest steel producer, its3%-plus share of global steel output is still very low; it is roughly the same as Ukraine’s share of world steel production. China, the world’s biggest steelmaker, produces nearly ten times as much as India.In 2005 India’s crude steel output of 46.5 million tons was 8%higher than in 2004; only in China was the growth rate considerably higher at 15%. By contrast, production volumes fell in the US and the EU-25 by nearly 5% and roughly 4% respectively. In the first five months of 2006 Indian steel production continued to expand unabated, rising 10% yoy. We forecast a significant increase in output by the Indian steel industry over the medium term. The entire industry’s contribution to gross domestic product PRAXIS BUSINESS SCHOOL | KOLKATA

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should rise in the coming years to more than 30% – compared to just under 27% at present. The growth drivers are the expanding client industries Automotive engineering (production up 16% p.a. between 2000 and 2005), mechanical engineering (up 10% p.a.) and construction (up 6% p.a.).

YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

SUPPLY ( in m t) 32.81 34.70 38.96 41.41 43.278 46.492 54.35

GROWTH IN % 5.76 12.23 6.29 4.51 7.42 16.91

GRAPHICAL REPRESENTATION OF SUPPLY OF INDIAN STEEL INDUSTRY

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SUPPLY DEMAND MISMATCH Even though India is now one of the world’s top ten steelmakers its domestic output is insufficient to meet the demand in all segments. In 2005, some 4.7 million tons of steel were imported, compared with only 2.2 million ten years earlier (an annual increase of 8%). The growth in Indian import demand in 2005 of around 2 million tons is roughly equivalent to the total annual output of Hungary. Low steel prices smooth the way for imports from Russia, Ukraine and Kazakhstan. The geographical proximity of Japan, South Korea and China makes them important suppliers as well. We do not expect India to be self-sufficient in many segments over the medium term. 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. In general, the trend towards weight-optimized components persists; this improves the prospects for Western European exporters in the Indian market. As a member of the WTO (since 1995) India is obliged to gradually abolish import restrictions, so importing steel should be far less problematic in future.

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MARKET SHARE OF LEADING PLAYERS IN IRON AND STEEL INDUSTRY

COMPAY

PRODUCTIO OF MARKET SHARE(I PERSTEEL (I MIL- CETAGE TERMS) LIO TOES)

SAIL

13.5

32%

TISCO

5.2

11%

RNIL

3.5

8%

ESSAR,ISPAT,JSWL

8.4

19%

OTHERS

14.5

30%

TOTAL

45.1

100%

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Others 31%

RINL 8%

Essar, JSW & Ispat 19%

Sail 30%

Tata steel 12%

SOURCE: SAILS Annual report

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COMPETITION ANALYSIS

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.

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• 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.

MERGERS AND ACQUISITIONS

Active mergers and acquisitions (M&A s) among players were indicative of the consolidation dynamics within the steel industry globally. Consolidation among top steel companies would continue in 2008 since industry players are engaged in an unfettered rush for scale. In so doing steelmakers are pursuing two main objectives: by purchasing additional production capacity they aim to both improve their cost structure and increase their market clout. The merger of the world’s two biggest steelmakers Mittal Steel (Netherlands) and Arcelor (Luxembourg) will create an industry giant whose output is nearly four times as much as that of the next biggest player (Nippon Steel) and eight times as much as SAIL’s. If it continues like this 35% of steel production confined in the top 10 companies within the next five years. 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. In India the three biggest steelmakers, whose combined output is almost 20 million tons, have a market share of 51%. Their domestic competitors are numerous medium sized and smallish companies. One of these, for example, is PRAXIS BUSINESS SCHOOL | KOLKATA

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Ispat with an output of 2 million tons. 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.

EXPECTED GROWTH The International Iron and Steel Institute(IISI) has fore casted that the steel demand will go of from 1.12 billion ton to 1.19 billion ton in 2008.And this will further increase in a higher rate up to 2010.In India the growth will be more prominent because of the growth in Real estate, Aviation, Manufacturing, Automobile sectors. The expected growth of the major steel in Indian market is given by the following table.

INCREASE

Year

COMPANY NAME In “000”ton ARCELOR

5000

2010

BAI BALAJI

2000

2010

BHUSAN STEEL & STRIPS

2000

2007

BHUSAN LTD.

300O

2008

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ESSAR GUJURAT

1250

2006

INDIAN IRON & STEEL

1500

2009

ISPAT INDUSTRIES

2800

2010

JINDAL STEEL & POWER

3000

2008

ISPAT INDUSTRIES

2800

2010

MITTAL STEEL

6000

2009

POSCO

4000

2010

RASHTRIYA ISPAT NIGAM

1450

2007

TATA STEEL

15000

2010

VEDANT RESOURCES

5000

2008

VISA INDUSTRIES

1500

2010

VIZAG

1600

2008

SAIL

2000

2007

VISHAKHPATTANAM

5100

2010

TOTAL

62700

2006-2010 SOURCE WV STAHI

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FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY The growth of the Indian steel industry and its share of global crude steel production could be even higher if they were not being held back by major deficiencies in fundamental areas. Investment in infrastructure is rising appreciably but remains well below the target levels set by the government due to financing problems. .

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. India will rely squarely on nuclear energy for its future power generation requirements. In September 2005 the 15th and largest nuclear reactor to date went on-line. The nuclear share of the energy mix is likely to rise to roughly 25% by 2050. Overall, India is likely to be the world’s fourth largest energy consumer by 2010 after the US, China and Japan.

Problems procuring raw material inputs Since domestic raw material sources are insufficient to supply the Indian steel industry, a considerable amount of raw materials has to be imported. For example, iron ore deposits are finite and there are problems in mining sufficient amounts of it. India’s hard coal deposits are of low quality. For this reason hard coal imports have increased in the last five years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal (the remainder is power station coal). India is the world’s sixth biggest coal importer. The rising output of electric steel is also leading to a sharp increase in demand for steel scrap. Some 3.5 million tons of scrap have

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already been imported in 2006, compared with just 1 million tons in 2000. In the coming years imports are likely to continue to increase thanks to capacity increases.

Inefficient transport system In India, insufficient freight capacity and a transport infrastructure that has long been inadequate are becoming increasingly serious impediments to economic development. Although the country has one of the world’s biggest transport networks – the rail network is twice as extensive as China’s – its poor quality hinders the efficient supply of goods. The story is roughly the same for port facilities and airports. In the coming years a total of USD 150 bn is to be invested in transport infrastructure, which offers huge potential for the steel industry. In the medium to long term this capital expenditure will lay the foundations for seamless freight transport.

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OUTLOOK THE outlook for the global steel industry in 2008 is stable, supported by strong demand from emerging economies amid further consolidation among players worldwide.

The scenario is quite same for the Indian steelmakers. And to keep pace with the growing economy Indian companies will produced more and more steel. We can even see several large acquisitions of global steel companies like Corus by Indian steel giants. Going forward, India’s lower wages and favorable energy prices will continue to promise substantial cost advantages compared to production facilities in (Western) Europe or the US. The growth prospects of the client industries are also very good. The deployment of modern production systems is increasingly enabling India to improve the quality of its steel products and thus to enhance its export prospects.

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