8501351 analysis on indian steel industry

8/10/2019 8501351 Analysis on Indian Steel Industry

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PRAXIS BUSINESS SCHOOL

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(0035)


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CONTENTS

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 forsteel 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 incoming 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 accountsfor 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 thecountry. 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 segmentsover 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 me-

dium-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, operatingprofit 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

( ) %

20002001 34.444

20012002 36.03 4.625

20022003 40.41 12.32

20032004 43.62 6.4

20042005 45.3 5.4

20052006 50.25 10.32006200 5.45 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 worlds most sustainedboom. The Deutsche Bank Research Formel-G econometric model forecastsaverage real GDP growth of 5.5% p.a. for India between 2006 and 2020 Ofollowed by Malaysia (5.4%) and China (5.2%). In all, the analysis covered34 economies that generate some 85% of global GDP. The growth driversare population growth, human capital, opening of the economy and risinginvestment. Despite the sharp increase in Indias population, per-capita

GDP in purchasing power parity terms should rise by nearly 4% peryear until 2020. Since the model does not take sufficient account of thecountrys major initiatives in the infrastructure area, average growth until2020 might turn out to be even closer to 6%. In fact, by the end of thedecade India could replace Japan as the worlds third biggest economyafter the US and China

Positive stimuli from construction industry

The steel companies are pinning their hopes largely on the expandingconstruction industry. The industry is one of the key drivers of Indiaseconomic growth. Up to 10 million new homes need to be built each yearuntil 2030. Strong population growth, rising incomes and decreasinghousehold sizes are forcing comprehensive measures to be taken in thehousing sector. The pent-up demand for housing is estimated at around 20million units by the Indian Construction Association; the Ministry for UrbanDevelopment and Poverty Alleviation claims that no less than 31 million

dwellings are needed. The hosting of the Commonwealth Games in NewDelhi in 2010 should generate additional stimulus for the constructionindustry and thus boost demand for steel. In addition to the sports facili-ties, accommodation for competitors and visitors is planned. The govern-ment has announced that some 40 hotels with a total of 15,000 beds areto be built. The Indian office market is benefiting from the ongoing off


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shoring activities of industrial nations. Indian insurers are concentrated inthe software development and software product segments. Their secondmain business area is assuming the responsibility for entire supportprocesses, or business process outsourcing (BPO). These segments still

look set for growth.6 Furthermore, the construction sector is benefitingfrom major infrastructure projects. Capital expenditure is to be focused onroad building and the rail network, as well as on the construction and ex-pansion of ports and airports

Strong growth in mechanical engineering

Mechanical engineering output has increased some 10% p.a. over the pastfive years. Thanks to the march of technological progress the prospects fordomestic suppliers should improve going forward, while import growth isslightly crimped. Demand is greatest for building machinery andplastic-moulding machines as well as machine tools and textile machinery.Since the domestic textile and apparel industry, for example, is focusingfurther up the value chain, firms have to make numerous investments inmodernising and expanding their machinery portfolios Makers of buildingmachinery are benefiting from the large-scale infrastructure projectsplanned by the Indian government, while machine-tool makers are beingbuoyed by the upturn in the automobile and auto parts industries forexample. Exports by the Indian mechanical engineering industry roserecently by nearly 30% to USD 10 bn. By comparison, German mechanicalengineering firms exported products worth close to USD 117 bn, includingmachinery to the value of about USD 1 bn to India. Germany claims aparticularly large share of Indian imports of Woodworking machinery andmachine tools as well as pumps and compressors. The demand for foreignmachinery comes from customers requiring especially high standards ofperformance 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 internationalstandards.


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Booming automobile industry

The automotive industry may consume a relatively small proportionof steel

output, but its growth rate is the highest of the mostimportant clients forthe steel industry. In India a small but flourishingautomobile industry has

now developed that sees its future primarilyin the budget price segment

and views the domestic market andother emerging nations as potential

markets.7 Vehicle ownership(cars and trucks) in India at 11 per 1,000

inhabitants are even lesswidespread than in China with its very low figure

of 21. The growthof the Indian automobile industry is being driven by

healthy domesticdemand. The consumption minded, fast-growing middle

class is amajor factor. The continuing increase in incomes and low-costfinancing facilities are boosting sales. However, it is not uncommonfor

cars to be used for 20 years (Western Europe: 12 years), withvehicles that

have been taken off urban roads often being driven forlonger in rural

areas.The populations steadily growing demand for mobility and sharply

rising traffic volumes will continue to generate strong demand forcars in

the future. At the same time Indias automobile sector isestablishing itself

as an exporter to international markets. Hyundai,for example, uses the

country as an export base for small cars, andFord manufactures vehicles

there for South Africa and othermarkets. However, competition between

automakers has intensifiedmarkedly. Whereas in 1995 there were just five

carmakers in Indiathe figure has now reached 10. The biggest are Maruti

Udyog Ltd.,Hyundai Motor India and Tata Engineering (Telco). The Tata

group iseven 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 Indias crude steel output rose nearly 7%per year to55.3 million tons , while global crude steel output increased by 4% (Germanymanaged an increase of just under 1%p.a.) Although India is the worlds eighthlargest steel producer, its3%-plus share of global steel output is still very low; itis roughly the same as Ukraines share of world steel production. China, theworlds biggest steelmaker, produces nearly ten times as much as India.In 2005Indias crude steel output of 46.5 million tons was 8%higher than in 2004; onlyin China was the growth rate considerably higher at 15%. By contrast, produc-

tion volumes fell in the US and the EU-25 by nearly 5% and roughly 4% respec-tively. In the first five months of 2006 Indian steel production continued to ex-pand unabated, rising 10% yoy.

We forecast a significant increase in output by the Indian steel industry over themedium term. The entire industrys contribution to gross domestic product


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should rise in the coming years to more than 30% compared to just under27% at present. The growth drivers are the expanding client industriesAutomotive engineering (production up 16% p.a. between 2000 and 2005),mechanical engineering (up 10% p.a.) and construction (up 6% p.a.).

( ) %

20002001 32.1

20012002 34.0 5.6

20022003 3.6 12.23

20032004 41.41 6.2

20042005 43.2 4.5120052006 46.42 .42

2006200 54.35 16.1

GRAPHICAL REPRESENTATION OF SUPPLY OF INDIAN STEEL

INDUSTRY


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SUPPLY DEMAND MISMATCH

Even though India is now one of the worlds top ten steelmakers its domestic

output is insufficient to meet the demand in all segments. In 2005, some 4.7million tons of steel were imported, compared with only 2.2 million ten yearsearlier (an annual increase of 8%). The growth in Indian import demand in 2005of around 2 million tons is roughly equivalent to the total annual output ofHungary. Low steel prices smooth the way for imports from Russia, Ukraine andKazakhstan. The geographical proximity of Japan, South Korea and China makesthem important suppliers as well. We do not expect India to be self-sufficient inmany 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 productswhich India will not be able to supply in sufficient quantities for the foreseeablefuture. These include products with surface finishing that helps them to be moredurable and retain their value for longer. In general, the trend towardsweight-optimized components persists; this improves the prospects for WesternEuropean exporters in the Indian market. As a member of the WTO (since 1995)India is obliged to gradually abolish import restrictions, so importing steel shouldbe far less problematic in future.


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MARKET SHARE OF LEADING PLAYERS IN IRON AND

STEEL INDUSTRY

COMPAY PRODUCTIO OF

STEEL (I MIL-

LIO TOES)

MARKET SHARE(I PER-

CETAGE TERMS)

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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SOURCE: SAILS Annual report

Steel Production 2006-07

RINL

8%Sail

30%

Tata

steel

12%

Essar,

JSW &

Ispat

19%

Others

31%


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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 indus-

try. 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 indica-

tor 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 in-

creases 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 industryplayers are engaged in an unfettered rush for scale. In so doing steelmakers arepursuing two main objectives: by purchasing additional production capacity theyaim to both improve their cost structure and increase their market clout. Themerger of the worlds two biggest steelmakers Mittal Steel (Netherlands) andArcelor (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 timesas much as SAILs. If it continues like this 35% of steel production confined inthe 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 success-ful global supply network.

In India the three biggest steelmakers, whose combined output is almost 20million tons, have a market share of 51%. Their domestic competitors arenumerous medium sized and smallish companies. One of these, for example, is


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Ispat with an output of 2 million tons. More mergers can be expected betweencompanies of this size as these firms need to improve their position with regardto the powerful suppliers of raw materials. But till now there is no sign ofacquisition 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, Auto-

mobile sectors. The expected growth of the major steel in Indian market is given

by the following table.

000

5000 2010

2000 2010

& 2000 200

. 300 200


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1250 2006

& 1500 200

200 2010

& 3000 200

200 2010

6000 200

4000 2010

1450 200

15000 2010

5000 200

1500 2010

1600 200

2000 200

5100 2010

6200 20062010


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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 pro-duction could be even higher if they were not being held back by major deficien-cies in fundamental areas. Investment in infrastructure is rising appreciably butremains well below the target levels set by the government due to financingproblems.

.

Energy supply

Power shortages hamper production at many locations. Since 2001 theIndian government has been endeavoring to ensure that power is availablenationwide by 2012. The deficiencies have prompted many firms withheavier energy demands to opt for producing electricity with their ownindustrial generators. India will rely squarely on nuclear energy for itsfuture power generation requirements. In September 2005 the 15th andlargest nuclear reactor to date went on-line. The nuclear share of theenergy mix is likely to rise to roughly 25% by 2050. Overall, India is likelyto be the worlds 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 Indiansteel industry, a considerable amount of raw materials has to be imported.For example, iron ore deposits are finite and there are problems in miningsufficient amounts of it. Indias hard coal deposits are of low quality. Forthis reason hard coal imports have increased in the last five years by atotal of 40% to nearly 30 million tons. Almost half of this is coking coal (theremainder is power station coal). India is the worlds sixth biggest coalimporter. The rising output of electric steel is also leading to a sharpincrease 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 tocapacity increases.

Inefficient transport system

In India, insufficient freight capacity and a transport infrastructure that haslong been inadequate are becoming increasingly serious impediments toeconomic development. Although the country has one of the worldsbiggest transport networks the rail network is twice as extensive asChinas 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 totalof USD 150 bn is to be invested in transport infrastructure, which offershuge potential for the steel industry. In the medium to long term this capi-tal 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 playersworldwide.

The scenario is quite same for the Indian steelmakers. And to keep pace with thegrowing economy Indian companies will produced more and more steel. We can

even see several large acquisitions of global steel companies like Corus by Indiansteel giants. Going forward, Indias lower wages and favorable energy prices willcontinue to promise substantial cost advantages compared to production facilitiesin (Western) Europe or the US. The growth prospects of the client industries arealso very good. The deployment of modern production systems is increasinglyenabling India to improve the quality of its steel products and thus to enhance itsexport prospects.


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8501351 analysis on indian steel industry

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