Post on 16-Nov-2014
STEEL INDUSTRY
Presented By: Sachin Kumar (103) Shivaramakrishna (118) Siddharth Rai (119) Prashant Kumat (143) Nitin Goel (155)
Steel Industry in India: An Overview
• India: a 16% steel demand CAGR over five years• Indian Steel sector poised for a major spurt in growth• Chinese expansion poses worry, but can be effectively
countered• Highly heterogeneous and fragmented industry, with widely
differentiated products• Controlled sector till 1992• Strong public sector presence• Complete abolition of price and distribution controls during
early nineties
Consumption Growth of Steel
WEAKNESS
Government control Weak presence in the international market
WEAKNESS
Government control Weak presence in the international market
OPPORTUNITY
Joint ventures to improve topline growth Expansion plans Development of special economic zone in Salem
OPPORTUNITY
Joint ventures to improve topline growth Expansion plans Development of special economic zone in Salem
THREATS
Consolidation in the steel industry Economic or industry downturns
a
THREATS
Consolidation in the steel industry Economic or industry downturns
a
SWOT Analysis of Steel Authority of India Limited (SAIL)
STRENGTHS
Leading steel company in India Broad product mix Captive sources of raw materials
STRENGTHS
Leading steel company in India Broad product mix Captive sources of raw materials
WEAKNESS
Downgrading in rating from stable to negative Substantial debt
WEAKNESS
Downgrading in rating from stable to negative Substantial debt
OPPORTUNITY
Expansion plans in foreign countries.Expansion in India
OPPORTUNITY
Expansion plans in foreign countries.Expansion in India
THREATS
Consolidation in the steel industry. Economic or industry downturns Environmental regulations
a
THREATS
Consolidation in the steel industry. Economic or industry downturns Environmental regulations
a
SWOT Analysis of TATA STEEL
STRENGTHS
Strong market position Acquisition of Corus Vertical integration
STRENGTHS
Strong market position Acquisition of Corus Vertical integration
Threat of Substitutes – Medium
Steel faces competition from substitutes such as Aluminium, Plastic and Copper. However, high strength of Steel prevents large scale substitution.
Threat of Substitutes – Medium
Steel faces competition from substitutes such as Aluminium, Plastic and Copper. However, high strength of Steel prevents large scale substitution.
Bargaining Power of Supplier – High
Supplier of Raw Material (Coal, Iron ore, Scrap) have high bargaining power vis a vis non-integrated players.
Bargaining Power of Supplier – High
Supplier of Raw Material (Coal, Iron ore, Scrap) have high bargaining power vis a vis non-integrated players.
Bargaining Power of Buyer- Medium to High
Diversified set of users prevents significant buying power with buyers. However, individual nations often initiate actions, which affect global trade
Bargaining Power of Buyer- Medium to High
Diversified set of users prevents significant buying power with buyers. However, individual nations often initiate actions, which affect global trade
Entry Barriers: Medium – High
Integrated 1 mtpa blast furnace costs – Rs 18 bn +
Entry Barriers: Medium – High
Integrated 1 mtpa blast furnace costs – Rs 18 bn +
Inter-firm Rivalry – HighThe steel industry is extremely fragmented. In India, apart from the 3 integrated players, there are 190 Electric Arc Furnaces, 950 Induction Furnaces and 1500 small scale stand alone producers.
Inter-firm Rivalry – HighThe steel industry is extremely fragmented. In India, apart from the 3 integrated players, there are 190 Electric Arc Furnaces, 950 Induction Furnaces and 1500 small scale stand alone producers.
Industry Analysis Five Force Model
Factors Qualitative Exploration Score
Economies of Scale and Capital requirement
-Min 2 to 3 million tones of annual production-Cost of setting up plant is high-Long Gestation period
1
Product Differentiation -Steel is commodity-ISI/BIS makes it standardized product
4
Switching Cost to customer -Zero cost 5
Access to distribution channels -Present players are well established-High setup cost
2
Brand Identity -Commodity 3
Government Policy -Favorable policies 5
Expected Retaliation - Availability of excess capacity 2
Barriers to Entry – Qualitative and Quantitative Analysis
Factors Qualitative Exploration Score
Numerous or Equally Balanced competitors
-Highly fragmented industry-Low operating profit margins
2
Industry Growth -High potential 3
Fixed or Storage Costs -Fixed proportion cost is higher 1
Capacity Issues -Over supply-Cheap imports
1
Exit Barriers -Investments are high 1
Inter firm rivalry – Qualitative and Quantitative Analysis
Bargaining Power of Suppliers – Qualitative and Quantitative Analysis
Raw material Concentration
Industry as an
important
customer
Switching
cost
Threat to forward
integration
Coking coal 3 2 5 1
Iron ore4 4 4 2
Scrap iron and
Sponge Iron2 4 3 2
Manganese and
Chromite ores 2 2 2 1
Ferro Alloys 4 3 3 1
Factors Qualitative Exploration Score
Concentrated or Organized buyers
-Significant purchasing power is concentrated among few buyers
3
Threat of Backward Integration
-High investment 5
International Perspective -Imports 2
Bargaining Power of Buyers – Qualitative and Quantitative Analysis
Plastic Aluminium
Price Attractiveness 1 (High) 4 (Low)
Performance 3 (Medium) 1 (High)
Threat of Substitutes – Qualitative and Quantitative Analysis
Global Steel Market Volume/Value
13
THUS SIGNIFICANT CAPACITIES ARE EXPECTED IN THE MEDIUM
TERMBoth by Capacity Expansion by existing players * . . . .
New Entrants with the Greenfield projects…
and
Capacity Addition projected : ~ 50 Mill T in next decade.
* Incl their Greenfield Projects
Product Range
Narrow
Broad
Geographical Scope
National Global
Tata Steel,SAIL
RINL , ESSAR
Jindal, ISPAT
Mukund Steel, Usha
Martin, Mukund Steel
Strategy Groups
Cost Comparison of various Players
Relative comparison of Raw material cost
Steel Industry : Impact MatrxKey Macro Influence
SAIL Tata Steel JSW Essar
Market VolatilityChina
Diversified Customer Segments (+) (+)
Global Customer (+) (+) Limited Customer Segments (-)
Limited Customer Segments (-)
Product Mix Value Added Products (+) (+) Wide Range(+) (+)
Value Added Product (+)
Limited range and Capacity (-) (-)
Raw MaterialIron Ore
Other Materials
Captive Iron, coal, Dolomite & Limestone Mines (+) (+)
Captive Iron, coal, Dolomite & Limestone
Mines (+) (+)
Imports dependence(-) (-)
Imports dependence(-) (-)
Operational Diversification
Multiple facilitiesSintering PlantBig Units (+) (+)
Single LocationBig Units
Chorus Factor (+) (+)
Single LocationSmaller Units (+)
Single LocationHigher Cost (-)
Size Largest Indian Producer (+) 5th Largest company of world (+) (+)
Small Player (-) (-) Small Player (-) (-)
Labor Government OrganizationLarger workforce (-) (-)
MultinationalSkilled workforce (+)
(+)
Unskilled manpowerSmaller Workforce (+)
Unskilled ManpowerSmaller Workforce (+)
Technology Specialized Steel and rail products (+) (+)
Foray into new products (+) (+)
Innovations in few product range (+)
(-)
Barrier to Entry Government Protection(+) Huge Size (+) (+) Small Player (-) Small Player (-)
Rural Market Rural marketing initiativesMore than 300 sales office in
India (+) (+)
Global presence (+) Small SizeLimited Customers (-)
Small SizeLimited Customers (-)
TOTAL (+ 12) (+17) (-3) (-10)
Key Strength
Zone of Irrelevance
Superfluous Strength
Key Weakness
C1C1
R1
C2C2
C3C3
C4C4
C5C5
C6C6C7C7
R2R3
R6
R5
R4
Strategic Importance1 5 10
5
1010
SAIL - Resource & Capabilities
R7
Key Strength
Zone of Irrelevance
Superfluous Strength
Key Weakness
C1C1
R1
C2C2
C3C3
C4C4C5C5
C6C6
C7C7
R2
R3 R6R5
R4
Strategic Importance1 5 10
5
1010
Essar - Resource & Capabilities
R7
Key Strength
Zone of Irrelevance
Superfluous Strength
Key Weakness
C1C1
R1
C2C2
C3C3
C4C4C5C5
C6C6C7C7
R2
R3
R6
R5R4
Strategic Importance1 5 10
5
1010
Tata Steel - Resource & Capabilities
R7
Key Strength
Zone of Irrelevance
Superfluous Strength
Key Weakness
C1C1
R1 C2C2
C3C3C4C4C5C5
C6C6
C7C7R2
R3
R6R5
R4
Strategic Importance1 5 10
5
1010
JSW - Resource & Capabilities
R7
Global Steel Market Volume/Value
Mergers & Acquisitions• Horizontal : Between 2 firms in the same business• Vertical: Between two firms that are suppliers and customers of each other• Conglomerate: Between two firms in totally different industries
Characteristics that make steel company a highly desirable acquisition: • Sizable EBITDA• Ownership of steel maker’s raw Material• Low Debt• A relatively low valuation• An “inside” group that owns a sizable block of the stock.• Economies of Scale• Enhancing Debt capacity
Global Steel Industry M&A Deal Volume
Segmentation and Producers
Other Benefits of M&A• Why take five to seven years to build and start-up a major new integrated steel
plant when, instead, one can be purchased that has– (a) good equipment, – (b) few environmental problems, – (c) a solid supporting infrastructure– (d) a strong customer base and – (e) an experienced work force
• If the profit environment remains favourable, many steel companies will have the cash flows to make sub stantial capital outlays and still be acquisitive.
• If shake-out conditions return, with steel prices dropping for a while to the marginal cost of the aver age-cost producer, the cost to acquire steel companies presumably will be much lower.
Tata Steel and Corus Deal
Cyclicality of Steel Industry• Strongly correlated to economic cycles
– Automobiles– Construction– Consumer durables
• Heavy Capital investment• Gestation period of 2-3 years• Reasons for shift in business cycles
– Change in general economy– Seasonal change in demands of goods– Changes in prevailing interest rates
Relationship between Growth of Automotive Industry(in Number of vehicle produced) and Steel Production (by Value)
Observations: Value of Coefficient of correlation comes out to be 0.8733 which is an indicator of high dependability of the above two Factors on each other.
Conclusion: The Growth of Automotive Industry (in Number of vehicle produced) and Overall manufacturing industry(in terms of GDP) is highly interrelated and it can be said that they are dependent on each other with a proximity of 87.33%.
Relationship between Growth of Steel Industry(Carbon and alloy Steel combined production in ‘000tonnes) and Overall manufacturing industry(in terms of GDP)
Observations: Value of Coefficient of correlation comes out to be 0.827551652 which is an indicator of high dependability of the above two Factors on each other.
Conclusion: The Growth of Steel Industry(Carbon and alloy Steel combined production in ‘000tonnes) and Overall manufacturing industry(in terms of GDP) is highly interrelated and it can be said that they are dependent on each other with a proximity of 82.75%.
Thank You