Indian Steel Industry Analysis

By

VIVEK BHUTANI

Indian Steel Industry

Overview:

The establishment of Tata Iron and Steel Company (TISCO) in 1907 was the starting point of

modern Indian steel industry. Afterwards a few more steel companies were established namely

Mysore Iron and Steel Company, (later renamed Vivesvaraya Iron & Steel Ltd) in 1923; Steel

Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron & Steel Ltd) in 1923; and

Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron and Steel Co) in

1939. All these companies were in the private sector.

Key Events

1907: Tata Iron and Steel Company set up.

1913: Production of steel begins in India.

1918: The Indian Iron & Steel Co. set up by Burn & Co. to compete with Tata Iron and Steel Co.

1923: Mysore Iron and Steel Company set up

1939: Steel Corporation of Bengal set up

1948: A new Industrial Policy Statement states that new ventures in the iron and steel industry

are to be undertaken only by the central government.

1954: Hindustan Steel is created to oversee the Rourkela plant.

1959: Hindustan Steel is responsible for two more plants in Bhilai and Durgapur.

1964: Bokaro Steel Ltd. is created.

1973: The Steel Authority of India Ltd. (SAIL) is created as a holding company to oversee most

of India’s iron and steel production.

1989: SAIL acquired Vivesvata Iron and Steel Ltd.

1993: India sets plans in motion to partially privatize SAIL.

At the time of independence, India had a small Iron and Steel industry with production of about a

Million tonnes (mt). In due course, the government was mainly focusing on developing basic

steel industry, where crude steel constituted a major part of the total steel production. Many

public sector units were established and thus public sector had a dominant share in the steel

production till early 1990s. Mostly private players were in downstream production, which was

mainly producing finished steel using crude steel products. Capacity ceiling measures were

introduced.

Basically, the steel industry was developing under a controlled regime, which established more

public sector steel companies in various segments. Till early 1990s, when economic

liberalization reforms were introduced, the steel industry continued to be under the control of

Indian Government, regulation were constituted such as large plant capacities were reserved only

for public sector under capacity control measures; price regulation; for additional capacity

creation producers had to take license from the government; foreign investment was restricted;

and there were restrictions on imports as well as exports.

But after liberalization many reforms and regulation were changed which brought the new era for

development in steel industry. Some of the major developments were :

1. Large plant capacities that were reserved for public sector were removed;

2. Export restrictions were eliminated;

3. Import tariffs were reduced from 100 percent to 5 percent;

4. Decontrol of domestic steel prices;

5. Foreign investment was encouraged, and the steel industry was part of the high priority

industries for foreign investments and implying automatic approval for foreign equity

participation up to 100 percent; and

6. System of freight ceiling was introduced in place of freight equalization scheme.

Due to this, the domestic steel industry has since then, become market oriented and integrated

with the global steel industry. This has helped private players to expand their operations and

bring in new cost effective technologies to improve competitiveness not only in the domestic but

also in the global market.

During the last decade more than 12 mt of capacity has been added in the steel industry, this is

mostly in the private sector. Recently, the steel industry is receiving significant foreign

investments such as POSCO—South Korean steel producer—and Arcelor-Mittal

Group—UK/Europe based steel producer—announcing plans for establishing about 12 mt

production units each in India.

Major production of steel is done by six companies.

Production:

India is currently the fifth largest steel-producing nation in the world with installed capacity of

59.02 million tons. China is the largest steel producer of the world. The steel industry in India

has an oligopolistic structure. The total capital investment is around Rs. 1 trillion and provides

employment to more than 2 million people.

Crude steel production was at 54.52 million tonnes, a growth of 1.23% over last year with

capacity utilisation at 89% during the year. It grew at more than 9% annually from 38.72 million

tonnes (MT) in 2003-04.

Production for sale of total finished steel was at 56.39 million tonnes, a growth of 0.6% as

compared to last year. As against 40.71 MT in 2003-04, an average annual growth of 7.3% was

registered.

Total finished steel exports decreased by 26 % as it reached an estimated 3.75 million tones

while imports were at an estimated 5.77 million tonnes, a decline of 18 %.

At 51.85 million tonnes, domestic consumption of total finished steel declined marginally by

0.53%.

The Government has announced initiatives to promote R&D in iron and steel sector to help

develop better products, improve the manufacturing process, and attain self sufficiency which

will bring Indian production steel in better position.

Imports and Exports

The exports and imports decreased in the 2008-09 due to increase in domestic consumption

mainly by infrastrucure sector with growth of 5.3% and automobile industry with growth of

12.7%. .

Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the

total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels

and retail stores is growing immensely.

India's steel consumption rose by 6.8 per cent during April-November 2009 over the same period

a year ago on account of improved demand from sectors like automobile and consumer durables.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 per

cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.

India has immense scope for increasing consumption of steel. Current per capita consumption is

around 40 kg, compared with 100 kg in Brazil, 250 kg in China and a global average of 198 kg.

Steel demand is expected to rise 5-6 percent annually until 2019-20

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail

outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail

outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at

least 10-15 per cent of their total production to be sold by their retail outlets.

Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000

outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two

years

India is not among the top exporters and importer of steel because of its high consumption. As

shown in above graphs.

Key Drivers of Steel Industry

Construction: The construction industry has been witnessing a growth rate of 12%-14% in

recent times. Steel construction is now identified with speed and since India is in need of speedy

project implementation, steel is the best alternative for fast track construction. With economy

surging ahead and expected increase in income levels of population, it is believed that demand

for steel from this sector will continue to grow at current rates if not improve

Automobile: The domestic automobile industry has also grown at more than double-digit rates

in the past five years. The Indian automobile sector is the second fastest growing market after

China and has emerged as a prime demand driver for alloy steel. Automobile sector which is

experiencing growth and competition is likely to be one of the major drivers for steel

consumption in the coming years and most likely, its contribution in the overall demand pie is

likely to improve from the current levels.

Auto components Industry: During the last five years, auto components market has grown at

19% CAGR, led by both robust domestic demand as well as exports. India is fast emerging as

hub for auto components. International companies such as General Motors, Ford, Daimler

Chrysler, Toyota and Volkswagen are outsourcing auto parts from India as it has cost advantage

with regard to forgings and castings. Also, the growing domestic automobile industry, which

relies on steel industry for its parts manufacturing, will enhance the demand for steel in India.

Infrastructure: Infrastructure sector comprises of roads, railways, airports and power. The 11th

Five-year plan has lined up huge investments in all the above related sectors of infrastructure.

The sector wise anticipated investment are $200bn in power, $80bn in railways, $48bn in roads,

$13bn in ports and $9bn in airports. Because of surge in the above activities, the demand for long

products of steel will be increasing in years ahead.

Consumer Durables: The consumer durables sector has also been witnessing robust growth. It

has grown at an average of 10% per annum and is expected to grow at double-digit rates for

coming years. The share of white goods and utensils is predominant in India. The domestic

appliances market which includes spin driers of washing machine, almirahs, thermo ware, water

filters, dishwashers, microwave ovens, catering equipments, cutlery, furniture etc have opened

new opportunities for steel consumption, thus ensuring a steadily growing trend of steel off take.

Oil & Gas Industry: Oil & gas sector is the major consumer of steel tubes and pipes. The pipe

consumption in oil & gas sector is expected to grow at a rate of 25% CAGR as this sector is set

to witness massive capital investment. Apart from laying cross-country pipelines, exploration

and production activities are also experiencing strong growth in both international as well as

domestic markets.

COMPETITION

Key Inputs

Supply

With trade barriers having been lowered over the years, imports play

an important role in the domestic markets.

Demand

The demand is derived from sectors that include infrastructure,

consumer durables and automobiles.

Barriers to entry

High capital costs, technology.

Bargaining power of

suppliers

The government’s move on railway freight costs and grid power

costs would determine the final price of the metal.

Bargaining power of

customers

High, presence of a large number of suppliers and access to global

markets.

Competition

High, presence of a large number of players in the unorganized

sector.

SWOT Analysis

Strengths

1. Availability of iron ore and coal: India has abundance of iron ore, coal & other raw

materials required for iron & steel making. It has 4 th largest iron ore reserves (13 bn tons)

in the world.

2. Low labor wage rates: India has low unit labor cost, this gets reflected in low cost of

production

3. Abundance of quality manpower: It has 3rd largest pool of technical manpower, next to

United States & erstwhile USSR, capable of understanding and assimilating new

technologies.

4. Mature production base

Weakness

1. Unscientific mining: India is deficient in raw materials required by the steel industry.

Iron ore deposits are finite and there are problems in mining sufficient amounts of it.

India's hard coal deposits are of low quality

2. Low productivity: According to an estimate crude steel output at the biggest Indian

steelmaker is roughly 144 tonnes per worker per year, whereas in Western Europe the

figure is around 600 tonnes.

3. Power shortages: Steel production in India is also hampered by power shortages.

4. Inadequate infrastructure: Insufficient freight capacity and transport infrastructure

impediments to hamper the growth of Indian steel industry

5. Low R&D investments: There are inadequate investments in infrastructure.

6. High cost of debt: Since huge capital investment is required therefore cost of these dbt is

very high.

Opportunities

1. Unexplored rural market: The Indian rural market remains fairly unexposed to the

multi-faceted use of steel.

2. Growing domestic demand: There is enormous scope for increasing consumption of

steel in almost all sectors in India.

3. Export Market Penetration: It is estimated that world steel consumption will double in

next 25yrs. Quality improvement of Indian steel combined with low cost advantages will

definitely help in substantial gain in export market.

4. Consolidation: As global companies have realized the threat of excess supply, they are

looking at M&A (mergers and acquisitions) option to retain market share and improve

margins.

Threats

1. Technological change: Technological changes force the industry structure to change. In

India where capital itself is costly, technological obsolescence is a major threat.

2. Price sensitivity & Demand volatility: The demand for steel is derived demand and the

purchase quantity depends on end-use requirements. The traders are price sensitive and

buy when there are discounts.

3. Dumping of steel by developed countries: High quality products for developed

countries available for imports at competitive prices.

4. Slow Industry Growth

ISSUES & CHALLENGES

Dependence on Global Market: The concern with respect to new steel capacities cropping up

across the globe have become louder, as this development would lead to significant pressure on

steel prices going forward. Further, the biggest disruption in the growth pattern is from a

slowdown in Chinese steel consumption. Post Olympics, demand from China has reduced and

therefore demand for Indian iron-ore. There is good amount of excess steel available for world

consumption. As global companies have realized the threat of excess supply, they are looking at

M&A (mergers and acquisitions) option to retain market share and improve margins.

Cheap Imports: The domestic steel sector is facing threat from cheap imports, now that the

import duties on steel in India being amongst the lowest in the world. Import pressure is

consequently leading to pressure on margins of the domestic companies on account of lower

steel realisations.

Increased transportation charge: Railway has decided to reclassify iron-ore to a higher tariff

class of 180(present is 170), which will increase the transportation charge by 5%.

Lack of best professionals: The methods that are adopted for the creation of wealth in the

Indian steel industry are also supposed to act as hindrances to the growth and development of the

Indian steel industry. The Indian steel industry has also not been able to draw the best

professionals in the steel industry and that has been a major drawback of the industry.

Lack of infrastructure: Even though India is capable of producing steel at a good rate and also

increase the volume of production there is not enough land available to support such activities.

One of the major reasons for such problems is the consistently increasing population of India.

Raw materials: The earth is made of iron. There is no shortage of iron in the longer term.

However, today over 70% of the total seaborne trade in iron ore is dominated by just three

companies: CVRD, Rio Tinto and BHP Billiton. As a result, the steel industry has seen a

dramatic increase in the price of raw materials, including iron ore. It is crucial and important for

the sustainable development of the steel industry to break out of the stranglehold that these three

companies have on raw material supply.

Policy and Regulations

The Government has also approved the National Steel Policy (NSP) in November 2005.

The long-term goal of the NSP is for India to have a modern and efficient steel industry

of world standards. The focus of the policy would therefore be to achieve global

competitiveness not only in terms of cost, quality and product-mix but also in terms of

global benchmarks of efficiency and productivity.

The policy targets to increase steel production at a compounded annual growth rate of

7.3% to 110 mt by 2019-2020. It projects domestic consumption to grow at annual

growth rate of 6.9% to 90 mt during this period. The policy envisages the share of

exports to increase to 25% from present share of 11%.

The government would also encourage investments in creation of an additional modern

iron ore mining and beneficiation capacity of 200 mt. under this policy

Recent increase in infrastructure spending is also expected to have a positive impact on

the steel demand. Major investments planned in infrastructure sector are, national

highway network, major ports, and airports. The Government also proposes to undertake

measures to promote usage of steel in bridges, crash barriers, flyovers and building

construction.

100% FDI is allowed under the automatic route for metallurgy and processing of all

metals.

Impact of Budget in Steel Industry

Proposal Impact

Introduction of competitive bidding for

allocation of coal block and regulator for the

domestic coal sector

would to lead to the development of the

domestic coal sector, which in turn would

benefit the steel industry, for which coal is a

key input

Cess of Rs. 50 per tonne on coal and

2% increase in excise duty

Companies will not be able to pass on the

complete rise in cost, marginally negative for

steel manufacturing companies

Increase in infrastructure spending Positive for the sector as this will lead to

higher domestic consumption  

Decrease in surcharge on domestic companies

from 10% to 7.5%

Positive for all the companies, will lead to

lower tax outgo

Impact of Budget on Stock prices of 3 major steel manufacturers:

SAIL

TATA STEEL

JSW steel

The stock prices before the Budget were flowing with the flow of market but soon after the

budget the prices of steel companies performed better than the market showing clear signs that

budget was good for steel industry.

Measures Taken by Ministry of steel for growth of

industry:

Mega Expansion Plans of SAIL, RINL & NMDC Ltd.

The expansion plans would increase the capacity of SAIL from 14.6 million tonnes per annum

(2006-07) hot metal production to 26.2 million tonnes by 2010-11. SAIL is also planning to

expand the capacity further to 60 million tonnes per annum by 2020.

Special Purpose Vehicle (SPV)

The Special Purpose Vehicle (SPV) called ‘International Coal Ventures Ltd (ICVL)’ has been

incorporated on 20.5.2009 with SAIL, RINL, CIL, NTPC & NMDC as promoter partners. ICVL

will function as a Navaratna Company and is presently examining various proposals and from

the point of view of suitability of coal, costs and logistics etc.

Mergers, Acquisitions and Joint Ventures

Merger of Kudremukh Iron and Steel Company (KISCO) with Kudremukh Iron Ore

Company Limited (KIOCL).

Merger of Bharat Refractories Limited(BRL) with Steel Authority Of India Limited (SAIL)

Proposal for acquisition of Neelachal Ispat Nigam Limited (NINL) by RINL

Joint Venture Company comprising Steel Authority of India Limited (SAIL) & Manganese

Iron Ore Limited (MOIL)

Rural Distribution Network of Steel

A decision was taken to have at least one dealer in each district in order to make available steel

items to common man. In order to ensure the availability of commonly used items of steel in the

rural areas across the country, SAIL and RINL are expanding their distribution networks at a fast

pace. Preference for SC, ST and OBC are given while allotting District Level Dealerships.

Further, common steel items have been made available in rural areas at the same price at which

they are available in cities having stockyards. The cost of transportation from the stockyard to

the dealer’s location is borne by the steel PSUs.

Encouraging Research & Development in Iron & Steel Sector

The current level of investment in R&D in the Indian Steel Plants is less than 0.24% of their total

turnover. In order to encourage R&D activities in Iron and Steel sector, Ministry of Steel is

providing financial assistance.

Critical Analysis

Looking at the increased demand from construction, real estate and automobile sectors the steel

industry will carry its growth momentum in coming years as well.

Construction Industry

Current and estimated growth of construction industry

Construction industry expected to witness effective investment over Rs. 10,000 bn during the

11th five year plan Construction is the second largest economic activity in the country next to

agriculture. Construction industry has generated employment for 33 mn people in the country.

Consumption of steel by construction industry has grown of 16.1% over past 5 years.

Real Estate

Almost five per cent of the country's GDP is contributed to by the housing sector. In the next five

years, this contribution to the GDP is expected to rise to 6 per cent. Foreign direct investment

(FDI) into India in the real estate sector for the fiscal year 2008-09 has been US$ 12.62 billion

Government initiatives in Real estate sector:

1. 100 per cent FDI allowed in realty projects through the automatic route.

2. Minimum capital investment for wholly-owned subsidiaries and joint ventures stands at

US$ 10 million and US$ 5 million, respectively.

3. The finance minister allocated US$ 207 million to grant a 1 per cent interest subsidy on

home loans up to US$ 20,691, 

Thus, Indian industry real estate is likely to grow to U.S. $ 90 billion in 2015.  This industry is

likely to grow in tandem in both residential property and commercial real estate to continue huge

influx of FDI in this sector will go a six times to U.S. $ 30 billion over the next 10 years .

Automobile Sector:

There is constant growth in automobile sector in past year but in 2010 the growth rate come

down to 7.1% due to increase in excise duty and increase in price of petrol.

But automobile sector is 2nd largest industry in India to attract FDI and being 100% FDI in

automobile sector will lead to ever growing demand of steel by Auto industry.

Looking at the increased demand from construction, real estate and automobile sectors the steel

industry will carry its growth momentum in coming years as well.

Government is also lending its full support to the steel sector which is cleared from the recent

Union Budget 2010 in which the government has decided to increase the outlay on urban

development and housing to Rs 5,400 Crore (up 75%). An additional 25% of plan outlay for

rural infrastructure has also been announced. This is being seen as a stimulus for domestic steel

companies. All these supporting factors will help the finished steel consumption in India to grow

more than 65 Million Tonnes in 2011-12.