Market Structure- Steel sector in India

Indian Steel Sector: An Overview

Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita consumption of steel is treated as an important index of the level of socioeconomic development and living standards of the people in any country.

The Indian steel industry has made a rapid progress on strong fundamentals over the recent few years. The industry is getting all essential ingredients required for dynamic growth. Even in the tough times of economic slowdown, the industry succeeded to sustain its positive growth momentum on the strong fundamentals of domestic demand from construction, automobile and infrastructure sectors:

World Crude steel production (million tonnes):Ran

kCountry/Region

2007 2008 2009 2010 2011

  World1,351.3

1,326.5

1,219.7

1,413.6

1,490.1

1 China 494.9 500.3 573.6 626.7 683.32  Japan 120.2 118.7 87.5 109.6 107.6

3  United States 98.1 91.4 58.2 80.6 86.24  India 53.5 57.8 62.8 68.3 73.45  Russia 72.4 68.5 60.0 66.9 6.0

(Source:http://www.worldsteel.org/)

Domestic Scenario

The Indian steel industry has entered into a new development stage from 2007-08, riding high on the resurgent economy and rising demand for steel.

Rapid rise in production has resulted in India becoming the 4 th largest producer of crude steel and the largest producer of sponge iron or DRI in the world.

The per capita steel consumption in the country is still 55 kg only. The India’s rural per capita consumption is just ten kg. The per capita world steel consumption is estimated at 250 kg for world and 460 kg for china.

The future outlook for Indian steel sector is quite positive with an estimated infrastructure investment of nearly a trillion dollars, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana etc.

The National Steel Policy 2005 is currently being reviewed keeping in mind the rapid developments in the domestic steel industry (both on the supply and demand sides) as well as the stable growth of the Indian economy since the release of the Policy in 2005.

Joint Plant Committee (JPC) is the only institution in the country, which is officially empowered by the Ministry of Steel / Government of India to collect data on the Indian iron and steel industry, resulting in the creation and maintenance of the only basic, complete and non-partisan databank on this industry.

Production

Steel industry was delicensed and decontrolled in 1991 & 1992 respectively. Today, India is the 4th largest crude steel producer of steel in the world. In 2011-12, production for sale of total finished steel (alloy + non alloy) was 73.42

mt. Production for sale of Pig Iron in 2011-12 was 5.78 mt. India is the largest producer of sponge iron in the world with the coal based route

accounting for 76% of total sponge iron production in the country. Last five year's production for sale of pig iron, sponge iron and total finished steel

(alloy + non-alloy) are given below:

Indian steel industry : Production for Sale (in million tonnes)

Category 2007-08

2008-09

2009-10

2010-11

2011-12*

Pig Iron 5.28 6.21 5.88 5.68 5.78

Sponge Iron 20.37 21.09 24.33 25.08 20.37

Total Finished Steel (alloy + non alloy)

56.07 57.16

 

60.62

 

68.62 73.42

Source: Joint Plant Committee;

Steel Prices

Price regulation of iron & steel was abolished on 16.1.1992. Since then steel prices are determined by the interplay of market forces.

Domestic steel prices are influenced by trends in raw material prices, demand – supply conditions in the market, international price trends among others.

YEAR-ON YEAR MOVEMENT IN RETAIL MARKET PRICE FOR TMT (10MM) AT DELHI MARKET, 2007-08 TILL SEPTEMBER 2010 TMT (10mm) (Rs/T)2007-08 2008-09 2009-10 2010-11

April 32250 46000 34122 40890May 32075 38200 35438 39420June 36925 47451 35479 39210July 30800 43335 33274 36260Aug 30900 42696 32503 36930Sept 29900 41934 32818 35910Oct 32550 40253 32328 Nov 31925 38846 31940

Dec 32200 36634 32220 Jan 37450 36448 33970 Feb 40200 34639 33310 Mar 43775 32285 35100

Market Structure

JPC has categorized Indian steel producer under three categories namely Main producer,(SAIL,RINL,TATA STEEL), Major producers (ESSAR steel, JSW steel, ISPAT industry, Bhushan Steel) and other producers of steel covering segments like crude steel, semi finished steel, non-flat steel and the entire downstream range of flat steels. As per the JPC data the market share of the four major producers based on 2011-12 sales is as under:

CURRENT YEAR-2011-12  Producer Production Market ShareSAIL 9.6 14.3RINL 3.2 4.8TSL 5.5 8.1Industry 67.2 100.0

(Production in MMT)

Indian Steel Capacity by 2020-Projected

Producer Production Market share

SAIL 60.0 25.0

TSL 33.5 14.0

JSW 32.0 13.3

ESSAR 20.5 8.5

ISPAT 17.0 7.1

Industry 240 100

(Production in MMT)

Profitability

Item SAIL TSL JSW

Operating Profit Margin 1335.49

17.44

Gross Profit Margin 9.732.09

12.09

Branding:

During the recent years there has been serious effort as the part of major players to position their products differently by creating product differentiation and branding exercise. The major brands are as under:

Tata Steel SAIL Essar JSWTata Agrico, Tata Bearing, Tata Pipes, Tata Shaktee, Tata Steelium, Tata Structura, Tata Tiscon etc.

SAIL TMT & SAIL Jyoti

ESSAR SONA & ESSAR HIRA

Jindal Vishwas JSW TMT+ JSW colouron.

Answers to Lead Questions:

1. Concentration ratio is a measure of total market share of the four largest firm in an industry. The existing Concentration ratio (four firms) in Indian steel sector based on the 2011-12 data is 31.9%. However, as per the proposed expansion plan, the market will strongly move towards further Oligopoly with concentration ratio 67.92% by 2020.

2. Kinked demand curve explains the price rigidity in an oligopolistic market. Oligopolistic firms are interdependent in term of price as they are concerned about the competitors’ price. In this market the firm faces elastic demand curve above price (P) and the demand curve becomes inelastic below price (P). We have enough evidence which suggest that Indian Steel firms faces Kinked Demand curve.

There is non-price competition in the sector due to the very size of few major players. The very size and deep pocket coupled with strong distribution network create non price competition. During the recent years there has been serious effort as the part of major players to position their products differently by creating product differentiation and branding exercise. The major brand name of the companies has been explained earlier. TATA Steel and ESSAR steel have also started steel junction and ESSAR hyper mart as steel retail chain.

3. Though there are evidences which points towards coming together of major players at occasions, however, we do not have enough evidence to say that there is collusion in the industry.

4. Steel Authority India Limited is supposedly the price leader in the Indian steel industry.

5. As the Indian steel market is led by two public sector majors namely SAIL and RINL, we have not encountered any evidence of abnormal profit in the

industry. The market being oligopolistic, the other players just follow the trend.

6. The major entry barriers in Indian steel industry are high capital requirement; land acquisition, stringent norms imposed during the recent times by Ministry of Environment and Forests, rehabilitation concerns, strong opposition by local communities against major steel plants and political indecisivenes.

7. The distinctive feature of Indian steel market is interdependence. The market is primarily led by SAIL, TATA steel, RNIL and JSW. Each of these firms are so large that their action affect market conditions. The competing firms therefore become aware of a firm’s actions and respond accordingly. We have also noticed that while contemplating the market action, SAIL and TATA steel take into consideration the possible reaction and counter moves of each other. The branding exercise initiated by Tata Steel was immediately followed by competitors.

Bibliography

1) www.steel.gov.in -Ministry of Steel, Government of India

2) www.jpcindiansteel.nic.in -Joint Plant Committee, Ministry Of Steel, GOI.

3) www.worldsteel.org

4) Annual report of TATA steel

5) Annual report of Steel Authority Of India limited

6) Annual Report of Jindal Steel

7) www.moneycontrol.com

8) Economics for Business by John Sloman and Mark Sutcliffe

9) Guidelines for ”Studying the case study” by Prof. Arindam BaniK

Market Structure: Oligopolies(Indian Steel Industry)

How far the theory of oligopoly matches with reality? A case study approach