Steel Industry - Severstal

Group 4 analysis

PESTLE ANALYSISPOLITICAL:• Existence of powerful trade unions and federal protectionist measures in

some countries.

ECONOMIC:• Global economic downturn demand decreased by 60 %• Increase in acquisition trend to achieve growth• Exchange rate are in favor of Russia , China as dollar is weakening.• Privatization of government - owned assets in BRIC

SOCIAL:Corporate Social Responsibility (CSR) activities increasing globally

PESTLE ANALYSIS

TECHNOLOGY:• Rapidly progressing industry requires constant innovation

Legal:• Environment regulations exists for building new steel plants in many

countries.

Environmental:• Kyoto protocol and European Union target of reducing 20 % CO2 by 2020

Porters 5 ForcesBuyers

•With the steel market being in the maturity stage with low growth, buyers have even more power with competitors seeking market share from each other.

Suppliers

•Due to the limited amount of iron ore suppliers, 3 mining companies supply 70% of the industry demand, the power of suppliers is high in the steel market. Despite the recession, 2010 iron ore prices were twice that of 2005.

Substitutes

Due to steels properties and price there have not been any substitutes considerable. However, with advances in technology, aluminium and more rarely carbon fibre is being used in car manufacturing, however, for big items like trains and bridges steel is still the main stay in building materials.

Porters 5 Forces

Competition

Competition is high throughout the steel industry as all the products created are relatively similar, Where more bespoke e.g. automotive market, rivalry is even higher to supply with keener pricing.

New Entrants

Due to the amount of machinery it takes to process Iron Ore (Bauxite) into Steel there is limited threat from new entrants to the market. There would only be an issue of a new company integrating vertically (downstream from a mine, upstream from a buyer), by acquiring a current steel mill, although the steel mill will still be a competitor it may be more of a threat from a new owner (Mittal Steel in the early days Indonesia).

Yip’s Globalisation Drivers

Strategic Choice – M&A

• Strategic Motive – Extension– Consolidation– Capability

• Financial Motive– Tax Efficiency– Asset Stripping

• Managerial motive– Personal ambition

Consequences of Environmental Regulation

• Comply with Kyoto protocol• Reduce emission by at least 20% by 2020• Energy consumption 20-40 % of cost of

production• Fuel prices are rising• Invest in new recyclable production facilities• Exploiting the recyclable properties of steel may

act as competitive advantage

Severstal’s Overall Strategy

• To make the company a globally recognised player especially in Automotive industry

• To make Severstal group one of the largest global steelmakers in the industry

Severstal’s Strategic PositionSWOT

• Strengths and Weaknesses– Strength

• Focused on its aim of making Severstal one of the largest steelmakers in the industry

• Through M&A in US and Europe and also turning loss making acquired steel mills into profitable businesses

– Weaknesses• Strong dependency on the skills and knowledge of few

top managers

Severstal’s Strategic PositionSWOT

• Environmental opportunities and threats– Opportunities

• Emerging markets of Africa, Middle east and Asia• Growing demand in China at 19.3 %• Not many Chinese producers are capable of exporting steel• Demand of stamping (car assembly early stage) by

Automotive industry

– Threats• Substitution of Steel by other metals like Aluminium etc • Plummeting of steel prices due to global recession

Severstal’s Strategic Position

• Culture which shapes strategy– Severstal along with Alexei are seen as a healthy

and clean Russian enterprise

– CSR activities part of strategy to enter LSE

– Clean image and LSE listing helped to raise multi-billion-dollar funds to support company’s global expansion strategy

Suitability, Acceptability and Feasibility of Severstal’s Acquisitions Strategy

• Acquisitions of steel companies taps the opportunities in Africa, Middle east and Asia which has higher rate of growth in demand

• Suits Severstal’s strength of making profits from acquired steel companies

• Better than organic development as discussed earlier• Acceptable to the top management of Severstal as they are

good in it• Strong and capable managers makes the acquisition a

feasible and successful one• Severstal raises money for its acquisition easily due to its

impressive image as discussed earlier

Severstal’s competitive advantage

• Focus on high value added steel products• Diversified business• Strategic locations near major customers• Corporate governance and corporate social

responsibility• Russian (RTS) & London (LSE) stock exchange• ISO 14001 environmental management• ISO 9001 quality management• Good relationship with Russian government

Severstal’s generic strategy

Russia • Maintain good relationship with the Russian government

– Access to capital to upgrade and extend its production facilities

• Retain positive public image – the modern face of healthy and transparent Russian enterprise

USA• Focus on the automotive steel market & lucrative steel products• Embark on aggressive acquisitions

– the acquisition of Rouge (Dearborn)

• Steel facilities are located near its main customers– provide high efficient, low cost and high margin products

• Possible sell some of its US assets to hold needed cash flow

Severstal’s generic strategy

Europe• Diversify into high added value steel products • Broaden its customer base• Take over offshore loss-making steel mills

– Turn them into profitable businesses

Global• Undertake international & domestic acquisitions

– grow its global presence & increase in size– as a defence mechanism to against hostile acquisitions

• Extend market and export Steel Mill production into China– China has become the major producer & the largest consumer

Pros & Cons of FDI

Pros• Inward flow of foreign

earnings (to Russia)• Learning valuable skills and

technologies• Increase in localised exports• Higher productivity• Increased range of

customers• Location

Cons• Government regulations• High risk, i.e. taxes• Difficult to manage• Competition• Culture Difficulties (GMM)• Quality

• Thank You for your kind attention !– Q & A ?