Project Steel Industry

Submitted to:- Submitted by:-

Prof. Bhargavi Jigar Mehta (21)

Vivek Modi (22)

Rahul Prakash (35)

Sagar Mahawar (43)

Pavan Singh (50)

Omkar Borle (53)

Steel Industry 1 of 29

1. Introduction

2. Market Scenario

3. Global scenario

4. Major Players

5. Pricing Strategy

6. Important Policy Measures

7. Duties and Levies on Steel

8. FDI Rule, Competitors & FII in

Steel Industry

9. Role of Government

10. Opportunities For Growth

11. Case Study :- Tata & Corus


Steel Industry

Introduction:

Steel plays a vital role in accelerating growth and development of a nation. It is

used as a basic material in the manufacture of metal products, electrical machinery,

transport equipment, textile, etc and thus considered to be the backbone of the human

civilization. It is a product of large and technologically advanced industry having strong

forward and backward linkages in terms of material flow and income generation. In other

words, the production and per capita consumption of steel is a major contributor to a

country’s gross domestic product (GDP) and an indicator of its industrial and economic

strength. Iron ore, manganese ore and chrome ore are the critical raw material inputs for

the steel industry. Their timely and assured availability in adequate quantity and quality,

on long term basis, is a prerequisite for the rapid and orderly growth of the sector.

India is the eighth largest crude steel producing country in the world. It is endowed with

richest iron and coal ore mines. Its cost of production of steel is comparatively much

lower than that in other countries. It has several advantageous features which gives the

dominant position to its steel industry on the world map. Some of these are:-

I. Establishment of new state-of-the-art steel plants in the country with lesser

dependence on external aid

II. Continuous modernization as well as implementation of de-bottlenecking and

technology upgradation schemes in the older plants

III. Improvement in energy efficiency of the plants in terms of coke rate and power

consumption

IV. Utilization of better quality raw materials, such as imported coking coal, accessed

from global sources

V. Optimum processing of raw materials like washing of coal, beneficiation and

sintering of iron ore etc.


Market Scenario:

After liberalization, there have been no shortages of steel materials in the country.

Apparent consumption of finished (carbon) steel increased from 14.84 Million

Tonnes in 1991-92 to 43.471 million tonnes (Provisional) in 2006-07. During

April-June, 2007, apparent consumption of finished (carbon) steel was 10.103

million tonnes(Provisionally estimated)

Steel industry that was facing a recession for some time has staged a turnaround

since the beginning of 2002.

Efforts are being made to boost demand.

China has been an important export destination for Indian steel.

The steel industry is buoyant due to strong growth in demand particularly by the

demand for steel in China.


Global Scenario:

The Asian countries have their respective dominance in the production of the steel

all over the world. India being one among the fastest growing economies of the world has

been considered as one of the potential global steel hub internationally. Over the years,

particularly after the adoption of the liberalization policies all over the world, the World

steel industry is growing very fast.

Steel Industry is a booming industry in the whole world. The increasing demand for it

was mainly generated by the development projects that have been going on along the

world, especially the infrastructural works and real estate projects that has been on the

boom around the developing countries. Steel Industry was till recently dominated by the

United Sates of America but this scenario is changing with a rapid pace with the Indian

steel companies on an acquisition spree. In the last one year, the world has seen two big

M&A deals to take place :-

The Mittal Steel, listed in Holland, has acquired the world's largest steel company called

Arcelor Steel to become the world's largest producer of Steel named Arcelor-Mittal.

Tata Steel of India or TISCO (as listed in BSE) has acquired the world's fifth largest steel

company, Corus, with the highest ever stock price.

It has been observed that Steel Industry has grown tremendously in the last one and a half

decade with a strong financial condition. The increasing needs of steel by the developing

countries for its infrastructural projects have pushed the companies in this industry near

their operative capacity.


The most significant growth that can be seen in the Steel Industry has been observed

during the period 1960 to 1974 when the consumption of steel around the whole world

doubled. Between these years, the rate at which the Steel Industry grew has been

recorded to be 5.5 %. This roaring market saw a phase of deceleration from the year 1975

which continued till 1982. After this period, the continuous fall slowed down and again

started its upward movement from the early 1990s.

Steel Industry is becoming more and more competitive with every passing day. During

the period 1960s to late 1980s, the steel market used to be dominated by OECD

(Organization for Economic Cooperation and Development) countries. But with the fast

emergence of developing countries like China, India and South Korea in this sector has

led to slipping market share of OECD countries. The balance of trade line is also tilting

towards these countries.

The main demand creators for Steel Industry are Automobile industry, Construction

Industry, Infrastructure Industry, Oil and Gas Industry, and Container Industry.

New innovations are also taking place in Steel Industry for cost minimization and at the

same time production maximization. Some of the cutting edge technologies that are being

implemented in this industry are thin-slab casting, making of steel through the use of

electric furnace, vacuum degassing, etc.

The Steel Industry has enough potential to grow at a much accelerated pace in the coming

future due to the continuity of the developmental projects around the world. This industry

is at present working near its productive capacity which needs to be increased with

increasing demand.


The following table gives a clear picture upon the major crude steel producers in the

world as of the year 2004.

Country Crude Steel Production (mtpa)

China 272.5

Japan 112.7

United State 98.9

Russia 65.6

South Korea 47.5

F.R.Germany 46.4

Ukraine 38.7

Brazil 32.9

India 32.6

Italy 28.4

In the year 2004, the global steel production has made a record level by crossing the 1000

million tones. Among the top producers in the steel production, China ranked 1 in the

world.

Production of steel in the 25 European Union countries was at 16.3 mmt in January 2005.

Production in Italy increased by 11.5 per cent in comparison to the same month in 2004.

Italy produced 2.5 mmt of crude steel in January 2005. Austria produced 646,000 metric

tones. In Russia it increased by 4.0 per cent to reach at 5.5 mmt in January. In case of the

North America region particularly in Mexico it was 1.5 mmt of crude steel in January

2005, up by 8.0 per cent compared to the same month in 2004. Production in the United

States was 8.3 mmt. Brazil had produced 2.6 mmt of crude steel in January 2005. In

South America region it was 3.7 mmt for January 2005.

According to rating made by the “World Steel Dynamics", Indian HR Products are

categorized in the Tier II category quality of products. Both EU and Japan have ranked

the top. USA and South Korea comes as like India.


http://www.economywatch.com/world_economy/mexico/

http://www.economywatch.com/indianeconomy/

http://www.economywatch.com/world_economy/brazil/

http://www.economywatch.com/world_economy/south-korea/

http://www.economywatch.com/world_economy/russia/

http://www.economywatch.com/world_economy/usa/

http://www.economywatch.com/world_economy/japan/

http://www.economywatch.com/world_economy/china/

Major Players:

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It

is a fully integrated iron and steel maker, producing both basic and special steels for

domestic construction, engineering, power, railway, automotive and defense industries

and for sale in export markets. The Government of India owns about 86% of SAIL's

equity and retains voting control of the Company. However, SAIL, by virtue of its

"Navratna" status, enjoys significant operational and financial autonomy. Major units of

SAIL are as under:

Integrated Steel Plants

Bhilai Steel Plant (BSP) in Chhattisgarh

Durgapur Steel Plant (DSP) in West Bengal

Rourkela Steel Plant (RSP) in Orissa

Bokaro Steel Plant (BSL) in Jharkhand

Special Steel Plants

Alloy Steels Plants (ASP) in West Bengal

Salem Steel Plant (SSP) in Tamil Nadu

Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Subsidiaries

Indian Iron and Steel Company (IISCO) in West Bengal

Maharashtra Elektrosmelt Limited (MEL) in Maharashtra

Bhilai Oxygen Limited (BOL) in New Delhi

Joint Venture

SAIL has promoted joint ventures in different areas ranging from power plants to

e-commerce.

NTPC SAIL Power Company Pvt. Ltd


Set up in March 2001, this 50:50 joint venture between SAIL and the National Thermal

Power Corporation (NTPC) operates and manages the Captive Power Plants-II of the

Durgapur and Rourkela Steel Plants which have a combined capacity of 240 MW.

Bokaro Power Supply Company Pvt. Limited

This 50:50 joint venture between SAIL and the Damodar Valley Corporation formed in

January 2002 is managing the 302-MW power generation and 1880 tonnes per hour

steam generation facilities at Bokaro Steel Plant.

.

Bhilai Electric Supply Company Pvt. Limited

Another SAIL-NTPC joint venture on 50:50 basis formed in March 2002 manages the 74

MW Power Plant-II of Bhilai Steel Plant which has additional capacity of producing 150

tonnes of steam per hour.

UEC SAIL Information Technology Limited

This 40:60 joint venture between SAIL and USX Engineers & Consultants, a subsidiary

of the US Steel Corporation, promotes information technology in the steel sector.

Metaljunction.com Private Limited

A joint venture between SAIL and Tata Steel on 50:50 basis, this company promotes e-

commerce activities in steel and related areas.

SAIL-Bansal Service Center Pvt. Ltd.

SAIL has formed a joint venture with BMW industries Ltd. on 40:60 basis to promote a

service centre at Bokaro with the objective of adding value to steel.

North Bengal Dolomite Limited


A joint venture between SAIL and West Bengal Mineral Development Corporation ltd on

50:50 basis was formed for development of Jayanti Dolomite Deposit, Jalpaiguri for

supply of Dolomite to DSP and other plants.

Romelt-SAIL (India) Ltd

A joint venture between SAIL, National Mineral Development Corporation (NMDC) and

Russian promoters for marketing Romelt Technology developed by Russia for reducing

of iron bearing materials, which is carried out with carbon in single stage reactor with the

use of oxygen.

Others major steel producers are:

Tisco ( Tata Iron and Steel Corporation ltd)

Essar Steel

Jindal Vijaynagar Steels Ltd

Jindal Strips Ltd

JISCO

Saw Pipes

Uttam Steels Ltd

Ispat Industries Ltd

Mukand Ltd

Mahindra Ugine Steel Company Ltd

Tata SSL Ltd

Usha Ispat Ltd

Kalyani Steel Ltd

Electro Steel Castings Ltd

Sesa Goa Ltd

NMDC

Lloyds SteeI Industries Ltd

Pricing Strategy:


Rise in steel prices for the past two years has been the cause of concern of many

user industries. Particularly, in some of the direct users and downstream segments where

steel component is high, the impact is a little harsh. Generally these fall under the

category of building and other steel-structured construction, tube-making, heavy

machineries, bicycles, auto-components steel furniture etc. The ability to absorb the

increased cost of raw materials depends on the individual market competitiveness, which

is characterized by excess capacity, demand growth, export opportunities and other

relevant factors. The construction sector, however, is guided by the escalation clauses in

the tenders, which may absolve the individual bidders to get away with equivalent

compensation. In India these clauses are anarchic, to say the least, and therefore the

impact of rise in raw material expenses is felt heavy in construction. That brings us to the

issue of retardation of investment in construction. Has the rise in steel cost led to a

diversion of investment from construction sector to other areas? The answer is negative.

A comparison of Gross Capital Formation in Construction and also in Machinery and

Equipment with steel price movement in the past years would show that there exists no

negative relation between the two. The availability of any basic input at a low price

always results in overuse of the material. Abundant availability of steel in Russia in 60s

and 70s brought about an overdose of steel use in many applications leading to

overweight and more use of energy. When the prices rose, some amount of substitution

took place. In India the emergence of plastic and PVC in place of galvanized sheets and

hot rolled coils in drums, buckets and pipes, aluminum in place of cold rolled sheet in bus

bodies, bumpers, auto-components, asbestos in place of galvanized corrugated sheets for

roofing, point out the similar phenomenon. The current price increase in steel may only

strengthen this trend. Apart from substitution effect, one positive fallout of price rise is

the more parsimonious use of steel in various applications, which has made the user

segment more quality-conscious.

Lot has been discussed on the probable reasons for steel price rise. This range from

global price trend which shot up regularly since Q2 2003, the increased cost of inputs for


steel making like coking coal, coke, iron ore and power, enhanced transportation cost

resulting from rail freight and diesel price rise and burgeoning port handling charges - all

leading to a higher cost of steel to the consumer. Price of steel went down sharply in 2001

and 2002. It had severely affected prospective investment in the sector and almost dubbed

the sector as dying. Indian financial Institutions including government-controlled banks

were genuinely perturbed over massive NPAs and debt-restructuring exercise became the

only mode of interaction between these institutions and steel-producing units. A look at

some of the financial figures during the past few years for steel companies along with a

few consuming units as compiled by CMIE show interesting facts.

Financial performance of Steel and a few related Industries

Segment 1997-98 2001-02 2002-03 2003-04

A) Steel

Value of output (Rs.cr) 40944.9 49534.2 64934.6 76822.0

% Rise in raw material & stores expenses (%) 0.9 1.6 21.4 18.1

Interest Payments(Rs.cr) 4165.9 5367.0 5032.7 3944.9

Profits after tax(Rs.cr) (-) 1228.2 (-) 5706.4 (-) 466.8 4741.6

Total Borrowings(Rs.cr) 46461.8 51348.1 50967.6 45065.9

Investments(Rs.cr) 2558.0 4062.5 4294.6 5320.1

B) Steel Wires

Value of output(Rs.cr) 1210.0 1496.9 861.5 1003.8

% rise in raw material & stores expenses (%) 12.7 6.7 (-) 1.1 29.4



Profits after tax(Rs.cr) (-) 31.2 (-) 79.4 (-) 49.8 (-) 38.5



C) Machinery

Value of output(Rs.cr)rrr 63545.2 77298.2 76564.6 82047.4

% rise in raw material & stores expenses (%) 3.8 (-) 1.3 (-) 1.3 7.8


Profits after tax(Rs.cr) 873.3 (-) 61.2 (-) 529.4 (-) 303.8

Total Borrowings (Rs.cr) 25744.8 30030.2 28248.6 27273.8


D)Air conditioners & Refrigerators

Value of output(Rs.cr) 2544.9 3267.8 2823.7 2844.5

% Rise in raw material & stores expenses (%) 5.6 4.4 (-) 0.1 (-) 2.9


Profits after tax(Rs.cr) (-) 133.4 (-) 234.5 (-) 229.3 (-) 225.1




E) Automobile

Value of output (Rs.cr) 33385.6 42321.9 46540.5 56957.2

% Rise in raw material & stores expenses (%) (-) 7.6 0.3 10.4 24.3

Interest Payments (Rs.cr) 1342.5 1447.8 1224.3 862.4

Profits after tax(Rs.cr) 1796.9 380.2 1315.0 3084.7



Keeping in view the problem of averaging in making industry-wise analysis, where, for

instance, mild carbon steel producers could have been clubbed with alloy and stainless

steel producers, the above analysis throws many interesting highlights.

High growth in value of output in steel in 02-03 and 03-04 reflects volume growth as

prices were depressed, while rise in input cost for steel was substantial. This was

reflected in negative PAT in 02-03 and nominal profits in 03-04, which could happen due

to remunerative prices in Q3/Q4 of 03-04. As borrowings maintained a significantly

higher level, it is no wonder that interest accruals were quite high. It goes to the credit of

the steel industry that investments were sustained at a reasonably high level. In steel wire

sector the negative growth in value of output reflects a recessionary condition in the end

product market as rise in input cost was also negative in 02-03 which, however, went up

sharply in 03-04 and steel cost may be one of them. The Machinery sector went through a

near recessionary condition in 02-03 when value of output dipped with negative growth

in raw material prices including steel. The negative PAT since 01-02 signifies constraints

in the end user segments. Air conditioner and Refrigerator segment has not been affected


much by input cost rise as shown by negative growth in raw material cost in 02-03/03-04.

In fact in whole of 02-03 and 03-04 the growth in consumer durable segment was less

impressive and this was mostly due to excess supply resulting from emergence of new

players coupled with lack of consumer demand. Conversely the automobile segment had

witnessed a significant rise in raw material cost in 02-03/03-04, which, apart from rise in

steel cost may emanate from rise in cost of auto ancillaries. As PAT of auto-ancillaries

has gone up by 8.8 and 14.6 per cent in 02-03 and 03-04 respectively, it is logical to

assume that increased cost of input (steel) has been passed on, at least large part of it, on

the finished products. It may be mentioned that value of output of auto-ancillaries went

up by an average 20 per cent during 01-02 to 03-04.

When the financial results of 04-05 would be available, the rise in raw material cost

including steel, in the user segments may exhibit a higher growth. To what extent it

affects the bottom line of these industries, would be determined by the nature of

competitiveness in each industry. The prices of almost all end products are increasing and

this reflects the low price elasticity of demand in the presence of a positive income effect.

The purpose of this analysis is not to list out reasons justifying increase in steel price. As

a basic input for industrialization the affordable steel price facilitates growth of all end-

using industries. But a high capital-intensive industry like steel must fetch a remunerative

price to become self-sustaining and not to become a drag on national economy and a

scare-field for the prospective investors.

Important Policy Measures:

i. In the new Industrial Policy announced in July, 1991 Iron and Steel industry,

among others, was removed from the list of industries reserved for the public

sector and also exempted from the provisions of compulsory licensing under the

Industries ( Development and Regulation) Act, 1951.


ii. With effect from 24.5.92, Iron and Steel industry has been included in the list of

`high priority' industries for automatic approval for foreign equity investment

upto 51%. This limit has been recently increased to 74%.

iii. Price and distribution of steel were deregulated from January, 1992. At the same

time, it was ensured that priority continued to be accorded for meeting the

requirements of small scale industries, exporters of engineering goods and North

Eastern Region of the country, besides strategic sectors such as Defense and

Railways

iv. The trade policy has been liberalized and import and export of iron and steel is

freely allowed. There are no quantitative restrictions on import of iron and steel

items, covered under Chapter No. 72 of the ITC (HS) Code. The only mechanism

regulating the imports is the tariff mechanism. Tariffs on various items of iron and

steel have drastically come down since 1991-92 levels and the government is

committed to bring them down to the international levels.

v. Freight equalization scheme was modified in January'92, removing freight

disadvantage to states located near steel plants in the country. At the same time, it

was ensured that far-flung areas and distant states were protected by stipulating

that the main producers charge either actual freight or freight element existing

prior to withdrawal of the scheme, whichever is less.

vi. Levy on account of Steel Development Fund was discontinued from April'94

providing greater flexibility to main producers to respond to market forces.

vii. Iron & Steel are freely importable as per the Extant Policy

viii. To check unbridled cheap imports of steel the Government has fixed floor prices

for seven items of finished steel viz. HR coils, HR sheets, CR coils, Tinplates,

CRNO and ASBR.

ix. Iron & Steel are freely exportable.


x. Advance Licensing Scheme allows duty free import of raw materials for exports.

Duties & Levies on Steel

Customs Duty

- Peak rate for non-agricultural products reduced from 15 % to 12.5 %.

- Customs Duty on stainless steel and other alloy steel has been reduced from 10 % to 7.5

%. Duty on non- alloy steel remains unchanged at 5%.

- Duty on steel melting scrap has been raised to 5%.

- Duty on refractories reduced to 7.5 %. Duty most of the raw material for manufacture of

refractories has also been reduced to 7.5%.

- Duty on ores and concentrates reduced from 5 % to 2 %. In respect of Ministry of Steel

this would mean a reduction in duty of 3% on iron ore, manganese ore and chrome ore.

- The Special Countervailing Duty (CVD) of 4 % to be imposed on all imports with a few

exceptions viz. ships for breaking, coal and coke etc. Full credit to be allowed to

manufacturers of excisable goods.

Service tax:

Service tax rate increased from 10% to 12%.

Direct Taxes:

No change in rates of personal income tax or corporate income tax. No new taxes are also

being imposed.

Levies on Steel

SDF LEVY- This was a levy started for funding modernization, expansion and

development of steel sector.


The Fund, inter-alia, supports :

1) Capital expenditure for modernization, rehabilitation, diversification, renewal &

replacement of Integrated Steel Plants.

2) Research & Development

3) Rebates to SSI Corporations

4) Expenditure on ERU of JPC

SDF levy was abolished on 21.4.94

Cabinet decided that corpus could be recycled for loans to Main producers

Interest on loans to Main Producers is set aside for promotion of R&D on steel

etc.

An Empowered Committee has been set up to guide the R&D effort in this sector.

EGEAF – Was a levy started for reimbursing the price differential cost of inputs

used for engineering exporters. Fund was discontinued on 19.2.96.

FDI Rule & Competitors

The NSP has been approved by the Cabinet on3rd November, 2005. The Policy inter alia

seeks to enhance the indigenous production to 110 million tones per annum by 2019-20


from the present level of 38 million tones, implying a compound annual growth rate of

7.3%. This requires additional investment of about Rs. 2,30,000 crores. This is expected

to generate additional employment of around 1 million by 2020.

The basic objective is to ensure that India has a modern, efficient and globally

competitive steel industry of world standards catering to diversified steel demand. On the

demand side, the Policy seeks to enhance steel usage at various levels of the economy.

On the supply side, the Policy proposes to adopt measures for removing major supply

side bottlenecks like improving the availability of critical raw materials.

With the upturn in the steel industry, the foreign companies/investors have started

showing interest in the investment by way of investing in the existing company or in

setting up of Greenfield steel projects. In addition to above, POSCO, South Korea has

proposed to set up a 12 million tonne steel plant in the state of Orissa involving an

investment of US$ 12 billion.Mittal Steel Company has also entered into a MoU with

Government of Jharkhand for setting up a 12 million tonne steel plant involving an

investment of US$ 9 billion.

FII in Steel SectorForeign institutional investors (FIIs) raised their stakes in most of the steel companies

while individual investors sold a substantial chunk of their holdings in the big steel

companies in January-June 2007.


Individual investors, particularly the small shareholders having less than Rs 1 lakh

investments, have sold heavily booking profits.

According to analysts, this trend is an outcome of difference of perceptions between the

two groups of investors, one is the retail segment and the other is institutional buyers.

FII holding in Steel Authority of India has gone up from 5.6 per cent in the beginning of

January to 6.39 per cent by June-end during which the holding of individuals has come

down from 2.28 per cent to 1.89 per cent.

Similarly, in the case of Tata Steel, the FII holding has gone up from 18.11 per cent to

22.65 per cent during January-June, while individual holding has come down from 24.74

per cent to 22.2 per cent.

In Jindal South West too, the FIIs have raised their stakes from 18.21 per cent to 21.17

per cent during the first six months while individual holding has come down from 13.89

per cent to 11.51 per cent.

Exception

However, an exception is Essar Steel where FII holding remained static at 2.04 per cent

throughout the six months while there had been a marginal increase of 0.01 per cent in

the case of Ispat Industries.

Individual holding has come down in both these companies. Interestingly, while all the

small shareholders have been consistent in selling, large individual shareholders have

raised their stakes in Essar in tandem with mutual funds and also in Ispat Industries

where corporate bodies too have raised their stake.


According to Mr. P.K. Choudhury, Managing Director of credit rating agency ICRA

Ltd, :“the small investors have exited at what they thought was the right price and many

of them had actually purchased the shares at the time of public issue.”

“On the other hand the institutions, who buy the shares after proper analysis of the

economic fundamentals, are still seeing better prospect for the Indian steel industry. The

difference of perception is because the retail investors have opted for short-term gains

while the institutions have taken their stand for the medium-term,” Mr. Choudhury said.

Role of Government:

The economic reforms initiated by the Government since 1991 have added new

dimensions to the industrial growth in general and the steel industry in particular.

Accordingly, several policy changes have been announced for the sector, from time to

time, by the Government of India. The major being, the New Industrial policy which had

opened up the iron and steel sector for private investment by:-

I. Removing it from the list of industries reserved for public sector

II. Exempting it from compulsory licensing.

Since then, the private sector has been playing an important and dominant role in

production and growth of the steel industry. They not only enhance the productive

capacity of primary and secondary steel, but also contribute substantial value addition in

terms of quality, innovation and cost effectiveness. During the period April-December,

2006, 20.5 million tonnes of steel has been produced by private sector steel units, out of

the total production of 33.15 million tonnes in the country. The private sector units

consist of major steel producers like Tata Steel Ltd., Essar Steel Holdings Ltd., Jindal

Steel and Power Ltd. (JSPL), Ispat Industries ltd. (IIL) etc. as well as relatively smaller

and medium units such as sponge iron plants, re-rolling mills, electric arc furnaces and

induction furnaces.


http://india.gov.in/outerwin.htm?id=http://www.ispatind.com/

http://india.gov.in/outerwin.htm?id=http://www.jindalsteelpower.com/

http://india.gov.in/outerwin.htm?id=http://www.jindalsteelpower.com/

http://india.gov.in/outerwin.htm?id=http://www.essarsteel.com/

http://india.gov.in/outerwin.htm?id=http://www.tatasteel.com/

Under the industrial policy, iron and steel has been made one of the high priority

industries. Price and distribution controls have been removed as well as foreign direct

investment upto 100% (under automatic route) has been permitted, with a view to make

the steel industry efficient and competitive. The trade policy has been liberalized making

import and export of iron and steel items freely allowable, with almost no quantitative

restrictions on them. Other policy measures such as convertibility of rupee on trade

account, permission to mobilize resources from overseas financial markets and

rationalization of existing tax structure have also benefited the Indian steel industry.

Apart from this, the Government has envisaged considerable additions to capacity in the

steel sector specially from the sponge iron segment. It has also given licenses for setting

up electric arc furnace units (mini steel plants), which account for 30% of the steel

production in the country, producing mild steel as well as alloy steel. Further, all efforts

are being made to ensure that the sector continues to meet the requirements of small scale

industries, exporters of engineering goods and North-Eastern region of the country, as

well as that of strategic sectors such as defense and railways.

Another important initiative, undertaken by the Ministry, has been the announcement of

the 'National Steel Policy' in 2005 which set out the Government's vision for future

growth of the sector. The policy largely aims to develop a modern and efficient steel

industry of world standards, catering to the diversified steel demands. It focuses on

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

also in terms of global benchmarks of efficiency and productivity. It seeks to enhance

indigenous production of steel to 110 million tonnes (mT) per annum by 2019-20 from

the 2004-05 level of 38 mT. This implies a compounded annual growth of 7.3 percent per

annum.

The increasing presence of the Indian steel companies in the world market with a wide-

ranging export basket, including technologically sophisticated products, is a pointer to the

enhanced competitiveness of this industry. They are having an efficient and strong base,

with rising level of per capita consumption, which is promoting massive industrialization

in the country as well as improving standard of living of the people. Further, there has

been an increase in the research, design and development activities, largely carried out by


http://india.gov.in/outerwin.htm?id=http://steel.nic.in/national%20steel%20policy.htm

the existing iron and steel plants; national research laboratories; academic institutions;

etc. The significant improvements have been made in the areas of iron and steel making

processes, upgradation of raw materials, product development, and increase in

productivity as well as reduction in energy consumption. All this shows that there exists

innumerable investment opportunities in the sector both for domestic and foreign

investors.

Steps taken to boost steel industry:

In budget 2004-05, the customs duty on non-alloy steel was reduced from 15 % to 10

per cent and on alloy steel from 20 per cent to 15 per cent. In August 2004, the customs

duty on non-alloy steel was further reduced from 10 per cent to 5 per cent; on melting

scrap from 5 per cent to 'zero' and on ships for breaking from 15 per cent to 5 per cent.

Further, customs duty on several raw materials used by the steel sector like non-coking

coal, met coke and nickel has been reduced to 5 per cent and on coking coal to 'zero'.

To bring down the prices of steel, the excise duty on steel products was reduced from 16

per cent to 8 per cent with effect from February 28, 2004 with a caveat that the duty

regime will be reviewed. Budget 2004-05 revised this partially by increasing the duty

from 8 per cent to 12 per cent, as the intended impact of duty cut on moderating prices

was not achieved.

What is further needed:

While the increase in the domestic prices of steel because of an increase in

international demand cannot be avoided, attention needs to be paid to the problem of

adequate and reliable supply of coal to the steel industry. Efforts are required for securing

assured linkages of coking coal from overseas sources.

Furthermore, cross-border investment in captive coal mines, especially for coking

coal, in major source countries as well as investment for developing coal mines in India,


needs to be encouraged. Further, the movement of raw materials and finished steel would

need good rail and road network as well as substantial improvement in port handling,

storage and haulage facilities.

Opportunities for growth


The New Industrial Policy Regime

The New Industrial policy has opened up the steel sector for private investment by

(a) removing it from the list of industries reserved for public sector and (b) exempting it

from compulsory licensing. Imports of foreign technology as well as foreign direct

investment are freely permitted up to certain limits under an automatic route. Ministry of

Steel plays the role of facilitator, providing broad directions and assistance to new and

existing steel plants, in the liberalized scenario.

The Growth Profile

The liberalization of industrial policy and other initiatives taken by the Government have

given a definite impetus for entry, participation and growth of the private sector in the

steel industry. While the existing units are being modernized/expanded, a large number of

new/greenfield steel plants have also come up in different parts of the country based on

modern, cost effective, state of-the-art technologies.

At present, total (crude) steel making capacity is over 34 million tonnes and India, the 8th

largest producer of steel in the world, has to its credit, the capability to produce a variety

of grades and that too, of international quality standards. As per the ratings of the

prestigious "World Steel Dynamics", Indian HR Products are classified in the Tier II

category quality products – a major reason behind their acceptance in the world market.

Case Study

TATA-CORUS MERGER


Ratan Naval Tata, the chairman of the increasingly global Tata Group, has revealed a

more daring side to his usually understated personality. Barely a week after pulling an

all-nighter to outgun Brazilian rival CSN for the $12.1-billion Corus acquisition, the 69-

year-old Tata chose to celebrate by taking an F-16 combat aircraft for a supersonic spin at

the Bangalore Aero India show.

There is no doubt that Tata has pulled off a coup — Corus makes nearly four times more

steel than Tata Steel. Together, the combine becomes the fifth largest producer in the

world and the second in Europe. But to make the most of the deal, Tata has to manage

several variables including steel prices, raw material supplies and interest costs on the $8-

billion debt that is being raised to fund the deal. Soon he may also have to deal with the

sensitive issue of possible job cuts in Corus’s manufacturing plants. There are also the

usual sets of integration challenges that come with such large buyouts. The deal may be

done, but the hard work is just beginning.

Tata group was willing to go as high as 630 pence per share in the nine-round bidding

auction. Arun Gandhi, the M&A whiz of the group, wouldn’t confirm that figure but

indicated that the Tatas were prepared to bid higher than the 608 pence that sealed the

deal. When the bidding began, he was stationed at the office of the group’s lawyer on

Primrose Street, London, EC 2A 2HS, all night — with a motorcycle stationed kerbside,

revved up and ready to go, in case networks failed and the e-mail bids could not be sent.

In the run up to the auction, Tata had maintained a low profile despite CSN’s aggressive

stance. “They underestimated our firepower,” says Gandhi, who admits that even bankers

to the transaction — ABN Amro and Deutsche Bank — were in the dark as to how far

Ratan Tata was willing to go.

The only blip, though, was the way the stock markets reacted. Tata Steel has lost a billion

dollars in market capitalization since it first announced its intention to buy Corus in

October last year. (The BSE Sensex rose 18 per cent during the same period.) The market


perception is that the Tata Group paid too much for this acquisition. Several brokerage

houses have pointed out that the deal implies a high enterprise value/ earnings before

interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 9 for Corus

versus 4.6 for Tata Steel. (L.N. Mittal paid 5.8 times EBITDA for Arcelor.) Ratan Tata

disagrees: “We believe that, looking back in time, the price today will prove to be one

that was worthwhile because the price of steel companies is likely to be even higher in

the coming year.” (See interview on page 36).

Despite the thumbs-down from the markets, the Tata Group is convinced of the long-term

synergies in manufacturing, access to global customers, opening India to Corus or

leveraging research and development for Tata Steel’s greenfield projects. It hopes these

will save costs up to $350 million per year. The combined entity could also scout for

more acquisitions together effectively — it is eyeing more buyouts in finished steel and

iron ore.

But tying up the funding is the immediate priority. The Corus acquisition is being routed

through a special purpose vehicle (SPV) called Tata Steel, UK. (A similar structure was

used for the Tetley buy in 2000.) So far, the Tatas have indicated that group holding

company Tata Sons will pump in $4.1 billion as equity into the SPV. The balance $8

billion will be raised by junk bonds and senior term loans (part of it has been tied up with

banks like ABN Amro, Deutsche Bank and CSFB). These loans will be serviced out of

Corus’s profits; Tata Steel need not repay

this. This has effectively ring-fenced Tata

Steel shareholders.

Of the $4.1-billion equity component,

analysts say that $2.3 billion-2.4 billion

could be tapped from Tata Steel’s cash

reserves. This leaves another $1.7 billion-1.8

billion that is yet to be raised. There are

three routes through which this could be mobilized.


First, if Tata Sons pumps in this amount as equity into the SPV, there will be a minimal

impact on Tata Steel’s balance sheet. This will be good for Tata Steel shareholders (see

‘How Tata Sons Could Further Protect Tata Steel Shareholders’). Tata Sons has the

resources to do so. Its 78.3 per cent holding in TCS is worth Rs 99,700 crore, and it

generates over Rs 3,250 crore in cash profit every year.

In the second scenario, Tata Steel could borrow $1.7 billion-1.8 billion. Analysis done by

brokerage firm CLSA shows that the interest on this borrowing could dilute earnings per

share (EPS) by 1.4 per cent in FY08. But such a borrowing may be difficult as Tata Steel

may need to raise more debt in the next 18-24 months for its greenfield projects in Orissa,

Chhattisgarh and Jharkhand.

The third option is that Tata Steel could dilute equity, possibly through a preferential

issue to Tata Sons. This will hurt Tata Steel’s EPS even more. CLSA predicts a 13.1 per

cent decline in EPS in FY08 if this option is exercised (see ‘EPS Unfriendly?’).

The financial strength of the Tata Group is not in doubt. But the funding puzzle is yet to

be solved. The $4.1-billion equity component is the first bit of the jigsaw. The second

piece in the puzzle is the $8 billion-debt being raised by the SPV.

This debt has to be serviced out of Corus’s profits. This is a short-term concern. Given

Corus’s EBITDA margins of only 8 per cent, compared to Tata Steel’s 30 per cent, the

UK-based firm’s ability to service the additional debt of $8 billion is under scrutiny.

Analysts say that the new debt of $8 billion, which will be serviced through Corus’s cash

flow, will roughly bear an interest cost of 8 per cent. In other words, the annual interest

cost would be as much as $640 million. Based on results for the 12 months ended

September 2006, Corus already has an interest outgo of $400 million, which means the

total interest outgo could be over a billion dollars after the acquisition. However, after

factoring in a tax break of 30 per cent on the interest paid, (interest cost on funds used for

acquisitions are an allowable expense in the UK), the net interest outflow may be about

$725 million.


Corus’s current EBITDA of $1.45 billion covers the interest outgo more than

comfortably, but a significant drop in steel prices would adversely impact it and its ability

to service debt.

Brokerage house First Global estimates that a $50 fall in global steel prices could lead to

a $414-million loss from the acquisition in FY08 (see ‘Price Impact’). If there is a $75

fall, the losses could climb to $846 million. This does not seem to be just a street view.

“The world steel consumption growth is expected to slow down from 8.9 per cent in 2006

to 5.2 per cent in 2007 and 4.2 per cent in 2010,” an ICRA industry monitor said.


Project Steel Industry

Business

Transcript of Project Steel Industry