“The Nature of the Indian Steel Industry”

Report On

“The Nature Of The Indian Steel Industry”

SUBMITTED TO:

Prof. Arindam Banik

SUBMITTED BY: -

MODAK PRIY (08XPGDM31)

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Introduction

The India steel industry is one of the major industries in India and the Indian government plays a very important role in the development of the steel industry in India.

The India steel industry is experiencing a slow but steady growth. The steel industry in India has huge scopes in the future with massive scale of infrastructural development happening all across the country. The India steel industry caters to many other industrial sectors such as construction industry, mining industry, transportation industry, automobile industry, engineering industry, chemical industry, etc.

The India steel industry has further plans of development. Plans are being chalked out for setting up of 3 pig iron manufacturing units of a combined capacity of 6 lakh tons per year and a steel manufacturing unit of the capacity of producing 1 million tons yearly in West Bengal, with the technical and financial support of China. With all these developments, India steel industry is all set to become one of the most reputed industries not only in India but also in the international market.

The different steel manufacturing plants under the India steel industry:

Integrated steel plants

1. Durgapur steel plant (DSP) in West Bengal

2. Bhilai steel plant (BSP) in Chhattisgarh

3. Bokaro steel plant (BSL) in Jharkhand

4. Rourkela steel plant (RSP) in Orissa

5.

Special steel plants

6. Alloy steels plants (ASP) in West Bengal

7. Visvesvaraya iron and steel plant (VISL) in Karnataka

8. Salem steel plant (SSP) in Tamil Nadu

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Subsidiaries

9. Indian iron and steel company (IISCO) in West Bengal

10. Bhilai oxygen limited (BOL) in New Delhi

11. Maharashtra Elektrosmelt limited (MEL) in Maharashtra

Others major steel producers

12. Tata iron and steel corporation ltd (TISCO)

13. Essar steel

14. Jindal Vijaynagar steels ltd

15. Ispat industries ltd

16. Jindal strips ltd

17. Mahindra Ugine steel company ltd

18. JISCO

19. Lloyds steel industries ltd

20. Electro steel castings ltd

21. Saw Pipes

22. Uttam steels ltd

23. Mukand ltd

24. Tata SSL ltd

25. Usha Ispat ltd

26. Kalyani steel ltd

Types of produce in the Steel Industry

Flat Products - Flat products include plates and hot rolled sheets such as coils and sheets. Flat products are derived

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from slabs. One of the major uses of steel plates is in ship building.

Long Products - Long products include bars, rods, wires, ropes and piers. These are called long products due to their shapes. Long products are made from billets and blooms. Long products are mostly used in housing and construction and also in rail tracks.

Statistics

Financial Performance of Selected Companies in Steel and Steel Products Industry of India

(1998-99 to 2000-01)

(Rs. in Crore)

Company

1998-99 1999-00 2000-01

Sales Net Profit Sales Net Profit Sales Net Profit

Explosives - - - - - -

I D L Inds 143.3 7.7 151.9 5.1 170.6 -14.3

Indo Gulf Expl 41.8 -3.1 - - - -

Noble Explochem 24.4 1.0 - - - -

Premier Explos 34.2 -2.0 - - - -

Metal - Ferrous - - - - - -

Hoganas India 27.6 2.8 29.7 3.1 - -

Kanthal India 14.4 -0.9 - - - -

Ispat Alloys 143.3 0.1 - - - -

Sponge Iron - - - - - -

Ispat Inds 1286.7 25.1 1326.6 4.4 1292.2 3.7

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Tata Sponge 82.0 5.2 106.4 9.4 112.9 8.5

Nova Iron & Steel

Monnet Inds 98.6 2.7 104.3 4.9

Steel - - - - - -

Essar Steel 2262.9 -496.5 2421.8 -581.2 2426.4a -164.0a

Jindal Vijaynagar 537.6 -29.0 - - 1160.6 -49.6

Malvika Steel 773.1 11.6 - - - -

Sunflag Iron 347.1 -4.3 415.8 7.8 369.2 10.3

Tata Steel 5584.6 157.0 6044.0 422.6 6838.6 816.0

SAIL 13203.5 7573.7 16722.9 -1134.5 14572.6 -728.7

Ballary Steel 455.9 19.1 - - 196.4a -24.0a

Bhuwalka Steel 253.0 1.5 - - - -

Gandhi Special 21.9 4.0 26.4 4.4 21.9 3.4

Jindal Iron 1007.5 10.8 1083.0 8.7 1536.6 -96.5

Kalyani Steels 197.6 8.2 89.1 -8.6 125.5 -13.7

Tata Yodogawa 67.1 5.4 87.3 4.7 - -

Special Steel - - - - - -

Mukand 595.2 -46.8 844.8 5.9 265.6 32.2

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Aggregate Investment in Individual Companies under Steel in India (1998-1999 to 2005-2006)

(Rs. in Lakh)

Company/YearPaid-UpCapital Loan

ShareApplication

MoneyTotal

2005-06

Ferro Scrap Nigam Limited 200 0 0 200

Indian Iron & Steel Co. Limited 0 0 0 0

Maharashtra Elektrosmelt Limited 2400 206 0 2606

Mishra Dhatu Nigam Limited 13734 0 0 13734

Rashtriya Ispat Nigam Limited 782732 0 0 782732

Sponge Iron India Limited 6510 0 0 6510

Steel Authority of India Limited 413040 388126 0 801166

Sub Total 1218616 388332 0 1606948

2004-05








Sub Total 1257382 548789 0 1806171

2003-04





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Sub Total 1257382 736614 0 1993996

2002-03



Maharashtra Electrosmelt Limited 2400 2224 0 4624





Sub Total 1257382 1049259 0 2306641

Production Of Iron –Ore In India

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-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Production GrowthRateExport Growth Rate

Domestic ConsumtionGrowth Rate

The production has grown over three times in the last five years:

Exports of Finished (Carbon) Steel Performance of Steel Industry

(1997-98 to 2001-02)

Year Production

1997-98 1880

1998-99 1771

1999-2000 2670

2000-01 2664

2001-02 2770

Imports of Finished (Carbon) Steel Performance of Steel Industry

(1997-98 to 2001-02)

Year Production

1997-98 1588

1998-99 1132

1999-2000 1600

2000-01 1417

2001-02 1375

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AnalysisStructural Weaknesses of Indian Steel Industry

Although India has modernised its steelmaking considerably, however, nearly 6% of its crude steel is still produced using the outdated open-hearth process.

Labour productivity in India is still very low. 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.

India has to do a lot of catching in the production of stainless steel, which is primarily required by the plant and equipment, pharmaceutical and chemical industries.

Steel production in India is also hampered by power shortages.

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.

Insufficient freight capacity and transport infrastructure impediments too hamper the growth of Indian steel industry.

Strengths of Indian Steel Industry

Low labour wage rates Abundance of quality manpower

Mature production base

Positive stimuli from construction industry

Booming automobile industry

OutlookThe outlook for Indian steel industry is very bright. India's lower wages and favourable energy prices will continue to promise substantial cost advantages compared to production facilities in (Western) Europe or the US. It is also expected that steel industry will undergo a process of consolidation since industry players are engaged in an unfettered rush for scale. This is evident from the recent acquisition of Corus by Tata. The deployment of modern production systems is also enabling Indian steel companies to improve the quality of their steel products and thus enhance their export prospects.

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Concentration Ratio

Concentration ratios depend upon technical factor, conduct and performance variables. The firm’s profit is the net result of two forces: - higher efficiency (conduct variable) and greater market power (structural variable). But leading firms may still collude to avoid reductions in their profitability that arises from competition. In such a case, collusion would have little or no impact on profitability of the leading firm and might even have a negative impact. A firm that moves from being a monopolist to being a duopolist or an oligopolist is no longer able to enjoy monopolist profits. Although collusion might result in joint profit maximization but it might not increase the profitability of the leading firm.

The following conclusions have been obtained by running a regression analysis with data taken from CMIE database for the period covering 1990-2003. Concentration in the Indian Steel Industry is inversely proportional to government regulation. After analysis it was found that concentration depends only upon government regulation and not on technical factors as hypothesised.

The relationship is inverse which suggests that higher the government regulation, the concentration in the industry will decrease. Concentration of the steel industry has decreased over the period of study. CR4 has decreased by 25% from 1990 to 2003 and CR2 has decreased by 36.8%. Thus the top firms are increasingly losing market shares to the smaller players. There is an evidence of collusion in the steel industry. The paper had hypothesised that in the Indian Steel Industry, firms collude to maximise profits.

Value of Herfindahl index for Indian Steel Industry is 2470. It implies that

the competition in the steel industry is medium to high and high

concentration.

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INTERDEPENCENCE

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Production

35(22.7%)

11.2(7.3%)

84.5(54.7%)

23.7(15.3%)

Cap Public

Cap Private

Non- CapPublic

Non-capPrivate

23.711.2

35

84.3

100

10075

5

0

20

40

60

80

100

120

140

Public Private Public Private

The data above clearly suggests an interdependence between the public and private sector undertakings, though there is a strong possibility that the private sector overtakes the public sector due to technical inductions and use of superior technology. The public sector though has the benefits of volume and thus returns to scale.

Abnormal profits are very unlikely in the industry, due to the structure of the industry, i.e. an open market being existent, fast entry being virtually impossible because of the massive capital investment required and availability of resources like huge chunks of land which is imperative for setup. These can also termed as the barriers to entry and thus also safeguard the profit margins of the dominant players.

The pricing structure in the industry suggests that there are no price leaders in the market, the same is demonstrated by the fact that the difference of prices range in the minimum of 2% and a maximum of 4%.

CONCLUSION

In conclusion we can say that the Indian Steel industry reflects Oligopolistic nature, the same being demonstrated by

1) Few players controlling the largest chunk of the business namely TATA STEEL, JINDAL, ESSAR, and SAIL.

2) Barriers to entry, demonstrated by huge investment, and requirement of other resources in quantity.

3) Interdependence among the players in the industry, as the actions of few affect the industry on the whole.

4) Collusion- coming together of firms to protect mutual interests.

5) Price leadership- minimum price ranges of firms(2-4%), displaying the affinity to avoid price wars which may in turn lower profits. Thus it can also be concluded that there is evidence of a kinked demand curve, as a rise in price will entice customers to switch to lower price products. Precisely the reason why the price ranges are low. This may involve working out new revenue predictions, and revaluing

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stock of finished goods. A tedious task considering the size of the market and the industry on the whole.

Sources of data / references

Indiastat.com

CMIE

Anupamblogspot.com

CII

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ACKNOWLEDGEMENT

We express our deepest gratitude to Prof. Arindam Banik of International

Management Institute for having given us this opportunity to try our

hands on our very first tangible take away. We feel motivated and

encouraged every time we attend his lectures. Without his

encouragement and guidance this term project would not have

materialized.

The guidance and support received from all the team members who contributed to this project, was vital for its successful completion.

Place: New DelhiDate : 1st September, 2008

TABLE OF CONTENTS

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Acknowledgement

Introduction

Statistics

Analysis

Concentration Ratio

Interdependence

Conclusion

Sources of data / reference

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“The Nature of the Indian Steel Industry”

Documents

Transcript of “The Nature of the Indian Steel Industry”