13 Strategy

STEEL INDUSTRY

Presented By: Sachin Kumar (103) Shivaramakrishna (118) Siddharth Rai (119) Prashant Kumat (143) Nitin Goel (155)

Steel Industry in India: An Overview

• India: a 16% steel demand CAGR over five years• Indian Steel sector poised for a major spurt in growth• Chinese expansion poses worry, but can be effectively

countered• Highly heterogeneous and fragmented industry, with widely

differentiated products• Controlled sector till 1992• Strong public sector presence• Complete abolition of price and distribution controls during

early nineties

Consumption Growth of Steel

WEAKNESS

Government control Weak presence in the international market

WEAKNESS

Government control Weak presence in the international market

OPPORTUNITY

Joint ventures to improve topline growth Expansion plans Development of special economic zone in Salem

OPPORTUNITY

Joint ventures to improve topline growth Expansion plans Development of special economic zone in Salem

THREATS

Consolidation in the steel industry Economic or industry downturns

 a

THREATS

Consolidation in the steel industry Economic or industry downturns

 a

SWOT Analysis of Steel Authority of India Limited (SAIL)

STRENGTHS

Leading steel company in India Broad product mix Captive sources of raw materials

STRENGTHS

Leading steel company in India Broad product mix Captive sources of raw materials

WEAKNESS

Downgrading in rating from stable to negative Substantial debt

WEAKNESS

Downgrading in rating from stable to negative Substantial debt

OPPORTUNITY

Expansion plans in foreign countries.Expansion in India

OPPORTUNITY

Expansion plans in foreign countries.Expansion in India

THREATS

Consolidation in the steel industry. Economic or industry downturns Environmental regulations

 a

THREATS

Consolidation in the steel industry. Economic or industry downturns Environmental regulations

 a

SWOT Analysis of TATA STEEL

STRENGTHS

Strong market position Acquisition of Corus Vertical integration

STRENGTHS

Strong market position Acquisition of Corus Vertical integration

Threat of Substitutes – Medium

Steel faces competition from substitutes such as Aluminium, Plastic and Copper. However, high strength of Steel prevents large scale substitution.

Threat of Substitutes – Medium

Steel faces competition from substitutes such as Aluminium, Plastic and Copper. However, high strength of Steel prevents large scale substitution.

Bargaining Power of Supplier – High

Supplier of Raw Material (Coal, Iron ore, Scrap) have high bargaining power vis a vis non-integrated players.

Bargaining Power of Supplier – High

Supplier of Raw Material (Coal, Iron ore, Scrap) have high bargaining power vis a vis non-integrated players.

Bargaining Power of Buyer- Medium to High

Diversified set of users prevents significant buying power with buyers. However, individual nations often initiate actions, which affect global trade

Bargaining Power of Buyer- Medium to High

Diversified set of users prevents significant buying power with buyers. However, individual nations often initiate actions, which affect global trade

Entry Barriers: Medium – High

Integrated 1 mtpa blast furnace costs – Rs 18 bn +

Entry Barriers: Medium – High

Integrated 1 mtpa blast furnace costs – Rs 18 bn +

Inter-firm Rivalry – HighThe steel industry is extremely fragmented. In India, apart from the 3 integrated players, there are 190 Electric Arc Furnaces, 950 Induction Furnaces and 1500 small scale stand alone producers.

Inter-firm Rivalry – HighThe steel industry is extremely fragmented. In India, apart from the 3 integrated players, there are 190 Electric Arc Furnaces, 950 Induction Furnaces and 1500 small scale stand alone producers.

Industry Analysis Five Force Model

Factors Qualitative Exploration Score

Economies of Scale and Capital requirement

-Min 2 to 3 million tones of annual production-Cost of setting up plant is high-Long Gestation period

1

Product Differentiation -Steel is commodity-ISI/BIS makes it standardized product

4

Switching Cost to customer -Zero cost 5

Access to distribution channels -Present players are well established-High setup cost

2

Brand Identity -Commodity 3

Government Policy -Favorable policies 5

Expected Retaliation - Availability of excess capacity 2

Barriers to Entry – Qualitative and Quantitative Analysis

Factors Qualitative Exploration Score

Numerous or Equally Balanced competitors

-Highly fragmented industry-Low operating profit margins

2

Industry Growth -High potential 3

Fixed or Storage Costs -Fixed proportion cost is higher 1

Capacity Issues -Over supply-Cheap imports

1

Exit Barriers -Investments are high 1

Inter firm rivalry – Qualitative and Quantitative Analysis

Bargaining Power of Suppliers – Qualitative and Quantitative Analysis

Raw material Concentration

Industry as an

important

customer

Switching

cost

Threat to forward

integration

Coking coal 3 2 5 1

Iron ore4 4 4 2

Scrap iron and

Sponge Iron2 4 3 2

Manganese and

Chromite ores 2 2 2 1

Ferro Alloys 4 3 3 1

Factors Qualitative Exploration Score

Concentrated or Organized buyers

-Significant purchasing power is concentrated among few buyers

3

Threat of Backward Integration

-High investment 5

International Perspective -Imports 2

Bargaining Power of Buyers – Qualitative and Quantitative Analysis

Plastic Aluminium

Price Attractiveness 1 (High) 4 (Low)

Performance 3 (Medium) 1 (High)

Threat of Substitutes – Qualitative and Quantitative Analysis

Global Steel Market Volume/Value

13

THUS SIGNIFICANT CAPACITIES ARE EXPECTED IN THE MEDIUM

TERMBoth by Capacity Expansion by existing players * . . . .

New Entrants with the Greenfield projects…

and

Capacity Addition projected : ~ 50 Mill T in next decade.

* Incl their Greenfield Projects

Product Range

Narrow

Broad

Geographical Scope

National Global

Tata Steel,SAIL

RINL , ESSAR

Jindal, ISPAT

Mukund Steel, Usha

Martin, Mukund Steel

Strategy Groups

Cost Comparison of various Players

Relative comparison of Raw material cost

Steel Industry : Impact MatrxKey Macro Influence

SAIL Tata Steel JSW Essar

Market VolatilityChina

Diversified Customer Segments (+) (+)

Global Customer (+) (+) Limited Customer Segments (-)

Limited Customer Segments (-)

Product Mix Value Added Products (+) (+) Wide Range(+) (+)

Value Added Product (+)

Limited range and Capacity (-) (-)

Raw MaterialIron Ore

Other Materials

Captive Iron, coal, Dolomite & Limestone Mines (+) (+)

Captive Iron, coal, Dolomite & Limestone

Mines (+) (+)

Imports dependence(-) (-)

Imports dependence(-) (-)

Operational Diversification

Multiple facilitiesSintering PlantBig Units (+) (+)

Single LocationBig Units

Chorus Factor (+) (+)

Single LocationSmaller Units (+)

Single LocationHigher Cost (-)

Size Largest Indian Producer (+) 5th Largest company of world (+) (+)

Small Player (-) (-) Small Player (-) (-)

Labor Government OrganizationLarger workforce (-) (-)

MultinationalSkilled workforce (+)

(+)

Unskilled manpowerSmaller Workforce (+)

Unskilled ManpowerSmaller Workforce (+)

Technology Specialized Steel and rail products (+) (+)

Foray into new products (+) (+)

Innovations in few product range (+)

(-)

Barrier to Entry Government Protection(+) Huge Size (+) (+) Small Player (-) Small Player (-)

Rural Market Rural marketing initiativesMore than 300 sales office in

India (+) (+)

Global presence (+) Small SizeLimited Customers (-)

Small SizeLimited Customers (-)

TOTAL (+ 12) (+17) (-3) (-10)

Key Strength

Zone of Irrelevance

Superfluous Strength

Key Weakness

C1C1

R1

C2C2

C3C3

C4C4

C5C5

C6C6C7C7

R2R3

R6

R5

R4

Strategic Importance1 5 10

5

1010

SAIL - Resource & Capabilities

R7

Key Strength

Zone of Irrelevance

Superfluous Strength

Key Weakness

C1C1

R1

C2C2

C3C3

C4C4C5C5

C6C6

C7C7

R2

R3 R6R5

R4

Strategic Importance1 5 10

5

1010

Essar - Resource & Capabilities

R7

Key Strength

Zone of Irrelevance

Superfluous Strength

Key Weakness

C1C1

R1

C2C2

C3C3

C4C4C5C5

C6C6C7C7

R2

R3

R6

R5R4

Strategic Importance1 5 10

5

1010

Tata Steel - Resource & Capabilities

R7

Key Strength

Zone of Irrelevance

Superfluous Strength

Key Weakness

C1C1

R1 C2C2

C3C3C4C4C5C5

C6C6

C7C7R2

R3

R6R5

R4

Strategic Importance1 5 10

5

1010

JSW - Resource & Capabilities

R7

Global Steel Market Volume/Value

Mergers & Acquisitions• Horizontal : Between 2 firms in the same business• Vertical: Between two firms that are suppliers and customers of each other• Conglomerate: Between two firms in totally different industries

Characteristics that make steel company a highly desirable acquisition: • Sizable EBITDA• Ownership of steel maker’s raw Material• Low Debt• A relatively low valuation• An “inside” group that owns a sizable block of the stock.• Economies of Scale• Enhancing Debt capacity

Global Steel Industry M&A Deal Volume

Segmentation and Producers

Other Benefits of M&A• Why take five to seven years to build and start-up a major new integrated steel

plant when, instead, one can be purchased that has– (a) good equipment, – (b) few environmental problems, – (c) a solid supporting infrastructure– (d) a strong customer base and – (e) an experienced work force

• If the profit environment remains favourable, many steel companies will have the cash flows to make sub stantial capital outlays and still be acquisitive.

• If shake-out conditions return, with steel prices dropping for a while to the marginal cost of the aver age-cost producer, the cost to acquire steel companies presumably will be much lower.

Tata Steel and Corus Deal

Cyclicality of Steel Industry• Strongly correlated to economic cycles

– Automobiles– Construction– Consumer durables

• Heavy Capital investment• Gestation period of 2-3 years• Reasons for shift in business cycles

– Change in general economy– Seasonal change in demands of goods– Changes in prevailing interest rates

Relationship between Growth of Automotive Industry(in Number of vehicle produced) and Steel Production (by Value)

Observations: Value of Coefficient of correlation comes out to be 0.8733 which is an indicator of high dependability of the above two Factors on each other.

Conclusion: The Growth of Automotive Industry (in Number of vehicle produced) and Overall manufacturing industry(in terms of GDP) is highly interrelated and it can be said that they are dependent on each other with a proximity of 87.33%.

Relationship between Growth of Steel Industry(Carbon and alloy Steel combined production in ‘000tonnes) and Overall manufacturing industry(in terms of GDP)

Observations: Value of Coefficient of correlation comes out to be 0.827551652 which is an indicator of high dependability of the above two Factors on each other.

Conclusion: The Growth of Steel Industry(Carbon and alloy Steel combined production in ‘000tonnes) and Overall manufacturing industry(in terms of GDP) is highly interrelated and it can be said that they are dependent on each other with a proximity of 82.75%.

Thank You