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1|Page PRAXIS BUSINESS SCHOOL MANAGERIAL ECONOMICS PRESENTED TO:SUMA DAMODARAN BY:NABENDU KAR (B08017) SUMANTA KUMAR SAMANTARAY

(B08035) INDUSTRY: INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA

2|Page CONTENTS Page THE GLOBAL STEEL INDUSTRY THE STRUCTURE OF INDIAN STEEL INDUSTRY CONSUMPTION OF STEEL INDIA SUPPLY OF STEEL IN INDIAN MARKET SUPPLY DEMAND MISMATCH MARKET SHARE OF DIFFERENT COMPETETION ANALYSIS MERGERS AND ACQUISITIONS EXPECTED GROWTH FACT ORS HOLDING BACK THE INDIAN STEEL INDUSTRY OUTLOOK 3 4 5 11 12 13 15 16 17 19 21 PRAXIS BUSINESS SCHOOL | KOLKATA

3|Page THE GLOBAL STEEL INDUSTRY The current global steel industry is in its best position in comparing to last d ecades. The price has been rising continuously. The demand expectations for stee l products are rapidly growing for coming years. The shares of steel industries are also in a high pace. The steel industry is enjoying its 6th consecutive year s of growth in supply and demand. And there is many more merger and acquisitions which overall buoyed the industry and showed some good results. The subprime cr isis has lead to the recession in economy of different countries, which may lead to have a negative effect on whole steel industry in coming years. However stee l production and consumption will be supported by continuous economic growth. CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA

4|Page The countries like China, Japan, India and South Korea are in the top of the abo ve in steel production in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan accounts for 9% i.e. 118m ton, India accounts f or 53m ton and South Korea is accounted for 49m ton, which all totally becomes m ore than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth. STRUCTURE OF INDIAN STEEL INDUSTRY The steel industry in India is concentrated in the east, south and west of the c ountry. The integrated foundries are located in the east, while electric steel i s produced predominantly in the south and west. In the future the east will see rapid expansion as more integrated capacities are being built in Orissa and othe r eastern states due to its raw materials. Although India is now one of the worl ds top ten steel producers, its domestic output is insufficient to meet the dema nd in all segments. Imports increased in 2005 by 8% and it is likely that India will continue to import in many segments over the medium term. According to Deut sche Bank Research,1 the three biggest steelmakers in India have a combined outp ut of almost 20 million tons and have a domestic market share of 51%. Their dome stic competitors are numerous medium-sized and smallish companies and more merge rs can be expected between these companies as these firms need to improve their position with regard to the powerful suppliers of raw materials. PRAXIS BUSINESS SCHOOL | KOLKATA

5|Page CONSUMPSION OF STEEL IN INDIA Driven a booming economy and concomitant demand levels, consumption of steel has grown by 12.5 per cent during the last three years, well above the 6.9 percent envisaged in the National Steel Policy. Steel consumption amounted to 58.45 mt i n 2006-07 compared to 50.27 mt in 2005-06, recording a growth rate of 16.3 per c ent, which is higher than the world average. During the first half of the curren t year, steel consumption has grown by 16 per cent. A study done by the Credit S uisse Group says that India's steel consumption will continue to grow by 17 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. The scope for raising the total consumption of steel in the country i s huge, as the per capita steel consumption is only 35 kgs compared to 150 kg in the world and 250 kg in China. With this surge in demand level, steel producers have been reporting encouraging results. For example, the top six companies, wh ich account for 70 per cent of the total production capacity, have recorded a ye ar-on-year growth rate of 13.4 per cent, 15.7 per cent and 11.7 per cent in net sales, operating profit and net profit, respectively, during the second quarter of 2007-08 We expect strong demand growth in India over the next five years, dri ven by a boom in construction (43%-plus of steel demand in India). Soaring deman d by sectors like infrastructure, real estate and automobiles, at home and abroa d, has put India's steel industry on the world steel map. PRAXIS BUSINESS SCHOOL | KOLKATA

6|Page YEAR WISE DEMAND OF INDIAN STEEL INDUSTRY YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 DEMAND (in m t) 34.444 36.037 40.471 43.O62 45.387 50.257 58.45 GROWTH IN % 4.625 12.32 6.4 5.4 10.73 16.3 GRAPHICAL REPRESENTATION OF GROWTH AND DEMAND OF INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA

7|Page MAJOR CONSUMERS OF INDIAN STEEL INDUSTRY Support from dynamic economy India is t he economic region that has enjoyed the worlds most sustained boom. The Deutsche Bank Research Formel-G econometric model forecasts average real GDP growth of 5. 5% p.a. for India between 2006 and 2020 O followed by Malaysia (5.4%) and China (5.2%). In all, the analysis covered 34 economies that generate some 85% of glob al GDP. The growth drivers are population growth, human capital, opening of the economy and rising investment. Despite the sharp increase in Indias population, p er-capita GDP in purchasing power parity terms should rise by nearly 4% per year until 2020. Since the model does not take sufficient account of the countrys maj or initiatives in the infrastructure area, average growth until 2020 might turn out to be even closer to 6%. In fact, by the end of the decade India could repla ce Japan as the worlds third biggest economy after the US and China Positive stimuli from construction industry The steel companies are pinning thei r hopes largely on the expanding construction industry. The industry is one of t he key drivers of Indias economic growth. Up to 10 million new homes need to be b uilt each year until 2030. Strong population growth, rising incomes and decreasi ng household sizes are forcing comprehensive measures to be taken in the housing sector. The pent-up demand for housing is estimated at around 20 million units by the Indian Construction Association; the Ministry for Urban Development and P overty Alleviation claims that no less than 31 million dwellings are needed. The hosting of the Commonwealth Games in New Delhi in 2010 should generate addition al stimulus for the construction industry and thus boost demand for steel. In ad dition to the sports facilities, accommodation for competitors and visitors is p lanned. The government has announced that some 40 hotels with a total of 15,000 beds are to be built. The Indian office market is benefiting from the ongoing of f PRAXIS BUSINESS SCHOOL | KOLKATA

8|Page shoring activities of industrial nations. Indian insurers are concentrated in th e software development and software product segments. Their second main business area is assuming the responsibility for entire support processes, or business p rocess outsourcing (BPO). These segments still look set for growth.6 Furthermore , the construction sector is benefiting from major infrastructure projects. Capi tal expenditure is to be focused on road building and the rail network, as well as on the construction and expansion of ports and airports Strong growth in mech anical engineering Mechanical engineering output has increased some 10% p.a. ove r the past five years. Thanks to the march of technological progress the prospec ts for domestic suppliers should improve going forward, while import growth is s lightly crimped. Demand is greatest for building machinery and plastic-moulding machines as well as machine tools and textile machinery. Since the domestic text ile and apparel industry, for example, is focusing further up the value chain, f irms have to make numerous investments in modernising and expanding their machin ery portfolios Makers of building machinery are benefiting from the large-scale infrastructure projects planned by the Indian government, while machine-tool mak ers are being buoyed by the upturn in the automobile and auto parts industries f or example. Exports by the Indian mechanical engineering industry rose recently by nearly 30% to USD 10 bn. By comparison, German mechanical engineering firms e xported products worth close to USD 117 bn, including machinery to the value of about USD 1 bn to India. Germany claims a particularly large share of Indian imp orts of Woodworking machinery and machine tools as well as pumps and compressors . The demand for foreign machinery comes from customers requiring especially hig h standards of performance and precision. The Engineering Exports Promotion Coun cil (EEPC) forecasts that Indian exports will be worth USD 30 bn (+32% p.a.) by 2008; nevertheless the volume is still very low by international standards. PRAXIS BUSINESS SCHOOL | KOLKATA

9|Page Booming automobile industry The automotive industry may consume a relatively sma ll proportion of steel output, but its growth rate is the highest of the most im portant clients for the steel industry. In India a small but flourishing automob ile industry has now developed that sees its future primarily in the budget pric e segment and views the domestic market and other emerging nations as potential markets.7 Vehicle ownership (cars and trucks) in India at 11 per 1,000 inhabitan ts are even less widespread than in China with its very low figure of 21. The gr owth of the Indian automobile industry is being driven by healthy domestic deman d. The consumption minded, fast-growing middle class is a major factor. The cont inuing increase in incomes and low-cost financing facilities are boosting sales. However, it is not uncommon for cars to be used for 20 years (Western Europe: 1 2 years), with vehicles that have been taken off urban roads often being driven for longer in rural areas. The populations steadily growing demand for mobility a nd sharply rising traffic volumes will continue to generate strong demand for ca rs in the future. At the same time Indias automobile sector is establishing itsel f as an exporter to international markets. Hyundai, for example, uses the countr y as an export base for small cars, and Ford manufactures vehicles there for Sou th Africa and other markets. However, competition between automakers has intensi fied markedly. Whereas in 1995 there were just five carmakers in India the figur e has now reached 10. The biggest are Maruti Udyog Ltd., Hyundai Motor India and Tata Engineering (Telco). The Tata group is even trying to gain a foothold in t he European market with new models. India currently produces a total of 711,000 cars each year (Germany: 5.4 million). PRAXIS BUSINESS SCHOOL | KOLKATA

10 | P a g e SUPPLY OF STEEL IN THE INDIAN MARKET Over the past ten years Indias crude steel output rose nearly 7%per year to 55.3 million tons , while global crude steel output increased by 4% (Germany managed an increase of just under 1%p.a.) Although India is the worlds eighth largest ste el producer, its3%-plus share of global steel output is still very low; it is ro ughly the same as Ukraines share of world steel production. China, the worlds bigg est steelmaker, produces nearly ten times as much as India.In 2005 Indias crude s teel output of 46.5 million tons was 8%higher than in 2004; only in China was th e growth rate considerably higher at 15%. By contrast, production volumes fell i n the US and the EU-25 by nearly 5% and roughly 4% respectively. In the first fi ve months of 2006 Indian steel production continued to expand unabated, rising 1 0% yoy. We forecast a significant increase in output by the Indian steel industr y over the medium term. The entire industrys contribution to gross domestic produ ct PRAXIS BUSINESS SCHOOL | KOLKATA

11 | P a g e should rise in the coming years to more than 30% compared to just under 27% at p resent. The growth drivers are the expanding client industries Automotive engine ering (production up 16% p.a. between 2000 and 2005), mechanical engineering (up 10% p.a.) and construction (up 6% p.a.). YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 SUPPLY ( in m t) 32.81 34.70 38.96 41.41 43.278 46.492 54.35 GROWTH IN % 5.76 12.23 6.29 4.51 7.42 16.91 GRAPHICAL REPRESENTATION OF SUPPLY OF INDIAN STEEL INDUSTRY PRAXIS BUSINESS SCHOOL | KOLKATA

12 | P a g e SUPPLY DEMAND MISMATCH Even though India is now one of the worlds top ten steelmakers its domestic outpu t is insufficient to meet the demand in all segments. In 2005, some 4.7 million tons of steel were imported, compared with only 2.2 million ten years earlier (a n annual increase of 8%). The growth in Indian import demand in 2005 of around 2 million tons is roughly equivalent to the total annual output of Hungary. Low s teel prices smooth the way for imports from Russia, Ukraine and Kazakhstan. The geographical proximity of Japan, South Korea and China makes them important supp liers as well. We do not expect India to be self-sufficient in many segments ove r the medium term. There are several reasons for this: firstly, steel consumptio n is rising very fast as a consequence of the prospective dynamic economic growt h. Secondly, there is demand for high-quality products which India will not be a ble to supply in sufficient quantities for the foreseeable future. These include products with surface finishing that helps them to be more durable and retain t heir value for longer. In general, the trend towards weight-optimized components persists; this improves the prospects for Western European exporters in the Ind ian market. As a member of the WTO (since 1995) India is obliged to gradually ab olish import restrictions, so importing steel should be far less problematic in future. PRAXIS BUSINESS SCHOOL | KOLKATA

13 | P a g e MARKET SHARE OF LEADING PLAYERS IN IRON AND STEEL INDUSTRY COMPA Y PRODUCTIO OF MARKET SHARE(I PERSTEEL (I MIL- CE TAGE TERMS) LIO TO ES) SAIL 13.5 32% TISCO 5.2 11% RNIL 3.5 8% ESSAR,ISPAT,JSWL 8.4 19% OTHERS 14.5 30% TOTAL 45.1 100% PRAXIS BUSINESS SCHOOL | KOLKATA

14 | P a g e Steel Production 2006-07 Others 31% RINL 8% Sail 30% Essar, JSW & Ispat 19% Tata steel 12% SOURCE: SAILS Annual report PRAXIS BUSINESS SCHOOL | KOLKATA

15 | P a g e COMPETITION ANALYSIS Concentration Ratio: In Economics the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which co nsists of the market share, as a percentage, of the four largest firms in the in dustry. In general, the N-firm concentration ratio is the percentage of market o utput generated by the N largest firms in the industry. The 4 firm concentration ratio of the Iron and Steel Industry is 71%. This implies that there is oligopo ly in the industry as it is dominated my few major players. Major percentage of market output is generated by the 4 largest firms in the industry. Herfindahl Index: The Herfindahl index, also known as Herfindahl-Hirschman Index or HHI, is a measure of the size of firms in relationship to the industry and a n indicator of the amount of competition among them. It is an economic concept b ut widely applied in competition law and antitrust. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 1 moving from a very large amount of very small firms to a single mono polistic producer. Decreases in the Herfindahl index generally indicate a loss o f pricing power and an increase in competition, whereas increases imply the oppo site. PRAXIS BUSINESS SCHOOL | KOLKATA

16 | P a g e Value of Herfindahl index for Indian Steel Industry is .2470. It implies that th e competition in the steel industry is medium to high and high concentration. MERGERS AND ACQUISITIONS Active mergers and acquisitions (M&A s) among players were indicative of the con solidation dynamics within the steel industry globally. Consolidation among top steel companies would continue in 2008 since industry players are engaged in an unfettered rush for scale. In so doing steelmakers are pursuing two main objecti ves: by purchasing additional production capacity they aim to both improve their cost structure and increase their market clout. The merger of the worlds two big gest steelmakers Mittal Steel (Netherlands) and Arcelor (Luxembourg) will create an industry giant whose output is nearly four times as much as that of the next biggest player (Nippon Steel) and eight times as much as SAILs. If it continues like this 35% of steel production confined in the top 10 companies within the ne xt five years. Consolidation among industry players would be driven by strategic fits between companies, rather than financially centered deals. A company can b e a good strategic fit for merger if it has, among other things, attractive acce ss to raw materials, production capabilities, proven success in complementary ma rkets, new technologies or patented products and a successful global supply netw ork. In India the three biggest steelmakers, whose combined output is almost 20 million tons, have a market share of 51%. Their domestic competitors are numerou s medium sized and smallish companies. One of these, for example, is PRAXIS BUSINESS SCHOOL | KOLKATA

17 | P a g e Ispat with an output of 2 million tons. More mergers can be expected between com panies of this size as these firms need to improve their position with regard to the powerful suppliers of raw materials. But till now there is no sign of acqui sition or mergers of Indian steel companies within India because most of the maj or producers are public. As different major global steel producers like Arcelormittal, Posco and others are setting up plants in India, competition in the futu re will increase. In that case several mid-size domestic companies may go for me rgers. But if we see from the current position of the industry we can say that i n future Indian steel industry will remain oligopoly or can become a competitive one. EXPECTED GROWTH The International Iron and Steel Institute(IISI) has fore casted that the steel demand will go of from 1.12 billion ton to 1.19 billion ton in 2008.And this wil l further increase in a higher rate up to 2010.In India the growth will be more prominent because of the growth in Real estate, Aviation, Manufacturing, Automob ile sectors. The expected growth of the major steel in Indian market is given by the following table. INCREASE COMPANY NAME In 000ton ARCELOR BAI BALAJI BHUSAN STEEL & STRIPS BHUSAN LT D. Year 5000 2000 2000 300O 2010 2010 2007 2008 PRAXIS BUSINESS SCHOOL | KOLKATA

18 | P a g e ESSAR GUJURAT 1250 1500 2800 3000 2800 6000 4000 1450 15000 5000 1500 1600 2000 5100 62700 2006 2009 2010 2008 2010 2009 2010 2007 2010 2008 2010 2008 2007 2010 2006-2010 SOURCE WV STAHI INDIAN IRON & STEEL ISPAT INDUSTRIES JINDAL STEEL & POWER ISPAT INDUSTRIES MITTA L STEEL POSCO RASHTRIYA ISPAT NIGAM TATA STEEL VEDANT RESOURCES VISA INDUSTRIES VIZAG SAIL VISHAKHPATTANAM TOTAL PRAXIS BUSINESS SCHOOL | KOLKATA

19 | P a g e FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY The growth of the Indian steel industry and its share of global crude steel prod uction could be even higher if they were not being held back by major deficienci es in fundamental areas. Investment in infrastructure is rising appreciably but remains well below the target levels set by the government due to financing prob lems. . Energy supply Power shortages hamper production at many locations. Since 2001 th e Indian government has been endeavoring to ensure that power is available natio nwide by 2012. The deficiencies have prompted many firms with heavier energy dem ands to opt for producing electricity with their own industrial generators. Indi a will rely squarely on nuclear energy for its future power generation requireme nts. In September 2005 the 15th and largest nuclear reactor to date went on-line . The nuclear share of the energy mix is likely to rise to roughly 25% by 2050. Overall, India is likely to be the worlds fourth largest energy consumer by 2010 after the US, China and Japan. Problems procuring raw material inputs Since domestic raw material sources are i nsufficient to supply the Indian steel industry, a considerable amount of raw ma terials has to be imported. For example, iron ore deposits are finite and there are problems in mining sufficient amounts of it. Indias hard coal deposits are of low quality. For this reason hard coal imports have increased in the last five years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal (the remainder is power station coal). India is the worlds sixth biggest co al importer. The rising output of electric steel is also leading to a sharp incr ease in demand for steel scrap. Some 3.5 million tons of scrap have PRAXIS BUSINESS SCHOOL | KOLKATA

20 | P a g e already been imported in 2006, compared with just 1 million tons in 2000. In the coming years imports are likely to continue to increase thanks to capacity incr eases. Inefficient transport system In India, insufficient freight capacity and a trans port infrastructure that has long been inadequate are becoming increasingly seri ous impediments to economic development. Although the country has one of the wor lds biggest transport networks the rail network is twice as extensive as Chinas it s poor quality hinders the efficient supply of goods. The story is roughly the s ame for port facilities and airports. In the coming years a total of USD 150 bn is to be invested in transport infrastructure, which offers huge potential for t he steel industry. In the medium to long term this capital expenditure will lay the foundations for seamless freight transport. PRAXIS BUSINESS SCHOOL | KOLKATA

21 | P a g e OUTLOOK THE outlook for the global steel industry in 2008 is stable, supported by strong demand from emerging economies amid further consolidation among players worldwi de. The scenario is quite same for the Indian steelmakers. And to keep pace with the growing economy Indian companies will produced more and more steel. We can even see several large acquisitions of global steel companies like Corus by Indian s teel giants. Going forward, Indias lower wages and favorable energy prices will c ontinue to promise substantial cost advantages compared to production facilities in (Western) Europe or the US. The growth prospects of the client industries ar e also very good. The deployment of modern production systems is increasingly en abling India to improve the quality of its steel products and thus to enhance it s export prospects. PRAXIS BUSINESS SCHOOL | KOLKATA

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