ECONOMICS PROJECT

ON

INDIAN STEEL INDUSTRY

ECONOMICS

Submitted by:
Yatin singh
Roll No. 3207072
B.Sc. Life Sciences IIyr.

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CONTENTS

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

FACTORS HOLDING BACK THE INDIAN STEEL INDUSTRY

OUTLOOK

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THE GLOBAL STEEL INDUSTRY

The current global steel industry is in its best position in

comparing to last decades. The price has been rising
continuously. The demand expectations for steel products
are rapidly growing for coming years. The shares of steel
industries are also in a high pace. The steel industry is
enjoying its 6 consecutive years of growth in supply and
th

demand. And there is many more merger and acquisitions

which overall buoyed the industry and showed some good
results.The subprime crisis 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 steel
production and consumption will be supported by continuous
economic growth.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL

INDUSTRY

40%

35%
EUROPE
30% USA
25% BRAJIL
JAPAN
20%
CIS
15% INDIA
10% CHINA
OTHERS
5%
0%

The countries like China, Japan, India and South Korea are in
the top of the above 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 for

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53m ton and South Korea is accounted for 49m ton, which all
totally becomes more 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 country. The integrated foundries are
located in the east, while electric steel is 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 other eastern states due to its raw
materials. Although India is now one of the worlds top ten
steel producers, its domestic output is insufficient to meet
the demand 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 Deutsche
Bank Research,1 the three biggest
steelmakers in India have a combined output of almost 20
million tons and have a domestic market share of 51%. Their
domestic competitors are numerous medium- sized and
smallish companies and more mergers can be expected
between these companies as these firms need to improve
their position with regard to the powerful suppliers of raw
materials.

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 in 2006-07 compared to 50.27 mt in 2005-06, recording a
growth rate of 16.3 per cent, which is higher than the world
average. During the first half of the current year, steel
consumption has grown by 16 per cent. A study done by the
Credit Suisse Group says that India's steel consumption will

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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 is 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,
which account for 70 per cent of the total production
capacity, have recorded a year-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, driven by a
boom in construction (43%-plus of steel demand in India).
Soaring demand by sectors like infrastructure, real estate
and automobiles, at home and abroad, has put India's steel
industry on the world steel map.

YEAR WISE DEMAND OF INDIAN STEEL INDUSTRY

YEAR DEMAND (IN MT) GROWTH IN %

2000 2001 34.444

2001-2002 36.037 4.625

2002-2003 40.471 12.32

2003-2004 43.062 6.4

2004-2005 45.387 5.4

2005-2006 50.257 10.73

2006-2007 58.45 16.3

MAJOR CONSUMERS OF INDIAN STEEL INDUSTRY

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Support from dynamic economy

India is the economic region that has enjoyed the world’s

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 global
GDP. The growth drivers are population growth, human
capital, opening of the economy and rising investment.
Despite the sharp increase in India’s population, per-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
country’s major 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 replace Japan as
the world’s third biggest economy after the US and China

Positive stimuli from construction industry

The steel companies are pinning their hopes largely on the

expanding
construction industry. The industry is one of the key drivers
of India’s
economic growth. Up to 10 million new homes need to be
built each year until 2030. Strong population growth, rising
incomes and decreasing 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 Poverty Alleviation
claims that no less than 31 million dwellings are needed. The
hosting of the Commonwealth Games in New Delhi in 2010
should generate additional stimulus for the construction
industry and thus boost demand for steel. In addition to the
sports facilities, accommodation for competitors and visitors
is planned. The government has announced that some 40

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hotels with a total of 15,000 beds are to be built. The Indian
office market is benefiting from the ongoing off shoring
activities of industrial nations. Indian insurers are
concentrated in the software development and software
product segments. Their second main business area is
assuming the responsibility for entire support processes, or
business process outsourcing (BPO). These segments still
look set for growth.6 Furthermore, the construction sector is
benefiting from major infrastructure projects. Capital
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 mechanical engineering

Mechanical engineering output has increased some 10% p.a.

over the past five years. Thanks to the march of
technological progress the prospects for domestic suppliers
should improve going forward, while import growth is slightly
crimped. Demand is greatest for building machinery and
plastic-moulding machines as well as machine tools and
textile machinery. Since the domestic textile and apparel
industry, for example, is focusing further up the value chain,
firms have to make numerous investments in modernising
and expanding their machinery portfolios Makers of building
machinery are benefiting from the large-scale infrastructure
projects planned by the Indian government, while machine-
tool makers are being buoyed by the upturn in the
automobile and auto parts industries for example. Exports
by the Indian mechanical engineering industry rose recently
by nearly 30% to USD 10 bn. By comparison, German
mechanical engineering firms exported 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 imports of Woodworking machinery and machine
tools as well as pumps and compressors. The demand for
foreign machinery comes from customers requiring

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especially high standards of performance and precision. The
Engineering Exports Promotion Council (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.

Booming automobile industry

The automotive industry may consume a relatively small

proportion of steel output, but its growth rate is the highest
of the most important clients for the steel industry. In India a
small but flourishing automobile industry has now developed
that sees its future primarily in the budget price 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 inhabitants are even less widespread
than in China with its very low figure of 21. The growth of
the Indian automobile industry is being driven by healthy
domestic demand. The consumption minded, fast-growing
middle
class is a major factor. The continuing 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: 12 years), with vehicles that have been taken off
urban roads often being driven for longer in rural areas. The
population’s steadily growing demand for mobility and
sharply rising traffic volumes will continue to generate
strong demand for cars in the future. At the same time
India’s automobile sector is establishing itself as an exporter
to international markets. Hyundai, for example, uses the
country as an export base for small cars, and Ford
manufactures vehicles there for South Africa and other
markets. However, competition between automakers has
intensified markedly. Whereas in 1995 there were just five
carmakers in India the figure 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 the European market with new models. India
currently produces a total of 711,000 cars each year

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(Germany: 5.4 million).

0.45
0.4
CONSTRUCTION
0.35
0.3 MECHANICAL
0.25 ENGINEEREING
0.2 AUTOMOTIVE
0.15 ENGINEERING
0.1 OTHERS
0.05
0

SUPPLY OF STEEL IN THE INDIAN MARKET

Over the past ten years India’s 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 world’s
eighth largest steel producer, its3%-plus share of global
steel output is still very low; it is roughly the same as
Ukraine’s share of world steel production. China, the world’s
biggest steelmaker, produces nearly ten times as much as
India.In 2005
India’s crude steel output of 46.5 million tons was 8%higher
than in 2004; only in China was the growth rate considerably
higher at 15%. By contrast, production volumes fell in the US
and the EU-25 by nearly 5% and roughly 4% respectively. In
the first five months of 2006 Indian steel production
continued to expand unabated, rising 10% yoy. We forecast
a significant increase in output by the Indian steel industry

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over the medium term. The entire industry’s contribution to
gross domestic product should rise in the coming years to
more than 30% – compared to just under 27% at present.
The growth drivers are the expanding client industries
Automotive engineering (production up 16% p.a. between
2000 and 2005),
mechanical engineering (up 10% p.a.) and construction (up
6% p.a.).

YEAR SUPPLY(IN M T) GROWTH IN %

2000-2001 32.81
2001-2002 34.70 5.76
2002-2003 38.96 12.23
2003-2004 41.41 6.29
2004-2005 43.278 4.51
2005-2006 46.492 7.42
2006-2007 54.35 16.91

SUPPLY DEMAND MISMATCH

Even though India is now one of the world’s top ten

steelmakers its domestic output 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 (an 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 steel prices smooth the way for imports from Russia,
Ukraine and Kazakhstan. The geographical proximity of
Japan, South Korea and China makes them important
suppliers as well. We do not expect India to be self-sufficient
in many segments over the medium term. There are several
reasons for this: firstly,steel consumption is rising very fast
as a consequence of the prospective dynamic economic
growth. Secondly, there is demand for high-quality products

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which India will not be able to supply in sufficient quantities
for the foreseeable future. These include products with
surface finishing that helps them to be more durable and
retain their value for longer. In general, the trend towards
weight-optimized components persists; this improves the
prospects for Western European exporters in the Indian
market. As a member of the WTO (since 1995) India is
obliged to gradually abolish import restrictions, so importing
steel should be far less problematic in future.

MARKET SHARE OF LEADING PLAYERS IN IRON

AND
STEEL INDUSTRY

COMPANY PRODUCTION OF MARKET SHARE (IN

STEEL (IN TERM OF %)
MILLIONTONNES)
SAIL 13.5 32%

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TISCO 5.2 11%

RNIL 3.5 8%

ESSAR,ISPAT,JSWL 8.4 19%

OTHERS 14.5 30%

TOTAL 45.1 100

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
consists of the market share, as a percentage, of the four
largest firms in the industry. In general, the N-firm
concentration ratio is the percentage of market output
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 oligopoly 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 an indicator of the amount of

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competition among them. It is an economic concept but
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
monopolistic producer. Decreases in the Herfindahl index
generally indicate a loss of pricing power and an increase in
competition, whereas increases imply the opposite.

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.

MERGERS AND ACQUISITIONS

Active mergers and acquisitions (M&A s) among players
were indicative of the consolidation 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 objectives: by
purchasing additional production capacity they aim to both
improve their cost structure and increase their market clout.
The merger of the world’s two biggest 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
SAIL’s. If it continues like this 35% of steel production
confined in the top 10 companies within the next five years.
Consolidation among industry players would be driven by
strategic fits between companies, rather than financially
centered deals.
A company can be a good strategic fit for merger if it has,
among other things, attractive access to raw materials,
production capabilities, proven success in complementary
markets, new technologies or patented products and a
successful
global supply network. In India the three biggest
steelmakers, whose combined output is almost 20 million
tons, have a market share of 51%. Their domestic

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competitors are numerous medium sized and smallish
companies. One of these, for example, is

Ispat with an output of 2 million tons. More mergers can be

expected between companies 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
acquisition or mergers of Indian steel companies within India
because most of the major producers are public. As different
major global steel producers like Arcelor-mittal, Posco and
others are setting up plants in India, competition in the
future will increase. In that case several mid-size domestic
companies may go for mergers. But if we see from the
current position of the industry we can say that in 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 will 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, Automobile sectors. The expected growth of
the major steel in Indian market is given
by the following table.

COMPANY NAME INCREASE IN “000” YEAR

TON

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ARCELOR 5000 2010

BAI BALAJI 2000 2010

BHUSAN STEEL AND 2000 2007

STRIPE
BHUSAN LTD 3000 2008

ESSAR GUJRAT 1250 2006

INDIAN IRON 1500 2009

&STEEL
JINDAL STEEL AND 2800 2010
POWER
ISPAT INDUSTRIES 3000 2008

MITTAL STEEL 6000 2010

POSCO 4000 2009

RASHTRIYA ISPAT 1450 2010

NIGAM
TATA STEEL 15000 2007

VEDANT 5000 2008

RESOURCES
VISA INDUSTRIES 1500 2008

VIZAG 1600 2008

SAIL 2000 2007

TOTAL 57600 2006-2010

FACTORS HOLDING BACK THE INDIAN STEEL

INDUSTRY

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The growth of the Indian steel industry and its share of
global crude steel production could be even higher if they
were not being held back by major deficiencies in
fundamental areas. Investment in infrastructure is rising
appreciably but remains well below the target Levels set by
the government due to financing problems.
.
Energy supply

Power shortages hamper production at many locations.

Since 2001 the Indian government has been endeavoring to
ensure that power is available nationwide by 2012. The
deficiencies have prompted many firms with heavier energy
demands to opt for producing electricity with their own
industrial generators. India will rely squarely on nuclear
energy for its future power generation requirements. 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 world’s fourth largest energy consumer by 2010
after the US, China and Japan.

Problems procuring raw material inputs

Since domestic raw material sources are insufficient to

supply the Indian steel industry, a considerable amount of
raw materials has to be imported. For example, iron ore
deposits are finite and there are problems in mining
sufficient amounts of it. India’s 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 world’s sixth biggest coal importer.
The rising output of electric steel is also leading to a sharp
increase in demand for steel scrap. Some 3.5 million tons of
scrap have 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 increases.

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Inefficient transport system

In India, insufficient freight capacity and a transport

infrastructure that has long been inadequate are becoming
increasingly serious impediments to economic development.
Although the country has one of the world’s biggest
transport networks – the rail network is twice as extensive as
China’s – its poor quality hinders the efficient supply of
goods. The story is roughly the same 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 the steel industry. In the medium to long term
this capital expenditure will lay the foundations for seamless
freight transport.

OUTLOOK

THE outlook for the global steel industry in 2008 is stable,

supported by strong demand from emerging economies
amid further consolidation among players worldwide. 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 steel giants. Going forward, India’s lower wages and
favorable energy prices will continue to promise substantial
cost advantages compared to production facilities in
(Western) Europe or the US. The growth prospects of the
client industries are also very good. The deployment of
modern production systems is increasingly
enabling India to improve the quality of its steel products
and thus to enhance its export prospects.

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 BIBLOGRAPHY

1.GOOGLE.COM
2.ECOHUNT.COM
3.SCRIBD.COM

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