Monday, June 3, 2019
Indian Steel Sector SWOT Analysis
Indian trade name Sector SWOT AnalysisIndia has rich mineral resources. It has abundance of weightlift ore, coal and umteen other raw strongs deald for iron and firebrand making. It has the fourth largest iron ore reserves (10.3 billion tonnes) after Russia, Brazil, and Australia. at that placefore, many raw bodilys argon available at comparatively depresseder costs. It has the third largest pool of technical manpower, next to United States and the erst mend USSR, capable of understanding and assimilating late technologies. Considering quality of workforce, Indian brand name intentness has low unit labour cost, commensu rate with skill. This gets reflected in the lower production cost of blade in India compargond to many advanced countries. With much(prenominal) strength of resources, along with vast home(prenominal) untapped marketplace, Indian firebrand fabrication has the effectiveness to lawsuit challenges success fully. The major strengths evict be summariz ed asAbundant resources of iron oreLow cost and efficient labor forceStrong managerial capabilityStrongly orbiculateised persistence and uphill global emulousnessModern new readys modernized old preparesStrong DRI production baseRegionally dispersed merchant rolling millsWeaknessesThis be inherent in the quality and availability of some of the essential raw materials available in India, e.g., blue ash content of indigenous coking coal adversely affecting the productive efficiency of iron-making and is generally imported. Also, stain is a working capital intensive application steel companies in India be charged an interest rate of around 14% on capital as compared to 2.4% in lacquer and 6.4% in USA. In India the advantages of cheap labour get off commit by low labour productivity e.g., at comparable capacities labour productivity of SAIL and TISCO is 75 t/man year and 100 t/man years, for POSCO, Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/man year. High administered price of essential inputs handle electricity puts Indian steel industry at a disadvantage about 45% of the input costs flock be attri barelyed to the administered costs of coal, fuel and electricity. The major failinges can be summarized asHigh cost of energy Higher duties and taxesHigh cost of capitalQuality of coking coalLabor lawsDependence on imports for steel manufacturing equipments technology fall statutory clearances for development of minesOpportunitiesThe biggest opportunity before Indian steel domain is that there is enormous scope for increasing consumption of steel in roughly all sectors in India. The Indian rural sector remains fairly unexposed to their Multi-faceted use of steel. The usage of steel in cost Effective manner is doable in the area of housing, fencing, structures and other possible applications where steel can substitute other materials which non only could bring about Advantages to users but is besides preferable for conservat ion of forest resources. Excellent potential exist for enhancing steel consumption in other sectors such(prenominal) as automobiles, packaging, engineering industries, irrigation and water supply in India. The key areas of opportunities can be summarized asHuge Infrastructure assumeRapid urbanizationIncreasing demand for consumer durablesUntapped rural demandIncreasing interest of contradictory steel producers in IndiaThreatsThe linkage between the economic addition of a country and the growth of its steel industry is strong. The growth of the domestic steel industry between 1970 and 1990 was similar to the growth of the economy, which as a whole was sluggish. This strong relation in todays environment where the growth of the industry has become stagnant owing to the overall slowdown has resulted in enhanced rivalry among existing mansions. As the industry is not growing the only other way to grow is by increasing ones market share. The Indian steel industry has witnessed spurt s of price wars and heavy trade discounts, which has impacted the Indian Steel Industry. dim growth in infrastructure developmentMarket fluctuations and Chinas export possibilitiesGlobal economic slow downGovt. Regulations in Steel SectorSubsidiesInterest gift Huge amount of interest subsidy id offers by Indian govt. to PSUs in this sector. In the budget of 2008-09, a total of 60.72 crores of intersest subsidies were provided for the implementation of VRS scheme. Since VRS was for govt. companies so private sector didnt got affected by the VRS scheme, so in a way this subsidy was justified. The benefactors were Hindustan Steelworks Construction Ltd. and MECON.Waiver of guarantee fees Waiver of guarantee fee was on the guarantee given by Govt. of India for cash credit and Bank guarantee and for loans raised from Banks for implementation of VRS. The benefactors were Hindustan Steelworks Construction Ltd., Bharat Refractories Ltd. and MECONCapital Investment Subsidies Indian Govt. provides capital investment subsidies to PSUs. Govt. controlled Steel Development Fund helps PSUs and in private sector Tata steel by providing subsidized capital for monetary Restructuring. However, new entrants, homogeneous Essar, Ispat and JVSL, who are negotiating with financial institutions (FIs) for capital restructuring, may feel the pinch.Also ,many state plungements provide subsidized large capital investments such as new mill realiseion. The pursuit states contrive actively engaged in capital incentive grants Maharashtra, Karnataka, Jharkhand, Andhra Pradesh, Chhattisgarh.Other RegulationsPrograms that reduce or eliminate customs duties borne by steel producers, based on their exports. The Advanced License Program allow steel producers to import key inputs without paying basic customs fees.Iron export restraints that result in the change of iron ore by Indias National Mining Development Council (NMDC) for less than cost. The NMDC has sold high-grade iron ore to st eel producers at less than market value.Programs that provide steel producers with subsidized loans, lines of credit, tax exemptions, and loan guarantees. The Reserve Bank of India has developed a program through which steel producers can obtain export financing. The politics-owned SAIL has reliable loan forgiveness under the Steel Development Fund.The awarding of captive mining rights for iron ore at less than cost. SAIL, Tata, JSW, and Jindal Steel and Power Limited have acquired iron ore from state-owned land at highly preferential rates estimated at one-fourth of market value.Exemptions from taxes and duties, as well as additional subsidies, for producers operating in Special Economic Zones. Under the 2005 SEZ Act, the Government of India has provided a variety of duty, tax, and fee exemptions.Export tariffs on iron ore supply In June 2008, India enacted export tariffs of 15 portion on all grades of iron ore, pig iron, and ferrous scrap. India revised its exports tariffs aga in in October and November 2008 the export tariff on pig iron has been revoked, but tariffs on iron ore and ferrous scrap remain in place. In addition, India maintains restrictions on the exports of certain high-grade iron ore. by Indias rapidly growing steel industry. Meanwhile, the GOI as well as announced plans for increased duties on imports of certain steel products in late 2008.Anti-Dumping Rules These are the measures to safeguard domestic industry from cheap steel exports of other countries. Recently, the government of India has levied anti-dumping duties on certain types of stainless steel that are shipped in from countries like China and Japan. The anti-dumping duties were imposed after finding that certain types of imported steel are landing at below the normal value in the countrys port. The subject countries will pay the duties in Indian currency, notified the board. The Central Board of Customs and impress imposed the duties by saying that the domestic industry has suffered badly receivable to the imports from other countries.LicensesIron ore mining licenses Iron being the basic raw material gestated such licenses play a major role in defining steel companies supply.Potential entrantsThe threat of potentially new entrants in the steel industry is low due to the high entry barriers that are present.Capital Requirement Steel industry requires heavy investment in a plant blast furnace, basic oxygen converters, rolling mills, transportation and infrastructure to deliver high volume of raw materials and so on. It is estimated that between Rs 25-Rs.30 bn. is required to set up an structured steel plant of 1 MTPA capacity reckoning on location of plant and technology used. Very few companies will be able to earn this kind of resources and it reduces the likelihood of new entrants.Government Policy Steel industry is a heavily protected industry and the government also has a affirmative policy for steel manufacturers. The government can use a variety of strategies like tariffs, subsidies loan and import restrictions to ensure the competitiveness of the domestic market. As a result of government regulations and protections, it has often allowed the domestic steel market to continue trading operations even when better, cheap quality steel could be imported from other country. Also the steel market face environment regulations and industries are legally bound to develop cleaner and to a greater extent efficient technologies. Regulation clearances and other issues are some other major concerns of new entrants.Economies of Scale Economies of scale are the cost advantages a ancestry has due to expansion. The average cost of production of the firm decreases as the output increases. As far as steel sector is concerned, economies of scale reduce the costs, RD expenses and industries with economies of scale have better bargaining power while sourcing raw materials.Power of BuyersThe buyers in the steel industry are usually qui te large like some of the major steel consumption sectors like automobiles, oil gas, consumer durables, power generation which enjoy high bargaining power and obtain better deals for themselves. This fly the coops to strengthen the buyer power somewhat. However steel is widely used in a wide variety of applications and steel companies can rely on relatively large number of customers overall which reduces the buyer power. There is not too much to distinguish between the products of companies in the market although some companies try to differentiate themselves by focussing on added-value speciality products. need of product differentiation tends to increase buyer power. However certain companies like TATA Steel enjoy a premium on their products because of its quality and its brand value. The buyers tend to enjoy a moderate level of power due to the relatively high no. Of players, low product differentiation and easy access to global markets.Power of SuppliersThe key inputs for th e steel industry are iron ore and metallurgical coal. The prices of these commodities are generally determined by large scale market forces which are beyond the control of individual steel making companies. Therefore in order to reduce suppliers power, some of the steel making companies go for backward integration. This dodging requires prodigious capital but it may be advantageous in the long run as the steel association need not depend on third party suppliers and it might offer the play along an additional source of revenue if it can sell its raw materials to other companies. Some of the market players also tend to enter into long term contracts with their suppliers in order to fix price and protect against fluctuations.The bargaining power of suppliers is low for fully integrated steel plants like TATA STEEL which have their own mines of key raw materials like iron ore. However non-integrated or semi integrated steel plants like SAIL which import coking coal has to depend on suppliers. In India, NMDC is a major supplier to standalone and non integrated steel plants.Threat of SubstitutesThere are potential substitutes for steel available like steel reinforced concrete in building construction and aluminium or less common materials like fiberglass (glass-reinforced plastic).In fact, in the automobile industry where manufacturers are looking to use lighter materials aluminium or fibreglass can be especially advantageous. Automobile industry is one of the biggest markets for steel and steel faces competition from plastic and other composites. An aluminium car may be lighter and so more(prenominal) fuel efficient than a steel car. Furthermore, while metals such as steel can corrode, reinforced plastic is more durable. It is therefore possible for substitutes to fulfil the buyers needs more effectively than the original goodness. Steel has already been replaced in some large volume applications railway sleepers (RCC sleepers), large diameter water pipes ( RCC pipes), small diameter pipes (PVC pipes), and domestic water tanks (PVC tanks).The ability of consumers to adopt these substitutes means that steelmakers cannot raise their prices indefinitely since at some point the substitute will turn out to be more cost effective.In spite of these factors, these alternatives are not very good replacements for steel. Aluminium is not preferable as a substitute for steel since the high cost of electricity used for the purification and extraction of aluminium in India outweighs its advantages as a substitute for steel in automobile industry. Using these substitutes would require substantial re-tooling of the assembly line. Certain large building and civil engineering projects which gain their structural strength from steel would become very difficult to construct if they are constructed using materials such as reinforced concrete. Thus although substitutes might be favourable in certain situations, switching costs are likely to be high. Thus t he threat from substitutes is low.CompetitionThe steel market is represented by several large players offering similar products and services. Steel is a commodity which is difficult to diversify strongly and being a commodity branding is not common and there is little difference between competing products. Although different customers require steel with different specifications(e.g. consistency in physical properties of steel, variations in strength, hardness, and bending properties) and steel producers try to specialize in order to reduce the competition but in doing so they also limit the size of their potential market. Therefore, the relative lack of diversification increases rivalry.Large companies present in the steel industry can take advantage of scale economies. The exit barriers are also high since many of the major tangible assets are highly specific to steel industry which makes it difficult to divest. As a result the steel makers are motivated to exist in the steel indus try even when the market conditions are not good which tends to increase rivalry. The steel industry in India is also affected by macroeconomic conditions which further intensify rivalry.Local Competition for POSCO and ArcellorMittalSAILSteel Authority of India (SAIL) is a steel manufacturing and marketing company. The Indian government owns about 86% of the outstanding shares of the company. SAIL is Indias countenance largest producer of iron ore. It is a fully integrated iron and steel maker, producing both basic and special steel products for domestic construction, engineering, power, railway, automotive, and defense industries, and for sale in export markets. The companys main steel products overwhelm hot and cold rolled sheets and coils, galvanized sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel, and other alloy steels.SAIL operates through eleven segments Bhilai steel plant (BSP), Bokaro steel plant (BSL), Rourkela steel plant (RSP), Durgapur steel plant (DSP), IISCO steel plant (ISP), Salem steel plant (SSP), Visveswaraya iron and steel plant (VISL), Alloy steel plant (ASP), Maharashtra Elektrosmelt, power companies, and others. The five integrated steel plants have a combined capacity of 12.5 million tonnes of crude steel and 10.74 million tonnes of saleable steel.The company recorded net sales (sales net of excise duty) of INR431,767.6 million ( or so $9,421.2 million) in the financial year ended March 2009 (FY2009), an increase of 9.1% over FY2008. The operating mesh of the company was INR75,600.2 million ( roughly $1,649.6 million) in FY2009, a decrease of 22.8% compared with FY2008. The net take in was INR62,529.1 million (approximately $1,364.4 million) in FY2009, a decrease of 17.7% compared with FY2008.The main strengths of SAIL are its government backing and its captive sources of raw materials. SAIL has the second largest mining outfit in India after Coal India (CIL). Spread over the states of Jharkhand, Orissa, and Madhya Pradesh, the mines of SAIL serve as captive sources of raw materials for its integrated steel plants. SAIL has five iron ore mines at Meghahatuburu, Kiriburu, Bolani, Barsua, and Kalta and four limestone/dolomite quarries at Kuteshwar, Purnapani, Bhawanathpur, and Tulsidamar.SAIL plans to meet its additional 40 million tonnes of iron ore requirement through the development of new mines at Rowghat in Chhatisgarh and Chiria, Taldih, South Block (Kiriburu), Central Block (Meghahataburu), and expansion of existing operations at Kiriburu, Meghahataburu, Bolani and Gua, all in Jharkhand. Furthermore, it is ontogenesis new coal mines at Tasra and Sitanala in Jharkhand, which will produce about 2.5 million tonnes of washed coking coal per annum in the next three to four years.Captive sources of raw materials provide a competitive advantage as they shield the company from fluctuations in raw material prices.However if they are successful in entering India, co mpetition from global steel manufacturers with expanded production capacity, such as ArcelorMittal and POSCO, could result in significant price competition, declining margins, and reductions in revenue for the company.Tata SteelTata Steel Group is a private sector steel class in India. It is the worlds sixth largest steel company with capacity of 31 million tonnes per annum (tpa). Set up as Asias first integrated steel plant and Indias largest integrated private sector steel company, it is the worlds second most geographically diversified steel producer, with operations in 26 countries and commercial presence in more than 50 countries. The group operates across Asia, Europe, and Australia.Tata Steel Group operates through two segments Steel and others. The steel segment comprises the subsidiaries, Tata Steel India, Tata Steel Europe, NatSteel Holdings, and Tata Steel (Thailand) Public Company.The group recorded revenues of INR1,473,292.6 million (approximately $32,147.2 million) in the financial year ended March 2009 (FY2009), an increase of 12% over FY2008. The operating profit of the group was INR141,279.5 million (approximately $3,082.7 million) in FY2009, compared with an operating profit of INR 141,213.4 million (approximately $3,081.3 million) in FY2008. The net profit was INR49,509 million (approximately $1,080.3 million) in FY2009, a decrease of 59.9% compared with FY2008.SWOT AnalysisA key strength of Tata Steel is its strong RD capabilities through which it develops new products and improves existing products, as well as enhances manufacturing and production methods. Tata Steel Group operates four research centers Tata Steel Limiteds (TSL) laboratories in Jamshedpur and the Tata Steel Europes (TSE) technology centers in IJmuiden, Netherlands and Rotherham and Teesside, the UK.The group is undertaking research activities in several areas. Tata Steel Group is currently working on various projects that include economic mineral beneficiation aimed at id entifying ways to maximize use of raw materials from captive sources new generation high strength steels, advanced coatings developments, production of ferro-chrome with less energy hydrogen harvesting, developing state-of-the-art thin film photovoltaic systems, and reducing carbon dioxide (CO2) emissions across its operations.As of March 2009, the patent portfolio of Tata Steel Group comprised over 850 patent applications at various stages between filing and grant and over 850 valid patents granting national exclusive rights owned by the respective group companies.However a weakness for this company is its dependence on Europe as a key market. In FY2009, the company generated about 65% of its revenues from Europe. The depressed levels of demand in the neighbourhood had a major impact on stainless steel markets. Minor changes in price levels, periodic demand growth, or currency rates in specific market areas and regions can affect Tata Steel Groups competitive position and financia l per bodyance.As with SAIL, competition from global steel manufacturers with expanded production capacity, such as ArcelorMittal and POSCO, could result in significant price competition, declining margins, and reductions in revenue for the company.Essar SteelEssar Steel (Essar) is a manufacturer of flat carbon steel from iron ore to ready-to-market products. The companys subsidiaries manufacture gas-based hot briquetted iron (HBI), steel pipes and cold rolled steel. The company operates in India, Canada, the US, the Middle East and Asia. It is headquartered in Mumbai, Maharastra.The company recorded revenues of INR116,883 million (approximately $2,550.4 million) in the fiscal year ended March 2009, an increase of 8.8% over 2008. The companys operating profit was INR17,969.4 million (approximately $392.1 million) in fiscal 2009, an increase of 13.3% over 2008. Its net profit was INR1,852 million (approximately $40.4 million) in fiscal 2009, a decrease of 56.8% compared to 2008.Jinda l SteelJindal Steel Power (JSPL), part of the Jindal Group, is engaged in steel manufacturing, power generation, coal and iron-ore mining, and exploration and mining of minerals and metals. JSPL operates in India. It is headquartered in New Delhi, India and employs about 15,000 people.The company recorded revenues of INR109,133.7 million (approximately $2,381.3 million) in the financial year ended March 2009 (FY2009), an increase of 97% over FY2008. The operating profit of the company was INR42,677.5 million (approximately $931.2 million) in FY2009, compared with INR17,737.3 million (approximately $387 million) in FY2008. The net profit was INR30,457.2 million (approximately $664.6 million) in FY2009, compared with INR 12,740.2 million (approximately $278 million) in FY2008. ledger entry Strategy of POSCO and ArcellorMittalThe foreign steel MNCs opted to enter India through the FDI route. POSCO signed a Memorandum of Understanding (MoU) with the Government of Orissa in June 2005, t o set up a 12 MTPA green field of force steel plant near Paradip, Jagatsinghpur District, Orissa, with an estimated investment of USD 12 billion. The company planned to build a 4 million-tons per annum capacity steel plant in Orissa, during the first phase of its project , and expand the final production volume to 12 million tons per annum. POSCO-India Pvt. Ltd. was in corporated on 25th revered 2005.In 2007, POSCO and SAIL signed a MoU to establish a strategic alliance for aligning and cooperating with for each one other in a wide turn over of strategic business and commercial interest areas. As per the MoU they agreed to cooperate in the following areas of business information sharing in the area of corporate strategy planning, exchange of engineers, technicians and other professionals, sharing of know-how and expertise in the areas of development of mines and business practices such as ERP, PI and Six Sigma, adjunction usage of each others existing marketing and warehousing network, coordination in procurement of coking coal, nickel and ferro-alloys and engagement of transportation vessels.The strategic alliance between POSCO and SAIL was forged so as to synergise their strengths, and retain their identities in the consolidating global steel industry. This alliance was supposed to reinforce the relationship and open the doors of large scale collaboration on strategic business and commercial alignment.ArcellorMittal India Ltd., a subsidiary of ArcellorMittal, entered into a Memorandum of Understanding (MoU) with the Government of Orissa on 21st December 2006 to set up their first green field integrated steel plant of initial capacity 6 million tons per year (MTPY) at an investment of around 9,300 million USD. ArcelorMittal had also proposed to set up a 12-Million Tonne Per Annum (MTPA) new steel plant in Jharkhand.In the case of both the companies, however, their plans for mega steel plants in India have not fructified due to delays in land acquisition and grant of mining leases. Hence, both the foreign steel giants have started looking for Joint-Venture opportunities in order to become operational in the lucrative Indian market. POSCO has announced a JV with Steel Authority of India Ltd. (SAIL) to set up a facility in India. ArcellorMittal also entered into a confederacy agreement with steel producer Uttam Galva to buy 35 per cent stake in the latter, partly through share purchase from existing promoters and an open offer. ArcellorMittal is also rumoured to be pursuing a JV with SAILPOSCO-SAIL JVSteel Authority of India Limited (SAIL) and Pohang Iron and Steel Company (POSCO) have agreed to form a vocalise venture to establish a 3 million ton steel manufacturing unit in Bokaro, India with a total investment of approximately INR150,000 million ($3,232.37 million).SAIL is an India-based manufacturer and supplier of steel and its allied products, while POSCO is a South Korea-based steel manufacturer.As part of the partnership, POS CO will hold a 51% stake in the joint venture by investing INR35,000 million ($754.22 million), while SAIL will hold a 49% stake.The proposed joint venture will also include setting up a 0.3 million ton cold rolled non-oriented (CRNO) steel plant in Maharashtra, IndiaThe joint venture with POSCO will allow SAIL to access the latest technology in steel manufacturing and facilitate production of certain special grades of steel.ArcellorMittal-SAIL JV fit to The Economic Times, ArcelorMittal, a Luxembourg-based steel producer, may form a 5050 joint venture (JV) with Steel Authority of India Limited, an Indian steel maker, to establish a steel plant at Bokaro, India.The JV will have a capacity between 3 to 4 million tonnes with an investment of approximately INR120,000 million ($2,697.06 million).ConclusionThe Indian steel industry has to factor in higher transaction costs, logistics costs and railway freight costs as compared to countries such as China and South Korea. Even electricity and interest costs in India are quite high, which makes the industry uncompetitive. As for labour costs, the industry suffers a comparative disadvantage vis--vis Russia, China and South Korea, even though wage rates are low in India. This is because the labour cost per tonne in India is much higher than these three countries, and therefore, labour productivity is very low.Yet, most of the major Indian steel producers have gained some competitive edge over the years. The Indian steel manufacturers also enjoy other advantages like abundant supply of raw materials, skilled technical manpower, low wage rates and locational advantages. These provide about 55-60 per cent advantage in terms of operational costs.In the final analysis, it is imperative that Indian steel companies become significantly more competitive by improving productivity further and going in for rapid technological upgradation. The companies need to shift focus to competing on superior products and processes, rather tha n competing on factor endowments. This becomes all the more important since giants like POSCO have realised the competitive advantage that India offers and decided to establish a manufacturing base in India. With international steel giants such as POSCO breathing down the neck of Indian steel makers, it will be even more difficult for the latter to face competition in both domestic as well as international markets.As for POSCO and ArcellorMittal, who are facing huge roadblocks in setting up their plants in India due to land acquisition and mining licence issues, they can pursue projects with lesser hassle in other developing countries like Mexico and Vietnam. In India, they have the support of the government and hence, gradually they have to appease the tribal people that setting up a steel plant will be to their benefit. The tribal people must be compensated in a commensurate manner and all environmental protocols must be maintained. Then the foreign MNCs can expect to have a smoo th road ahead in their Indian ventures.