Biz Steel Sector

1,108 views
1,045 views

Published on

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,108
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
79
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Biz Steel Sector

  1. 1. %Bizness Read on ................................... Steel Sector Analysis Happy Days are Here Again! - Prakash Patil After the prolonged slump between 1998 and 2002, the Indian steel industry is witnessing a boom once again. The slump had touched its nadir in 2001, but since then, the Indian steel industry’s fortunes have been on an upswing. The current boom is fuelled by the boom in the construction sector, pick up in demand from the domestic manufacturing sector, and the strong demand for steel from China - which accounts for 25% of total global steel consumption. 6 he economic boom has demand for steel from the tiger Institute, the global consumption had a dramatic impact of steel is projected to have economies of South-east Asia, but on the profitability of increased to over one billion tonnes the meltdown of these economies the steel companies. in 2004. The consumption in China coupled with financial crises in Some of the companies, alone is estimated to have Russia and Brazil triggered a so far straddled with huge losses, increased to 290 million tonnes in downward spiral in the demand have turned around to make 2004. However, the per capita for steel, squeezing the margins handsome profits. TISCO, the only consumption of steel in India is 30 and pushing many steel Indian company which managed kg, which is way below the global conglomerates across the globe to remain profitable even during average of 150 kg, with the into the red. The Indian steel the worst years of the downturn, developed countries averaging 450 industry passed through its most has been scaling new peaks in kg. The major importers of steel are difficult times between 1998-2002, profitability. The public sector countries like China, USA, Canada largely due to overcapacity, poor behemoth SAIL, after being in the and the European Union. demand and declining tariffs. To dumps for about 5 years, has also The global prices of hot-rolled survive through the lean period, been consistently putting up (HR) coils moved up from $175 per the companies had to resort to cost excellent quarterly performances. tonne in December 2001 to reach cutting, restructuring their It has cut down its huge debt an all-time high of $750 per tonne business operations, and moving burden, and also witnessed huge in September 2004. Since then, the up the value chain. increase in its market prices have corrected and Of course, it has been widely capitalisation. stabilised around $500 per tonne. acknowledged that the steel industry is cyclical in nature. The Flashback Impact of Trade Restrictions current boom is seen as a part of an upward cycle. Such a cycle is The industry had witnessed a The removal of price and generally of 3-5 years’ duration. similar boom between 1994 and distribution controls by the According to estimates made by 1997. This boom in the mid- government since the launch of the International Iron and Steel nineties resulted from the rising liberalisation and economic
  2. 2. %Bizness Read on ................................... Even electricity and interest costs Recent Developments in India are quite high, which The Union Budget 2005-06 has makes the industry uncompetitive. not helped the steel industry much: As for labour costs, the industry the benefit of lowering of customs suffers a comparative duty on import of coke/coal, disadvantage vis-à-vis Russia, refractories, catalysts, electrodes, China and South Korea, even and spare parts from 15% to 10% though wage rates are low in India. has been offset by the hike in excise This is because the labour cost per duty on iron and steel from 12% to tonne in India is much higher than 16%. Should the companies pass on these three countries, and the excise duty hike to domestic therefore, labour productivity is consumers, the customs duty cut very low. Because of these, the may add to the companies’ Indian steel industry cannot bottomlines, albeit marginally. So, possibly compete with the likes of reforms in 1992 has had a major the steel industry does not have POSCO, Nucor or CST. influence on the industry, making much to cheer about in the Budget. Yet, most of the major Indian it more cost-effective and Of course, the reduction in steel producers like Steel Authority competitive. The tariff protection corporate tax from 35% to 30% will of India Ltd. (SAIL), Rashtriya accorded by the government to the benefit all companies, including Ispat Nigam Ltd. (RINL), Jindal steel industry progressively those in this sector. Vijaynagar Steel Ltd (JVSL), Essar declined from over 100 per cent to The government’s proposal to Steel Ltd. (ESL) and Ispat 5 per cent over the years, forcing form a special purpose vehicle Industries Ltd. (IIL) have gained the steel producers to cut costs and (SPV) to channelise the burgeoning some competitive edge over the bring in state-of-the-art technology forex reserves towards and private investments to face the infrastructure development challenge of global competition. augurs well for the steel industry. Although tariff protection for The government’s resolve to give the Indian steel industry has been a thrust to infrastructure (by drastically reduced, the industry utilising forex reserves for the worldwide still faces market purpose) is expected to push the barriers which act as impediments demand for steel and steel to global trade. Steel has attracted products. This should ensure a anti-dumping duties in both robust domestic demand for the developed as well as developing steel industry, which will give it countries. Due to this, Indian steel the much-needed push for further producers face a double-whammy: growth. first, they cannot sell their entire Comparative advantages and production in India since the domestic consumption is disadvantages abysmally low; second, they The Indian steel industry has to cannot sell in other countries due factor in higher transaction costs, to trade barriers in the form of anti- logistics costs and railway freight dumping duties. costs as compared to countries such as China and South Korea.
  3. 3. %Bizness Read on ................................... competitive advantage India offers China has closed down virtually all and decided to establish a the sub-optimal and low-value- manufacturing base in India. end steel making capacities to (POSCO has already declared that boost the efficiency of the sector. it will invest $1 billion in setting Conclusion up an ultra-modern steel-making In the final analysis, it is facility in Orissa). With imperative that Indian steel international steel giants such as companies become significantly POSCO breathing down the neck more competitive by improving of Indian steel makers, it will be productivity further and going in even more difficult for the latter to for rapid technological face competition in both domestic upgradation. The companies need as well as international markets. to shift focus to competing on Thus, while Indian steel makers superior products and processes, may be having a field day today, years. The Indian steel rather than competing on factor they should also prepare for the manufacturers also enjoy other endowments. This becomes all the future and brace themselves for the advantages like abundant supply more important since giants like stiff competition ahead, which may of raw materials, skilled technical POSCO have realised the arrive sooner than they expect. manpower, low wage rates and locational advantages. These provide about 55-60 per cent Imports by major countries advantage in terms of operational Importers Imports (in million tonnes) costs. 1999 2000 2001 2002 2003 Government Intervention US 32.7 34.8 27.6 30.0 21.3 Despite the advantages China 17.0 20.7 25.6 29.3 43.2 mentioned above, steel EU-15 97.4 106.8 103.4 102.0 105.3 manufacturers in India have not World 265.1 298.7 292.5 311.7 322.9 been able to exploit the full potential of the business due to Source: IISI intervention of the government. The latter has not got over the 350 ‘administer-and-control’ mentality 300 and continues to intervene (or 250 threatens to intervene) whenever (million tonnes) the consumers of steel (i.e. the 200 downstream producers) protest 150 against price hike. The government 100 has failed to come up with a policy for the orderly development of the 50 steel sector, as a result of which 0 over a thousand small induction 1999 2000 2001 2002 2003 and arc furnaces operate US China EU-15 World informally today. In contrast,

×