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Market Entry Strategies  for ‘Al Sayeed Steel Industries’ By  Vikram.R
Market overview The Indian finished steel industry consists of 173 players.  On the basis of scale of operations and level of backward integration, Indian steel makers can be broadly classified into numerous small standalone plants integrated steel producers (ISPs) or primary producers The Indian Steel Industry is characterized by fragmentation, particularly in the downstream segment, with a large number of unorganized players The Indian steel industry comprises of the producers of  Finished steel Semi-finished steel Stainless steel  Pig iron
Products in Steel  Type  End product  User Industries  Semi finished (semis)  Ingots, billets & slabs  EAF units & mini steel plants  Long products  Wire rods  Bars Angles  Construction Infrastructure Heavy Engineering Flat products  Hot rolled (HR)  Cold rolled (CR) Galvanized Coils  (GC) Consumer durables  Industrial machinery  Railways materials  Railways Tracks  Alloy Railway  Special  Tin plates  & Pipes  Automotive Aircrafts Shipbuilding  Oil & Gas
Industrial Trends India is the 5 th  largest producer & consumer of steel globally The Industry enjoys advantages of domestic availability of raw materials and cheap labour.  Produces 53 million tonnes (MT) of steel a year, accounts 7 % of the world's total production. Steel demand to grow by about 2 % in 2009-10,  Negative growth of 15 % recorded globally - World Steel Association  India's steel capacity to touch 124.06 MT by 2011–12 - Ministry of Steel  India's steel capacity is likely to be 293 MT by 2020
Facts about the Indian Market India's GDP growth is forecast at 5.8 to 6.3 % in 2009 and 6.8 to 7.3 % in 2010. Overall, the Indian economy is expected to continue in the positive growth trajectory on account of domestic forces - robust local consumption driven demand reinforced by strong policy responses.  Continuously improving macro economic factors A strong demographic profile with a large consumer base Growing urbanization  Stable social and political environment Indian labour costs at around US$ 1.2 per hour is the lowest in the world
Key Points  Supply:  With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Demand:  The demand is derived from sectors that include infrastructure, consumer durables and automobiles. Barriers to entry:  High capital costs, technology.  Bargaining power of suppliers:  The government’s move on railway freight costs and grid power costs would determine the final price of the metal.  Bargaining power of customers:  High, presence of a large number of suppliers and access to global markets. Competition:  High, presence of a large number of players in the unorganized sector
Major players in the Indian Steel Industry Flat Products are more consolidated, 96 % is organized. Long products are fragmented with a lot of unorganized players.  6 major producers account to 66 % of production.  FLAT  STEEL  LONG STEEL  Source : JPC
Key sectorial growth drivers  Construction  -  speedy project implementation & a huge growth driver for the steel industry Automotive -  second fastest growing market after China, prime driver of alloy steel Automotive components -  robust domestic demand as well as exports,  India is fast emerging as hub for auto component Infrastructure -  comprises of roads, railways, airports and power The sector wise anticipated investment are $200bn in power, $80bn in railways, $48bn in roads, $13bn in ports and $9bn in airports. Consumer Durables -  The share of white goods and utensils is predominant, domestic appliances market includes spin driers of washing machine, almirahs, thermo ware, water filters, dishwashers, microwave ovens, catering equipments, cutlery, and furniture  Oil & Gas Industry -  pipe consumption in oil & gas sector has huge demands
Automotive sector high prospects for steel sector CAGR 7 % CAGR 15 % PV – Passenger Vehicle CV – Commercial Vehicle The automotive industry is set to increase with a growth rate of 15 % up till 2020. The Passenger vehicle market is very matured market therefore entry into them is tough The Commercial vehicle market is more fragmented. Source - Citigroup estimates
Investment in infrastructure segment India has potential to absorb US $ 150 billion in next five years in the infrastructure sector alone. PROJECTED INVESTMENT Till 2012 by Committee on Infrastructure Source - Citigroup estimates RS Billion FY 03 FY 04 FY 05 FY 06 FY 07 F Planned Exp in next 5 years Airports 20 15 15 24 25 400 Irrigation 151 139 208 222 252 1300 Ports 7 5 5 10 20 500 Power 232 312 340 350 346 2000 Railways 121 135 153 146 140 750 Roads 206 190 199 212 213 1700 Telecom 133 126 89 116 116 800 Urban Infrastructure 162 174 184 220 250 1400
Macro Economic Factors To achieve faster clearance of projects, government proposed single-window clearances for large projects, a statutory clearances by the ministries Steel ministry has proposed to the finance ministry to reimpose 15% export duty on iron ore (lumps and fines) Levy of 15% duty on imports of hot rolled coils (HRCs), which are used mainly by construction and automobile sectors.  The finance ministry scrapped 15% duty on lumps by simultaneously lowering export duty on fines to 5% last year end with a view to tackle global economic slowdown The growth in steel demand would witness a 10% rise mainly due to higher government allocation in rural India The steel ministry is also pushing for higher duty on HRCs, which attracts 5% customs duty currently,  is aimed at curbing low-priced steel coming from countries such as Japan, England, Ukraine, China and Kazakhstan into India
Pricing Strategy  A big plus is that India is one of the cost effective producers. According IL&FS (Infrastructure leasing & financial services Ltd), the cost of making steel in India at $266 per tonne is much lower than $370 per tonne globally Penetration pricing should be the initial strategy as, As India is a price sensitive market Cost of labour is cheap with quality  Higher margins could be obtained, despite of keeping the price low. Huge Unorganized steel market base  A Volume based product, could fetch more margins
Demand Demand for steel is likely to grow upto 12 % against the global average of  5  to 6 %. A recent study states that India's steel consumption will grow by 16 %  annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. The steel industry in India is operates at 90% capacity whereas in Europe it operates at 65 to 70% capacity and 55 to 60% in the US and in China they are operates at 75% capacity 70 % of Steel accounts to kitchenware.
Supply situation in excess (by Fy - 2012) GAP: ~ 20-25 mn T DEMAND SIDE SUPPLY SIDE 65 90 All fig in million tonnes
Sourcing Hubs States where iron ore is present West Bengal Esinghbhum Chhattisgarh Durg Orissa Keonjhar Goa North Goa South Goa Andra Pradesh  Guntur Ongole Karnataka Chikmagalooru Belery Chitaurgrh
Overview of  key potential sourcing hubs Goa The mining belt of Goa covers an area of approximately 700 sq. km. and is mostly concentrated in four talukas, namely Bicholim, Salcete, Sanguem and Quepem  Goa is a major iron ore exporting state and over 60 % of the country’s iron ore export is from Goa Mining in Goa is done by open cast method which necessitates the removal of over burden overlying the iron ore formations The average annual production of iron ore is of the order of 15 to 16 million tonnes Iron, manganese and bauxite ores are the major minerals found in Goa The iron ore industry is the main industry and the backbone of the Goan economy Orissa Orissa is one of the biggest producers of iron and steel in the country. The state already accounts for about 32.9 per cent of all the iron ore deposits in India thus making it the favourite designation for domestic and international players to set up their iron and steel plants West Bengal With more than US$ 22.2 billion worth investments pipeline, West Bengal has emerged as a favourite destination for the steel industry West Bengal has deposits of iron ore that has help in getting these projects.
Chhattisgarh The state is the iron and steel hub of the country.  Ranks third among all the iron ore producing states in India The Bhilai Steel Plant of Steel Authority of India Ltd. (SAIL) produces over 4 million tonnes of iron and steel per annum.  Substantial capacities have been set up in the private sector too 28 %  of India's sponge iron production comes from Chhattisgarh.  There are more than 10,000 iron ore reserves out of which the state contributes more than 23 per cent of the production in the country In 2005-2006, around 25.5 million tonnes of iron ore amounting to approximately US$ 280 million was produced in the state.  Between 2006 and 2007, December 2006 witnessed around 18.27 million tonnes of iron ore production
Entry Strategies  Build a strong presence in some niche products  like precoated steel  To ensure raw materials are available at competitive rates either through captive mines or long – term supply deals  A Greenfield project takes 36 months to commission; most new projects are unlikely to be operational till 2010. Tie ups with channel partners, dealer networks Trade Associations would play a huge role while venturing into the Indian markets Liberal Budget provisions for rural infrastructure could be a good entry level strategy to gain a market share in rural and semi-urban pockets, and these markets would drive the steel growth in the future.
Obtaining mining rights is a challenge. Hence, Tie-ups with existing players should be a strategic approach M&As  entry into the Indian markets as the FDI policies are a lot more liberalized for foreign investors. Acquiring bankrupt / sick facilities could be a smart move, during this recessionary period MOU with various state governments and public utility steel companies could created a solid entry Strategic alliances with established players in the public and private steel sector, for Information sharing in the areas of corporate strategy planning; of professionals, including engineers and technician; Know-how and expertise sharing in the areas of development of mines Know-how and expertise sharing in the areas of business practices such as Enterprise Resource Planning (ERP), Process Improvement (PI) and Six Sigma Joint usage of the existing marketing and warehousing network of each other; coordination in procurement of various raw materials from a common sourcing point  Joint research and development projects
Final Analysis  Venturing into India should be a long term plan for steel companies There is a positive sentiment about various support sectors and catering to them could be a lucrative proposition.  Infrastructure (Growth rate 2006 to 2010 of 8%)  Organized Retail (Growth of 14 to 18 %  by 2015)  Real Estate (Currently estimated to be US$ 48 billion, with a CAGR of 30 %) Automotive  (Growth of 15 % annually)  Construction (Growth of 12 to 14 %)  Auto components Industry ( Last 5 years growth of 19% CAGR)  Consumer Durables  ( Growth rate of 10 % per annum)  Oil & Gas Industry (Growth rate of 25% CAGR)  Penetration into small and medium sectors would facilitate high turnover (MT) and reduce financial risk Setting up base into the rural market could be very promising, as nearly 20 to 25 % revenue is expected
Establish a strategic base setup in one of the four sourcing hubs, as per the nature of business and requirement of raw materials  Chhattisgarh Orissa West Bengal  Goa The Indian steel ministry plans to raise the export share from 15% at present to 24% in the next 15 years Export opportunity of steel could definitely be on the cards, after a firm strategic base is setup in India.
Sources Ibef.org Rncos.com Dbresearch.com  Economictimes.com  Equitymaster.com Assocham.org Indiabusiness.nic.in Steel.nic.in Credit Suisse

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Entry Level Strategies Vikram

  • 1. Market Entry Strategies for ‘Al Sayeed Steel Industries’ By Vikram.R
  • 2. Market overview The Indian finished steel industry consists of 173 players. On the basis of scale of operations and level of backward integration, Indian steel makers can be broadly classified into numerous small standalone plants integrated steel producers (ISPs) or primary producers The Indian Steel Industry is characterized by fragmentation, particularly in the downstream segment, with a large number of unorganized players The Indian steel industry comprises of the producers of Finished steel Semi-finished steel Stainless steel Pig iron
  • 3. Products in Steel Type End product User Industries Semi finished (semis) Ingots, billets & slabs EAF units & mini steel plants Long products Wire rods Bars Angles Construction Infrastructure Heavy Engineering Flat products Hot rolled (HR) Cold rolled (CR) Galvanized Coils (GC) Consumer durables Industrial machinery Railways materials Railways Tracks Alloy Railway Special Tin plates & Pipes Automotive Aircrafts Shipbuilding Oil & Gas
  • 4. Industrial Trends India is the 5 th largest producer & consumer of steel globally The Industry enjoys advantages of domestic availability of raw materials and cheap labour. Produces 53 million tonnes (MT) of steel a year, accounts 7 % of the world's total production. Steel demand to grow by about 2 % in 2009-10, Negative growth of 15 % recorded globally - World Steel Association India's steel capacity to touch 124.06 MT by 2011–12 - Ministry of Steel India's steel capacity is likely to be 293 MT by 2020
  • 5. Facts about the Indian Market India's GDP growth is forecast at 5.8 to 6.3 % in 2009 and 6.8 to 7.3 % in 2010. Overall, the Indian economy is expected to continue in the positive growth trajectory on account of domestic forces - robust local consumption driven demand reinforced by strong policy responses. Continuously improving macro economic factors A strong demographic profile with a large consumer base Growing urbanization Stable social and political environment Indian labour costs at around US$ 1.2 per hour is the lowest in the world
  • 6. Key Points Supply: With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Demand: The demand is derived from sectors that include infrastructure, consumer durables and automobiles. Barriers to entry: High capital costs, technology.  Bargaining power of suppliers: The government’s move on railway freight costs and grid power costs would determine the final price of the metal.  Bargaining power of customers: High, presence of a large number of suppliers and access to global markets. Competition: High, presence of a large number of players in the unorganized sector
  • 7. Major players in the Indian Steel Industry Flat Products are more consolidated, 96 % is organized. Long products are fragmented with a lot of unorganized players. 6 major producers account to 66 % of production. FLAT STEEL LONG STEEL Source : JPC
  • 8. Key sectorial growth drivers Construction - speedy project implementation & a huge growth driver for the steel industry Automotive - second fastest growing market after China, prime driver of alloy steel Automotive components - robust domestic demand as well as exports, India is fast emerging as hub for auto component Infrastructure - comprises of roads, railways, airports and power The sector wise anticipated investment are $200bn in power, $80bn in railways, $48bn in roads, $13bn in ports and $9bn in airports. Consumer Durables - The share of white goods and utensils is predominant, domestic appliances market includes spin driers of washing machine, almirahs, thermo ware, water filters, dishwashers, microwave ovens, catering equipments, cutlery, and furniture Oil & Gas Industry - pipe consumption in oil & gas sector has huge demands
  • 9. Automotive sector high prospects for steel sector CAGR 7 % CAGR 15 % PV – Passenger Vehicle CV – Commercial Vehicle The automotive industry is set to increase with a growth rate of 15 % up till 2020. The Passenger vehicle market is very matured market therefore entry into them is tough The Commercial vehicle market is more fragmented. Source - Citigroup estimates
  • 10. Investment in infrastructure segment India has potential to absorb US $ 150 billion in next five years in the infrastructure sector alone. PROJECTED INVESTMENT Till 2012 by Committee on Infrastructure Source - Citigroup estimates RS Billion FY 03 FY 04 FY 05 FY 06 FY 07 F Planned Exp in next 5 years Airports 20 15 15 24 25 400 Irrigation 151 139 208 222 252 1300 Ports 7 5 5 10 20 500 Power 232 312 340 350 346 2000 Railways 121 135 153 146 140 750 Roads 206 190 199 212 213 1700 Telecom 133 126 89 116 116 800 Urban Infrastructure 162 174 184 220 250 1400
  • 11. Macro Economic Factors To achieve faster clearance of projects, government proposed single-window clearances for large projects, a statutory clearances by the ministries Steel ministry has proposed to the finance ministry to reimpose 15% export duty on iron ore (lumps and fines) Levy of 15% duty on imports of hot rolled coils (HRCs), which are used mainly by construction and automobile sectors.  The finance ministry scrapped 15% duty on lumps by simultaneously lowering export duty on fines to 5% last year end with a view to tackle global economic slowdown The growth in steel demand would witness a 10% rise mainly due to higher government allocation in rural India The steel ministry is also pushing for higher duty on HRCs, which attracts 5% customs duty currently, is aimed at curbing low-priced steel coming from countries such as Japan, England, Ukraine, China and Kazakhstan into India
  • 12. Pricing Strategy A big plus is that India is one of the cost effective producers. According IL&FS (Infrastructure leasing & financial services Ltd), the cost of making steel in India at $266 per tonne is much lower than $370 per tonne globally Penetration pricing should be the initial strategy as, As India is a price sensitive market Cost of labour is cheap with quality Higher margins could be obtained, despite of keeping the price low. Huge Unorganized steel market base A Volume based product, could fetch more margins
  • 13. Demand Demand for steel is likely to grow upto 12 % against the global average of 5 to 6 %. A recent study states that India's steel consumption will grow by 16 % annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. The steel industry in India is operates at 90% capacity whereas in Europe it operates at 65 to 70% capacity and 55 to 60% in the US and in China they are operates at 75% capacity 70 % of Steel accounts to kitchenware.
  • 14. Supply situation in excess (by Fy - 2012) GAP: ~ 20-25 mn T DEMAND SIDE SUPPLY SIDE 65 90 All fig in million tonnes
  • 15. Sourcing Hubs States where iron ore is present West Bengal Esinghbhum Chhattisgarh Durg Orissa Keonjhar Goa North Goa South Goa Andra Pradesh Guntur Ongole Karnataka Chikmagalooru Belery Chitaurgrh
  • 16. Overview of key potential sourcing hubs Goa The mining belt of Goa covers an area of approximately 700 sq. km. and is mostly concentrated in four talukas, namely Bicholim, Salcete, Sanguem and Quepem Goa is a major iron ore exporting state and over 60 % of the country’s iron ore export is from Goa Mining in Goa is done by open cast method which necessitates the removal of over burden overlying the iron ore formations The average annual production of iron ore is of the order of 15 to 16 million tonnes Iron, manganese and bauxite ores are the major minerals found in Goa The iron ore industry is the main industry and the backbone of the Goan economy Orissa Orissa is one of the biggest producers of iron and steel in the country. The state already accounts for about 32.9 per cent of all the iron ore deposits in India thus making it the favourite designation for domestic and international players to set up their iron and steel plants West Bengal With more than US$ 22.2 billion worth investments pipeline, West Bengal has emerged as a favourite destination for the steel industry West Bengal has deposits of iron ore that has help in getting these projects.
  • 17. Chhattisgarh The state is the iron and steel hub of the country. Ranks third among all the iron ore producing states in India The Bhilai Steel Plant of Steel Authority of India Ltd. (SAIL) produces over 4 million tonnes of iron and steel per annum. Substantial capacities have been set up in the private sector too 28 % of India's sponge iron production comes from Chhattisgarh. There are more than 10,000 iron ore reserves out of which the state contributes more than 23 per cent of the production in the country In 2005-2006, around 25.5 million tonnes of iron ore amounting to approximately US$ 280 million was produced in the state. Between 2006 and 2007, December 2006 witnessed around 18.27 million tonnes of iron ore production
  • 18. Entry Strategies Build a strong presence in some niche products like precoated steel To ensure raw materials are available at competitive rates either through captive mines or long – term supply deals A Greenfield project takes 36 months to commission; most new projects are unlikely to be operational till 2010. Tie ups with channel partners, dealer networks Trade Associations would play a huge role while venturing into the Indian markets Liberal Budget provisions for rural infrastructure could be a good entry level strategy to gain a market share in rural and semi-urban pockets, and these markets would drive the steel growth in the future.
  • 19. Obtaining mining rights is a challenge. Hence, Tie-ups with existing players should be a strategic approach M&As entry into the Indian markets as the FDI policies are a lot more liberalized for foreign investors. Acquiring bankrupt / sick facilities could be a smart move, during this recessionary period MOU with various state governments and public utility steel companies could created a solid entry Strategic alliances with established players in the public and private steel sector, for Information sharing in the areas of corporate strategy planning; of professionals, including engineers and technician; Know-how and expertise sharing in the areas of development of mines Know-how and expertise sharing in the areas of business practices such as Enterprise Resource Planning (ERP), Process Improvement (PI) and Six Sigma Joint usage of the existing marketing and warehousing network of each other; coordination in procurement of various raw materials from a common sourcing point Joint research and development projects
  • 20. Final Analysis Venturing into India should be a long term plan for steel companies There is a positive sentiment about various support sectors and catering to them could be a lucrative proposition. Infrastructure (Growth rate 2006 to 2010 of 8%) Organized Retail (Growth of 14 to 18 % by 2015) Real Estate (Currently estimated to be US$ 48 billion, with a CAGR of 30 %) Automotive (Growth of 15 % annually) Construction (Growth of 12 to 14 %) Auto components Industry ( Last 5 years growth of 19% CAGR) Consumer Durables ( Growth rate of 10 % per annum) Oil & Gas Industry (Growth rate of 25% CAGR) Penetration into small and medium sectors would facilitate high turnover (MT) and reduce financial risk Setting up base into the rural market could be very promising, as nearly 20 to 25 % revenue is expected
  • 21. Establish a strategic base setup in one of the four sourcing hubs, as per the nature of business and requirement of raw materials Chhattisgarh Orissa West Bengal Goa The Indian steel ministry plans to raise the export share from 15% at present to 24% in the next 15 years Export opportunity of steel could definitely be on the cards, after a firm strategic base is setup in India.
  • 22. Sources Ibef.org Rncos.com Dbresearch.com Economictimes.com Equitymaster.com Assocham.org Indiabusiness.nic.in Steel.nic.in Credit Suisse