Indian Steel

2011

FUTURE OF STEEL IN
INDIA
STEEL
Steel is one of the most efficient modern construction materials. It offers the
highest strength-to-weight ratio of any commonly-used material and is
exceptionally durable. Over 20 billion tonnes of steel remains in use today in a
variety of products. Steel can be infinitely recycled, allowing the creation of new
products out of old products without any loss of strength, formability, or any
other important measure of performance. This is why steel remains the material
of choice for construction and manufacturing around the world.

Er. GAURAV MISHRA (PROJECTS)
CAPE INDUSTRIAL SERVICES PVT. LTD.
6/25/2011

1. Introduction
2. Market Scenario
3. Global scenario
4. Major Players
5. Pricing Strategy
6. Important Policy Measures
7. Duties and Levies on Steel
8. FDI Rule, Competitors & FII in Steel
Industry
9. Role of Government
10. Opportunities For Growth
11. Summary

Steel Industry
Introduction:
Steel plays a vital role in accelerating growth and development of a nation. It is used as a
basic material in the manufacture of metal products, electrical machinery, transport equipment,
textile, etc and thus considered to be the backbone of the human civilization. It is a product of
large and technologically advanced industry having strong forward and backward linkages in
terms of material flow and income generation. In other words, the production and per capita
consumption of steel is a major contributor to a country’s gross domestic product (GDP) and an
indicator of its industrial and economic strength. Iron ore, manganese ore and chrome ore are the
critical raw material inputs for the steel industry. Their timely and assured availability in
adequate quantity and quality, on long term basis, is a prerequisite for the rapid and orderly
growth of the sector.

The life cycle of a steel item in a multi-material product

India is the eighth largest crude steel producing country in the world. It is endowed with richest iron and
coal ore mines. Its cost of production of steel is comparatively much lower than that in other countries.
It has several advantageous features which gives the dominant position to its steel industry on the world
map. Some of these are:-

I. Establishment of new state-of-the-art steel plants in the country with lesser dependence on
external aid
II. Continuous modernization as well as implementation of de-bottlenecking and technology up
gradation schemes in the older plants
III. Improvement in energy efficiency of the plants in terms of coke rate and power consumption
IV. Utilization of better quality raw materials, such as imported coking coal, accessed from global
sources
V. Optimum processing of raw materials like washing of coal, beneficiation and sintering of iron ore
etc.

Market Scenario:

 After liberalization, there have been no shortages of steel materials in the country.
 Apparent consumption of finished (carbon) steel increased from 14.84 Million Tonnes in 1991-
92 to 43.471 million tonnes (Provisional) in 2006-07. During April-June, 2007, apparent
consumption of finished (carbon) steel was 10.103 million tonnes(Provisionally estimated)
 Steel industry that was facing a recession for some time has staged a turnaround since the
beginning of 2002.
 Efforts are being made to boost demand.
 China has been an important export destination for Indian steel.
 The steel industry is buoyant due to strong growth in demand particularly by the demand for
steel in China.

Global Scenario:

The Asian countries have their respective dominance in the production of the steel all over the
world. India being one among the fastest growing economies of the world has been considered as one
of the potential global steel hub internationally. Over the years, particularly after the adoption of the
liberalization policies all over the world, the World steel industry is growing very fast.

Steel Industry is a booming industry in the whole world. The increasing demand for it was mainly
generated by the development projects that have been going on along the world, especially the
infrastructural works and real estate projects that has been on the boom around the developing
countries. Steel Industry was till recently dominated by the United Sates of America but this scenario is
changing with a rapid pace with the Indian steel companies on an acquisition spree. In the last one year,
the world has seen two big M&A deals to take place:-

The Mittal Steel, listed in Holland, has acquired the world's largest steel company called Arcelor Steel to
become the world's largest producer of Steel named Arcelor-Mittal.

Tata Steel of India or TISCO (as listed in BSE) has acquired the world's fifth largest steel company, Corus,
with the highest ever stock price.

It has been observed that Steel Industry has grown tremendously in the last one and a half decade with
a strong financial condition. The increasing needs of steel by the developing countries for its
infrastructural projects have pushed the companies in this industry near their operative capacity.

The most significant growth that can be seen in the Steel Industry has been observed during the period
1960 to 1974 when the consumption of steel around the whole world doubled. Between these years,
the rate at which the Steel Industry grew has been recorded to be 5.5 %. This roaring market saw a
phase of deceleration from the year 1975 which continued till 1982. After this period, the continuous
fall slowed down and again started its upward movement from the early 1990s.

Steel Industry is becoming more and more competitive with every passing day. During the period 1960s
to late 1980s, the steel market used to be dominated by OECD (Organization for Economic Cooperation
and Development) countries. But with the fast emergence of developing countries like China, India and
South Korea in this sector has led to slipping market share of OECD countries. The balance of trade line
is also tilting towards these countries.

The main demand creators for Steel Industry are Automobile industry, Construction Industry,
Infrastructure Industry, Oil and Gas Industry, and Container Industry.

New innovations are also taking place in Steel Industry for cost minimization and at the same time
production maximization. Some of the cutting edge technologies that are being implemented in this
industry are thin-slab casting, making of steel through the use of electric furnace, vacuum degassing,
etc.

The Steel Industry has enough potential to grow at a much accelerated pace in the coming future due to
the continuity of the developmental projects around the world. This industry is at present working near
its productive capacity which needs to be increased with increasing demand.

The following table gives a clear picture upon the major crude steel producers in the world as of the
year 2004.

Country Crude Steel Production (mtpa)

China 272.5

Japan 112.7

United State 98.9

Russia 65.6

South Korea 47.5

F.R.Germany 46.4

Ukraine 38.7

Brazil 32.9

India 32.6

Italy 28.4

In the year 2004, the global steel production has made a record level by crossing the 1000 million tones.
Among the top producers in the steel production, China ranked 1 in the world.
Production of steel in the 25 European Union countries was at 16.3 mmt in January 2005. Production in
Italy increased by 11.5 per cent in comparison to the same month in 2004. Italy produced 2.5 mmt of
crude steel in January 2005. Austria produced 646,000 metric tones. In Russia it increased by 4.0 per
cent to reach at 5.5 mmt in January. In case of the North America region particularly in Mexico it was 1.5
mmt of crude steel in January 2005, up by 8.0 per cent compared to the same month in 2004.
Production in the United States was 8.3 mmt. Brazil had produced 2.6 mmt of crude steel in January
2005. In South America region it was 3.7 mmt for January 2005.
According to rating made by the “World Steel Dynamics", Indian HR Products are categorized in the Tier
II category quality of products. Both EU and Japan have ranked the top. USA and South Korea comes as
like India.

WORLD’S 30 LARGEST STEEL COMPANIES:-

Crude
Steel
N Company
Company Logo Country Company Picture Output
o Name
per year
(MT)

103,300,0
1 ArcelorMittal Luxembour
g 0

37,500,00
2 Nippon Steel Japan
0

35,400,00
3 Baosteel China
0

South 34,700,00
4 Posco
Korea 0

Crude
Steel
N Company
o Name
per year
(MT)

Hebei Iron & 33,300,00
5 China
Steel Group 0

33,000,00
6 JFE Holdings Japan
0

Wuhan Iron
& Steel 27,700,00
7 China
Group 0
(Wisco)

24,400,00
8 Tata Steel India
0

Crude
Steel
N Company
o Name
per year
(MT)

Jiangsu
23,300,00
9 Shagang China
0
Group

23,200,00
10 U.S. Steel USA
0

Shandong
21,800,00
11 Iron & Steel China
0
Group

20,500,00
12 Nucor USA
0

Crude
Steel
N Company
o Name
per year
(MT)

20,400,00
13 Gerdau Brazil
0

19,200,00
14 Severstal Russia
0

17,700,00
15 Evraz Group Russia
0

16,900,00
16 Gruppo Riva Italy
0

Crude
Steel
N Company
o Name
per year
(MT)

Anshan Iron
16,000,00
17 & Steel China
0
Group

Thyssenkrup 15,900,00
18 Germany
p 0

Maanshan
15,000,00
19 Iron & Steel China
0
Company

Sumitomo
14,100,00
20 Metal Japan
0
Industries

Crude
Steel
N Company
o Name
per year
(MT)

Steel
13,700,00
21 Authority Of India
0
India (SAIL)

Shougang 12,200,00
22 China
Group 0

Magnitogors
k Iron And 12,000,00
23 Russia
Steel Works 0
(MMK)

Novolipetsk 11,300,00
24 Russia
Steel (NLMK) 0

Crude
Steel
N Company
o Name
per year
(MT)

Hunan Valin 11,200,00
25 China
Steel Group 0

China Steel 11,000,00
26 Taiwan
Corporation 0

Techint Luxembour 10,400,00
27
(Tenaris) g 0

Iranian
Mines &
10,000,00
28 Mining Iran
0
Industries
(IMIDRO)

Crude
Steel
N Company
o Name
per year
(MT)

Industrial
Union of
29 Ukraine 9,900,000
Donbass
(ISD)

Hyundai South 98,00000
30
Steel (HSC) Korea

Major Players:

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated
iron and steel maker, producing both basic and special steels for domestic construction, engineering,
power, railway, automotive and defense industries and for sale in export markets. The Government of
India owns about 86% of SAIL's equity and retains voting control of the Company. However, SAIL, by
virtue of its "Navratna" status, enjoys significant operational and financial autonomy. Major units of SAIL
are as under:

 Integrated Steel Plants
 Bhilai Steel Plant (BSP) in Chhattisgarh
 Durgapur Steel Plant (DSP) in West Bengal
 Rourkela Steel Plant (RSP) in Orissa
 Bokaro Steel Plant (BSL) in Jharkhand
 Special Steel Plants
 Alloy Steels Plants (ASP) in West Bengal
 Salem Steel Plant (SSP) in Tamil Nadu
 Visvesvaraya Iron and Steel Plant (VISL) in Karnataka
 Subsidiaries
 Indian Iron and Steel Company (IISCO) in West Bengal
 Maharashtra Elektrosmelt Limited (MEL) in Maharashtra
 Bhilai Oxygen Limited (BOL) in New Delhi
 Joint Venture
 SAIL has promoted joint ventures in different areas ranging from power plants to e-commerce.

NTPC SAIL Power Company Pvt. Ltd

Set up in March 2001, this 50:50 joint venture between SAIL and the National Thermal Power
Corporation (NTPC) operates and manages the Captive Power Plants-II of the Durgapur and Rourkela
Steel Plants which have a combined capacity of 240 MW.

Bokaro Power Supply Company Pvt. Limited

This 50:50 joint venture between SAIL and the Damodar Valley Corporation formed in January 2002 is
managing the 302-MW power generation and 1880 tonnes per hour steam generation facilities at
Bokaro Steel Plant.

.

Bhilai Electric Supply Company Pvt. Limited

Another SAIL-NTPC joint venture on 50:50 basis formed in March 2002 manages the 74 MW Power
Plant-II of Bhilai Steel Plant which has additional capacity of producing 150 tonnes of steam per hour.

UEC SAIL Information Technology Limited

This 40:60 joint venture between SAIL and USX Engineers & Consultants, a subsidiary of the US Steel
Corporation, promotes information technology in the steel sector.

Metaljunction.com Private Limited

A joint venture between SAIL and Tata Steel on 50:50 basis, this company promotes e-commerce
activities in steel and related areas.

SAIL-Bansal Service Center Pvt. Ltd.

SAIL has formed a joint venture with BMW industries Ltd. on 40:60 basis to promote a service centre at
Bokaro with the objective of adding value to steel.

North Bengal Dolomite Limited

A joint venture between SAIL and West Bengal Mineral Development Corporation ltd on 50:50 basis was
formed for development of Jayanti Dolomite Deposit, Jalpaiguri for supply of Dolomite to DSP and
other plants.

Romelt-SAIL (India) Ltd

A joint venture between SAIL, National Mineral Development Corporation (NMDC) and Russian
promoters for marketing Romelt Technology developed by Russia for reducing of iron bearing materials,
which is carried out with carbon in single stage reactor with the use of oxygen.

Others major steel producers are:

 Tisco ( Tata Iron and Steel Corporation ltd)
 Essar Steel
 Jindal Vijaynagar Steels Ltd
 Jindal Strips Ltd
 JISCO
 Saw Pipes
 Uttam Steels Ltd
 Ispat Industries Ltd
 Mukand Ltd
 Mahindra Ugine Steel Company Ltd
 Tata SSL Ltd
 Usha Ispat Ltd
 Kalyani Steel Ltd
 Electro Steel Castings Ltd
 Sesa Goa Ltd
 NMDC
 Lloyds SteeI Industries Ltd

Pricing Strategy:

Rise in steel prices for the past two years has been the cause of concern of many user industries.
Particularly, in some of the direct users and downstream segments where steel component is high, the
impact is a little harsh. Generally these fall under the category of building and other steel-structured
construction, tube-making, heavy machineries, bicycles, auto-components steel furniture etc. The ability
to absorb the increased cost of raw materials depends on the individual market competitiveness, which
is characterized by excess capacity, demand growth, export opportunities and other relevant factors.
The construction sector, however, is guided by the escalation clauses in the tenders, which may absolve
the individual bidders to get away with equivalent compensation. In India these clauses are anarchic, to
say the least, and therefore the impact of rise in raw material expenses is felt heavy in construction.
That brings us to the issue of retardation of investment in construction. Has the rise in steel cost led to a
diversion of investment from construction sector to other areas? The answer is negative. A comparison
of Gross Capital Formation in Construction and also in Machinery and Equipment with steel price
movement in the past years would show that there exists no negative relation between the two. The
availability of any basic input at a low price always results in overuse of the material. Abundant
availability of steel in Russia in 60s and 70s brought about an overdose of steel use in many applications
leading to overweight and more use of energy. When the prices rose, some amount of substitution took
place. In India the emergence of plastic and PVC in place of galvanized sheets and hot rolled coils in
drums, buckets and pipes, aluminum in place of cold rolled sheet in bus bodies, bumpers, auto-
components, asbestos in place of galvanized corrugated sheets for roofing, point out the similar
phenomenon. The current price increase in steel may only strengthen this trend. Apart from substitution
effect, one positive fallout of price rise is the more parsimonious use of steel in various applications,
which has made the user segment more quality-conscious.

Lot has been discussed on the probable reasons for steel price rise. This range from global price trend
which shot up regularly since Q2 2003, the increased cost of inputs for steel making like coking coal,
coke, iron ore and power, enhanced transportation cost resulting from rail freight and diesel price rise
and burgeoning port handling charges - all leading to a higher cost of steel to the consumer. Price of
steel went down sharply in 2001 and 2002. It had severely affected prospective investment in the sector
and almost dubbed the sector as dying. Indian financial Institutions including government-controlled
banks were genuinely perturbed over massive NPAs and debt-restructuring exercise became the only
mode of interaction between these institutions and steel-producing units. A look at some of the
financial figures during the past few years for steel companies along with a few consuming units as
compiled by CMIE show interesting facts.

Financial performance of Steel and a few related Industries

Segment 1997-98 2001-02 2002-03 2003-04

A) Steel

Value of output (Rs.cr) 40944.9 49534.2 64934.6 76822.0
% Rise in raw material & stores expenses (%) 0.9 1.6 21.4 18.1
Interest Payments(Rs.cr) 4165.9 5367.0 5032.7 3944.9
Profits after tax(Rs.cr) (-) 1228.2 (-) 5706.4 (-) 466.8 4741.6
Total Borrowings(Rs.cr) 46461.8 51348.1 50967.6 45065.9
Investments(Rs.cr) 2558.0 4062.5 4294.6 5320.1
B) Steel Wires

Value of output(Rs.cr) 1210.0 1496.9 861.5 1003.8

% rise in raw material & stores expenses (%) 12.7 6.7 (-) 1.1 29.4
Profits after tax(Rs.cr) (-) 31.2 (-) 79.4 (-) 49.8 (-) 38.5

C) Machinery

Value of output(Rs.cr)rrr 63545.2 77298.2 76564.6 82047.4

% rise in raw material & stores expenses (%) 3.8 (-) 1.3 (-) 1.3 7.8
Profits after tax(Rs.cr) 873.3 (-) 61.2 (-) 529.4 (-) 303.8
Total Borrowings (Rs.cr) 25744.8 30030.2 28248.6 27273.8

D)Air conditioners & Refrigerators

Value of output(Rs.cr) 2544.9 3267.8 2823.7 2844.5
% Rise in raw material & stores expenses (%) 5.6 4.4 (-) 0.1 (-) 2.9
Profits after tax(Rs.cr) (-) 133.4 (-) 234.5 (-) 229.3 (-) 225.1
E) Automobile

Value of output (Rs.cr) 33385.6 42321.9 46540.5 56957.2

% Rise in raw material & stores expenses (%) (-) 7.6 0.3 10.4 24.3
Interest Payments (Rs.cr) 1342.5 1447.8 1224.3 862.4
Profits after tax(Rs.cr) 1796.9 380.2 1315.0 3084.7

Keeping in view the problem of averaging in making industry-wise analysis, where, for instance, mild
carbon steel producers could have been clubbed with alloy and stainless steel producers, the above
analysis throws many interesting highlights.

High growth in value of output in steel in 02-03 and 03-04 reflects volume growth as prices were
depressed, while rise in input cost for steel was substantial. This was reflected in negative PAT in 02-03
and nominal profits in 03-04, which could happen due to remunerative prices in Q3/Q4 of 03-04. As
borrowings maintained a significantly higher level, it is no wonder that interest accruals were quite high.
It goes to the credit of the steel industry that investments were sustained at a reasonably high level. In
steel wire sector the negative growth in value of output reflects a recessionary condition in the end
product market as rise in input cost was also negative in 02-03 which, however, went up sharply in 03-04
and steel cost may be one of them. The Machinery sector went through a near recessionary condition in
02-03 when value of output dipped with negative growth in raw material prices including steel. The
negative PAT since 01-02 signifies constraints in the end user segments. Air conditioner and Refrigerator
segment has not been affected much by input cost rise as shown by negative growth in raw material
cost in 02-03/03-04. In fact in whole of 02-03 and 03-04 the growth in consumer durable segment was
less impressive and this was mostly due to excess supply resulting from emergence of new players
coupled with lack of consumer demand. Conversely the automobile segment had witnessed a significant
rise in raw material cost in 02-03/03-04, which, apart from rise in steel cost may emanate from rise in
cost of auto ancillaries. As PAT of auto-ancillaries has gone up by 8.8 and 14.6 per cent in 02-03 and 03-
04 respectively, it is logical to assume that increased cost of input (steel) has been passed on, at least
large part of it, on the finished products. It may be mentioned that value of output of auto-ancillaries
went up by an average 20 per cent during 01-02 to 03-04.

When the financial results of 04-05 would be available, the rise in raw material cost including steel, in
the user segments may exhibit a higher growth. To what extent it affects the bottom line of these
industries, would be determined by the nature of competitiveness in each industry. The prices of almost
all end products are increasing and this reflects the low price elasticity of demand in the presence of a
positive income effect.

The purpose of this analysis is not to list out reasons justifying increase in steel price. As a basic input for
industrialization the affordable steel price facilitates growth of all end-using industries. But a high
capital-intensive industry like steel must fetch a remunerative price to become self-sustaining and not to
become a drag on national economy and a scare-field for the prospective investors.

Important Policy Measures:
i. In the new Industrial Policy announced in July, 1991 Iron and Steel industry, among
others, was removed from the list of industries reserved for the public sector and also
exempted from the provisions of compulsory licensing under the Industries (
Development and Regulation) Act, 1951.
ii. With effect from 24.5.92, Iron and Steel industry has been included in the list of `high
priority' industries for automatic approval for foreign equity investment upto 51%. This
limit has been recently increased to 74%.
iii. Price and distribution of steel were deregulated from January, 1992. At the same time, it
was ensured that priority continued to be accorded for meeting the requirements of small
scale industries, exporters of engineering goods and North Eastern Region of the country,
besides strategic sectors such as Defense and Railways
iv. The trade policy has been liberalized and import and export of iron and steel is freely
allowed. There are no quantitative restrictions on import of iron and steel items, covered
under Chapter No. 72 of the ITC (HS) Code. The only mechanism regulating the imports
is the tariff mechanism. Tariffs on various items of iron and steel have drastically come
down since 1991-92 levels and the government is committed to bring them down to the
international levels.
v. Freight equalization scheme was modified in January'92, removing freight disadvantage
to states located near steel plants in the country. At the same time, it was ensured that far-
flung areas and distant states were protected by stipulating that the main producers charge
either actual freight or freight element existing prior to withdrawal of the scheme,
whichever is less.
vi. Levy on account of Steel Development Fund was discontinued from April'94 providing
greater flexibility to main producers to respond to market forces.
vii. Iron & Steel are freely importable as per the Extant Policy

viii. To check unbridled cheap imports of steel the Government has fixed floor prices for
seven items of finished steel viz. HR coils, HR sheets, CR coils, Tinplates, CRNO and
ASBR.
ix. Iron & Steel are freely exportable.
x. Advance Licensing Scheme allows duty free import of raw materials for exports.

Duties & Levies on Steel:
Customs Duty

- Peak rate for non-agricultural products reduced from 15 % to 12.5 %.
- Customs Duty on stainless steel and other alloy steel has been reduced from 10 % to 7.5 %.
Duty on non- alloy steel remains unchanged at 5%.
- Duty on steel melting scrap has been raised to 5%.
- Duty on refractories reduced to 7.5 %. Duty most of the raw material for manufacture of
refractories has also been reduced to 7.5%.
- Duty on ores and concentrates reduced from 5 % to 2 %. In respect of Ministry of Steel this
would mean a reduction in duty of 3% on iron ore, manganese ore and chrome ore.
- The Special Countervailing Duty (CVD) of 4 % to be imposed on all imports with a few
exceptions viz. ships for breaking, coal and coke etc. Full credit to be allowed to manufacturers
of excisable goods.

Service tax:

Service tax rate increased from 10% to 12%.

Direct Taxes:

No change in rates of personal income tax or corporate income tax. No new taxes are also being
imposed.

Levies on Steel

SDF LEVY- This was a levy started for funding modernization, expansion and development of
steel sector.

The Fund, inter-alia, supports :

1) Capital expenditure for modernization, rehabilitation, diversification, renewal & replacement
of Integrated Steel Plants.

2) Research & Development

3) Rebates to SSI Corporations

4) Expenditure on ERU of JPC

 SDF levy was abolished on 21.4.94
 Cabinet decided that corpus could be recycled for loans to Main producers
 Interest on loans to Main Producers is set aside for promotion of R&D on steel etc.
 An Empowered Committee has been set up to guide the R&D effort in this sector.
 EGEAF – Was a levy started for reimbursing the price differential cost of inputs used for
engineering exporters. Fund was discontinued on 19.2.96.

FDI Rule & Competitors:

The NSP has been approved by the Cabinet on3rd November, 2005. The Policy inter alia seeks to
enhance the indigenous production to 110 million tones per annum by 2019-20 from the present level
of 38 million tones, implying a compound annual growth rate of 7.3%. This requires additional
investment of about Rs. 2,30,000 crores. This is expected to generate additional employment of around
1 million by 2020.

The basic objective is to ensure that India has a modern, efficient and globally competitive steel industry
of world standards catering to diversified steel demand. On the demand side, the Policy seeks to
enhance steel usage at various levels of the economy. On the supply side, the Policy proposes to adopt
measures for removing major supply side bottlenecks like improving the availability of critical raw
materials.

With the upturn in the steel industry, the foreign companies/investors have started showing interest in
the investment by way of investing in the existing company or in setting up of Greenfield steel projects.
In addition to above, POSCO, South Korea has proposed to set up a 12 million tonne steel plant in the
state of Orissa involving an investment of US$ 12 billion. Mittal Steel Company has also entered into a
MOU with Government of Jharkhand for setting up a 12 million tonne steel plant involving an
investment of US$ 9 billion.

FII in Steel Sector:
Foreign institutional investors (FIIs) raised their stakes in most of the steel companies while individual
investors sold a substantial chunk of their holdings in the big steel companies in January-June 2007.

Individual investors, particularly the small shareholders having less than Rs 1 lakh investments, have sold
heavily booking profits.

According to analysts, this trend is an outcome of difference of perceptions between the two groups of
investors, one is the retail segment and the other is institutional buyers.

FII holding in Steel Authority of India has gone up from 5.6 per cent in the beginning of January to 6.39
per cent by June-end during which the holding of individuals has come down from 2.28 per cent to 1.89
per cent.

Similarly, in the case of Tata Steel, the FII holding has gone up from 18.11 per cent to 22.65 per cent
during January-June, while individual holding has come down from 24.74 per cent to 22.2 per cent.

In Jindal South West too, the FIIs have raised their stakes from 18.21 per cent to 21.17 per cent during
the first six months while individual holding has come down from 13.89 per cent to 11.51 per cent.

Exception

However, an exception is Essar Steel where FII holding remained static at 2.04 per cent throughout the
six months while there had been a marginal increase of 0.01 per cent in the case of Ispat Industries.

Individual holding has come down in both these companies. Interestingly, while all the small
shareholders have been consistent in selling, large individual shareholders have raised their stakes in
Essar in tandem with mutual funds and also in Ispat Industries where corporate bodies too have raised
their stake.

According to Mr. P.K. Choudhury, Managing Director of credit rating agency ICRA Ltd, :“the small
investors have exited at what they thought was the right price and many of them had actually purchased
the shares at the time of public issue.”

“On the other hand the institutions, who buy the shares after proper analysis of the economic
fundamentals, are still seeing better prospect for the Indian steel industry. The difference of perception
is because the retail investors have opted for short-term gains while the institutions have taken their
stand for the medium-term,” Mr. Choudhury said.

Role of Government:
The economic reforms initiated by the Government since 1991 have added new dimensions
to the industrial growth in general and the steel industry in particular. Accordingly, several
policy changes have been announced for the sector, from time to time, by the Government of
India. The major being, the New Industrial policy which had opened up the iron and steel sector
for private investment by:-

I. Removing it from the list of industries reserved for public sector
II. Exempting it from compulsory licensing.

Since then, the private sector has been playing an important and dominant role in production and
growth of the steel industry. They not only enhance the productive capacity of primary and secondary
steel, but also contribute substantial value addition in terms of quality, innovation and cost
effectiveness. During the period April-December, 2006, 20.5 million tonnes of steel has been produced
by private sector steel units, out of the total production of 33.15 million tonnes in the country. The
private sector units consist of major steel producers like Tata Steel Ltd., Essar Steel Holdings Ltd., Jindal
Steel and Power Ltd. (JSPL), Ispat Industries ltd. (IIL) etc. as well as relatively smaller and medium units
such as sponge iron plants, re-rolling mills, electric arc furnaces and induction furnaces.

Under the industrial policy, iron and steel has been made one of the high priority industries. Price
and distribution controls have been removed as well as foreign direct investment upto 100%
(under automatic route) has been permitted, with a view to make the steel industry efficient and
competitive. The trade policy has been liberalized making import and export of iron and steel
items freely allowable, with almost no quantitative restrictions on them. Other policy
measures such as convertibility of rupee on trade account, permission to mobilize resources from
overseas financial markets and rationalization of existing tax structure have also benefited the
Indian steel industry. Apart from this, the Government has envisaged considerable additions to
capacity in the steel sector specially from the sponge iron segment. It has also given licenses for
setting up electric arc furnace units (mini steel plants), which account for 30% of the steel

production in the country, producing mild steel as well as alloy steel. Further, all efforts are
being made to ensure that the sector continues to meet the requirements of small scale industries,
exporters of engineering goods and North-Eastern region of the country, as well as that of
strategic sectors such as defense and railways.

Another important initiative, undertaken by the Ministry, has been the announcement of the
'National Steel Policy' in 2005 which set out the Government's vision for future growth of the
sector. The policy largely aims to develop a modern and efficient steel industry of world
standards, catering to the diversified steel demands. It focuses on achieving global
competitiveness not only in terms of cost, quality and product-mix, but also in terms of global
benchmarks of efficiency and productivity. It seeks to enhance indigenous production of steel to
110 million tonnes (mT) per annum by 2019-20 from the 2004-05 level of 38 mT. This implies a
compounded annual growth of 7.3 percent per annum.

The increasing presence of the Indian steel companies in the world market with a wide-ranging
export basket, including technologically sophisticated products, is a pointer to the enhanced
competitiveness of this industry. They are having an efficient and strong base, with rising level
of per capita consumption, which is promoting massive industrialization in the country as well as
improving standard of living of the people. Further, there has been an increase in the research,
design and development activities, largely carried out by the existing iron and steel plants;
national research laboratories; academic institutions; etc. The significant improvements have
been made in the areas of iron and steel making processes, upgradation of raw materials, product
development, and increase in productivity as well as reduction in energy consumption. All this
shows that there exists innumerable investment opportunities in the sector both for domestic and
foreign investors.

Steps taken to boost steel industry:
In budget 2004-05, the customs duty on non-alloy steel was reduced from 15 % to 10 per cent
and on alloy steel from 20 per cent to 15 per cent. In August 2004, the customs duty on non-alloy
steel was further reduced from 10 per cent to 5 per cent; on melting scrap from 5 per cent to
'zero' and on ships for breaking from 15 per cent to 5 per cent.
Further, customs duty on several raw materials used by the steel sector like non-coking coal, met
coke and nickel has been reduced to 5 per cent and on coking coal to 'zero'.
To bring down the prices of steel, the excise duty on steel products was reduced from 16 per cent
to 8 per cent with effect from February 28, 2004 with a caveat that the duty regime will be
reviewed. Budget 2004-05 revised this partially by increasing the duty from 8 per cent to 12 per
cent, as the intended impact of duty cut on moderating prices was not achieved.

What is further needed:

While the increase in the domestic prices of steel because of an increase in international
demand cannot be avoided, attention needs to be paid to the problem of adequate and reliable
supply of coal to the steel industry. Efforts are required for securing assured linkages of coking
coal from overseas sources.

Furthermore, cross-border investment in captive coal mines, especially for coking coal, in
major source countries as well as investment for developing coal mines in India, needs to be
encouraged. Further, the movement of raw materials and finished steel would need good rail and
road network as well as substantial improvement in port handling, storage and haulage facilities.

Opportunities for growth:

The New Industrial Policy Regime

The New Industrial policy has opened up the steel sector for private investment by (a)
removing it from the list of industries reserved for public sector and (b) exempting it from
compulsory licensing. Imports of foreign technology as well as foreign direct investment are
freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of
facilitator, providing broad directions and assistance to new and existing steel plants, in the
liberalized scenario.

The Growth Profile

The liberalization of industrial policy and other initiatives taken by the Government have given
a definite impetus for entry, participation and growth of the private sector in the steel industry.
While the existing units are being modernized/expanded, a large number of new/greenfield steel
plants have also come up in different parts of the country based on modern, cost effective, state
of-the-art technologies.

At present, total (crude) steel making capacity is over 34 million tonnes and India, the 8th largest
producer of steel in the world, has to its credit, the capability to produce a variety of grades and
that too, of international quality standards. As per the ratings of the prestigious "World Steel
Dynamics", Indian HR Products are classified in the Tier II category quality products – a major
reason behind their acceptance in the world market.

Summary:
Steel demand in India rose more than 8% in 2009, buoyed by the government's focus on
infrastructure and revival in the automobile and consumer goods sectors of Asia's third-largest
economy.

With strong growth predicted for the auto and housing sectors in 2010, steel demand is set to
grow in double digits.

Global steel production, however, fell 8% last year as demand from key industries shrank amid
the economic downturn.

Following are some key facts about India's steel industry, which is witnessing growth rates
second only to China.

* India's iron and steel industry contributes about 2% of gross domestic product, or about USD
20 billion to the country's USD 1 trillion economy.

* India is now the fifth-largest producer of steel in the world, behind China, Japan, Russia and
the United States.

It produced 55.1 million tonnes of the alloy in 2009, but is still only a tenth the size of China, the
No.1 steel producing country.

* State-run Steel Authority of India is the largest producer, with capacity of 13.8 million tonnes.
Tata Steel, the world's No. 8 steelmaker, has capacity in India of 7 million tonnes, while JSW
Steel is third with annual capacity of about 6.9 million tonnes.

About half of India's steel industry comprises a large number of makers of higher-end re-rolled
steel with less than one million tonnes of capacity each.

* India's steel producing capacity is likely to touch 120.62 million tonnes by 2011/12, according
to the federal steel ministry. Based on planned projects, capacity could go up to 293 million
tonnes by 2020.

Regional governments have signed 222 memorandums of understanding for planned capacity of
276 million tonnes.

* India has immense scope for increasing consumption of steel. Current per capita consumption
is around 40 kg, compared with 100 kg in Brazil, 250 kg in China and a global average of 198
kg. Steel demand is expected to rise 5-6 percent annually until 2019-20.

* India's growing status as a global small-car hub is drawing global steel makers, especially
Japanese firms, to the country. World No. 2 steelmaker Nippon Steel is in talks with Tata Steel
for an automotive steel joint venture, JFE Steel has tied-up with India's JSW Steel, while
Sumitomo Metal Industries Ltd is considering a JV with Bhushan Steel.

* Indian steel companies have been among the best performing stocks in 2009, widely
outperforming the benchmark stock index.

Shares of Tata Steel, SAIL and JSW Steel rose between 2-4 times during the year, compared
with the 81 percent rise in the main BSE index.

Indian Steel

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