economic report _steel demand supply

8/8/2019 Economic Report _steel Demand Supply

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Sydenham Institute of Management Studies,

Research and Entrepreneurship Education

(SIMSREE)

Steel: Demand and

Supply AnalysisSubmitted by:

Vishal Bhanushali(M1006)

Sumit

Powar(M1037) Dhiraj Meshram(P1029)


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Steel: Demand and Supply AnalysisOctober 1, 2010

Acknowledgement

We take immense pleasure in thanking Respected Prof. Swaha Shome for having

permitted and helped us to carry out this project work.

We wish to express our deep sense of gratitude to college and Director M.A.Khan to

help us out in making the important databases available for the project work.

Words are inadequate in offering our thanks to classmates and also senior friends

for their encouragement and cooperation in carrying out the project work.

Finally, yet importantly, we would like to express our heartfelt thanks to our beloved

parents and god for their wishes which helped successful completion of this project.

Sydenham Institute of Management Studies Research and EntrepreneurEducation (SIMSREE)


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Table of ContentsIntroduction................................................................................................................3

Determinants of Demand...........................................................................................4

Own price................................................................................................................4

Income of consumer................................................................................................5

Price of other goods................................................................................................5Complements.......................................................................................................5

Substitutes...........................................................................................................6

Taste and preference..............................................................................................6

Expectation from future..........................................................................................7

Short term............................................................................................................7

Long term.............................................................................................................8

Advertisement.........................................................................................................8

Distribution of income.............................................................................................9

Climate condition....................................................................................................9

Determinants of Supply..............................................................................................9

Price........................................................................................................................9

Cost of production...................................................................................................9

Technological progression.....................................................................................10

Price of related output...........................................................................................10

Raw material......................................................................................................10

Energy................................................................................................................11

Government policy................................................................................................11



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Elasticity analysis..................................................................................................13

Price elasticity....................................................................................................13

Determinants of Elasticity..................................................................................14

Conclusion................................................................................................................15

Bibliography.............................................................................................................16

Bibliography

Introduction

The Indian steel industry was the first core sector to be completely freed from the

licensing regime (in 1990-91) and the pricing and distribution controls. The steel

industry is expanding worldwide. For a number of years it has been benefiting from

the exceptionally buoyant Asian economies (mainly India and China). The economic

modernization processes in these countries are driving the sharp rise in demand for

steel.

The New Industrial policy adopted by the Government of India has opened up the

iron and steel sector for private investment by removing it from the list of industries

reserved for public sector and exempting it from compulsory licensing. Imports offoreign technology as well as foreign direct investment are freely permitted up to

certain limits under an automatic route. This, along with the other initiatives taken

by the Government has 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.

Soaring demand by sectors like infrastructure, real estate and automobiles, at

home and abroad, has put India's steel industry on the world map. Dominating the



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Indian horizon is steel giant Tata Steel, whose takeover of the UK-Dutch steel

company Corus is the country's biggest buyout. Meanwhile, the LN Mittal-owned

Mittal Steel acquired French steel company Arcelor to create the world's number

one steel company, Arcelor Mittal; and Korean steel giant POSCO is pumping money

into mines and steel plants in Orissa to emerge as one of the biggest steel plants in

the state.



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Determinants of Demand

Own price

Demand is the major driving factor and the decision maker for the Indian

steel price in the domestic market. Though mostly price trend is in line with

the international price index, it varies somewhat based on the demand in the

domestic market (largely from the automobile and infrastructure industry).

Source: India Economy Review June 2010

In the near past companies have increased prices in the range of Rs.1000-

Rs.1500 (approx. 3 -4 %).Considering the fact that the major steel

consumption is by the follow listed three sectors and hence are major role

player in deciding price.

1. Automobile

2. Infrastructure

3. White goods

Source: India Economy Review June 2010

Income of consumer

Though in case of steel there is no direct influence of the consumer income

on steel demand, there is certainly indirect relationship exists. The



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consumer income can largely push the steel demand in the by the way of

derived demand.

For example consider the increased demand for 2-wheelers or any

automobile product will induce the increase in demand of steel. Analysing

other factors like better infrastructure need, better housing which is greatly

dependent on standard of living of the country population also contributes in

the steel demand. Hence, increase in consumer income have the certain

impact on the steel demand and is one of the fundamental determinant of

steel demand.

Price of other goods

Complements

Steel is the main input to the various industry ranging from Automobile, white

goods to infrastructure like railway, housing, etc. The major problem with steel is, it

is highly prone to corrosion which could lead to high cost of capital loss in case of

machinery where it can hold the whole production line. Below mentioned are few

complementary goods,

Lubricating Oil:

Lubricating oil is highly used commodity in the production or manufacturing

industry where it has the great demand in order to keep production line up and

running. Hence, on long term it will have certain impact on the steel demand. For

instance take high investment machinery which have reduced life due to poor

maintenance or oiling this will definitely have the periodicity of demand for thatmachinery and hence steel in turn.



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Paint:

Paint is again the complementary goods for steel in industries like automobile,

sheep making, etc. Steel demand will come down on the long time scale if the final

goods(with steel as input) remains working.

Though this have the very limited effect on short term it will have considerable

impact on long term demand of steel.

Substitutes

In case of domestic use:

Plastic and china clay are the close substitutes of steel.

Steel: Steel buckets were replaced by the plastic ones.

China Clay: Steel plates and dishes were replaced by the china clay dishes.

In case of automobile industry:

Fibre is the close substitute for steel sheets for the production of 2-wheelers.

Incase of infrastructure sector:

There is no close substitute for steel in this sector.

Taste and preference

Steel industry as explained earlier is mainly driven by derived demand from

various industry. Various industry require the specific form of the steel based

on their field of operations for example sheets are majorly consumed by

automobile industry hence their exists certain relation between demand of

the steel sheets .Steel demand hence is the subjective in case of preference

based purely on the requirement from particular industry. Following table

depicts the production of the various form of steel,



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April-March % Change

2010 2009 2010 2009

Bars and rods 22094 20525 7.65 12.02

H.R.Coils/Skelps 11461 11370 0.80 -1.27

Structural 5149 5161 -0.23 12.18

GP/GC Steel 4470 4359 2.54 -0.67

C.R.Sheets/Coils 5325 4520 17.82 -26.96

H.R. Sheets 603 738 -18.28 8.74

Expectation from future

Steel industry as a whole is the important pillar for the economy as it caters

to the various sectors which are key indicator for countries economical

growth. Future outlook for the steel demand can be categorised as short

term and long term.

Short term

Short future expectation is based on the expected demand for the upcoming2-3 years considering current domestic and international market scenario.

Short term market expectation will definitely act as a catalyst for the steel

demand. Below mentioned are few of the factors,

Capacity expansion by various steel majors (eg.JSW steel, SAIL etc)

Production cut in China will increase the demand of Indian steel

products

Reduction in the raw material (coal and iron ore) prices in internationalmarket



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Source: World Steel Association

Long term

A long term future expectation is comparatively more promising on the back

of the growing economy of India and increased focus on the basic

infrastructure. Next 10-15 years will be crucial for Indian economy as it is

expected to go under major changes. Following is the list of some factors

which will hamper the long term plans,

Huge growth in infrastructure sector (eg. Roads, Railways, Shipyards,

Aviation, etc.)

Increased demand for housing

Compounding growth in automobile, white goods sectors with increase

in per capita income

Advertisement

Advertisement in the past had very little role to play as far as the steel

industry is considered but lately there has been a tremendous change

observed in the trend where in publicly owned companies like SAIL spending

a considerable chunk on the advertisement to boost the demand. Similarly

the trend is being followed by private player as well like JSW which is

promoting their product by various means of media. This will certainly boost

the demand as there are many players entering in to this market segment

and competition getting intensified. Firms are working towards increasing

their market share by promoting their product through various channels of

communications.



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Distribution of income

Increase and decrease in the income distribution do not have any marginal

effect on the demand of the steel. Steel is largely consumed by the

infrastructure, ship building and various other industries which have very

high capital investment.

Climate condition

Climate conditions have the definite role in steel demand as it is the

important factor which is considered while planning any long term projects

or company strategy. Government undertaken projects are the typical

examples for the scenario. For an instance consider the case of the railwayprojects, in large scale projects it is taken in to the consideration that work

will proceed at slow pace and hence it is implicit that steel demand is

expected to remain low in that duration of the year.

Determinants of Supply

Price

Price has very important role to play from supplier point of view as they are thedecision maker of the price in Indian market. Huge demand leads to increase in

price which is largely dependent on the price of the inputs like energy, raw material

etc. Most of the players in the steel industry are working on the marginal range of

profit which is the price deciding.

Cost of production

The average per tonne cost of production in India remained much lower than the

global average cost of production (See chart). Production cost in the india is the

lowest across the globewhich gives immence competitive edge over the

competitor.cost of production majorly depends on the raw material price and

energy prices.



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Technological progression

Indian steel industry being lead by major players like Tata, SAIL, JSW and others is

the mixes of the private and public firms. Firms operating from decades follow thetraditional technology and are slow in getting momentum and keep pace with fast

growing technology. This is the major constrain in optimizing the output and need

an attention on priority basis. More and more companies coming up with their

expansion plan have concentrated on this importance and are improving on this

front by coming up with joint ventures with partners who are advanced in

technology. The typical example of this is the

Price of related output

Raw material

A comparative advantage for Indias steel industry is the ready domestic availability

of significant reserves of high quality iron ore (a key raw material input to steel

making), predominantly in the east of India. Although current steel production

capacity is located in both the east (.at products from large producers near iron ore

supplies) and in the west (long products from smaller producers nearer large

construction centres), most significant forthcoming developments are planned in

the east to take advantage of low cost iron ore supply.

Energy

Energy is the important factor in production of steel where in it is used in the

melting of steel through various production processes. Production is mainly done in

the Open hearth furnace or Electric arc furnace. Thus, Energy (Coal or Electricity) is

the factor of high importance which has huge impact on the steel pricing. On close

analysis it is observed that when the price of energy falls, it becomes less costly to

produce steel. Thus the supply of steel increases at all prices.



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Government policy

The Government has been making all-out efforts to boost the demand and

consumption of steel, an Institution for Steel Development & Growth (INSDAG) wasset up involving leading steel producers in the country. The Development

Commissioner for Iron & Steel had launched a National Campaign for increasing the

demand for steel in non-traditional sectors, particularly in the construction, rural

and agro-based industrial sectors. Other areas include reduction in power and

railway tariffs, reduction in input costs, strengthening of antidumping mechanism,

setting up a steel exporters forum and an empowered committee for research and

development.

In addition to above government of India has rolled out National Steel Policy 2005 to

facilitate the creation of additional capacity, removal of procedural and policy



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bottlenecks that affect the availability of production inputs, increased investment in

research and development, and the creation of road, railway, and port

infrastructure. The policy focuses on the domestic sector but also envisages a steel

industry growing faster than domestic consumption, which will enable export

opportunities to be realized.



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Elasticity analysis

Overall analysis of the steel demand shows that it has no considerable impact of

price as it is completely based on the demand from various industries. Following

graph depicts the quantity demanded and price of the steel in year 2008-09.It is

clearly indicated by the curve that huge drop in the price had no significant impact

on demand of the steel in the given time frame. Following are various measures of

elasticity

Price elasticity

From the data given in following demand schedule below is the calculated

price elasticity for steel demand for the year 2008-09 the time frame which

seen the huge fluctuation and drop in price but no considerable impact on

demand.

Price elasticity

=0.077 / 0.267

=0.288


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Aug 4644 45381

Sep 4586 45502

Oct 4524 45375Nov 4154 43441

Dec 4240 39222

Jan 4546 34795

Feb 4482 33667

Mar 4874 34314Demand and price schedule of steel for year 2008-09

Determinants of Elasticity Price of the product-

Price of the steel doesnt make any difference to the demand of steel because ofits highly inelasticity.

Necessity -

Because of its durability, it is the necessary component for the construction of

infrastructure, production of automobiles, railway industry and shipping industry.



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ConclusionThe recent announcement of various steel companies of their plans to expand

capacity in the coming years show that if their plans materialize, the steel market

will see significant increase in concentration and emergence of strong oligopoly in

most product categories. It is worth noting that individual project sizes have gone

up from an average of about 3 mt of annual capacity for a large one to about 12-15

mt today. Whereas the largest single site steel mill today has a annual crude steel

capacity of only 5 mt, the projects such as those of POSCO, Arcelor Mittal Steel,

Tata Steel, JSW Steel, Essar Steel, etc. are above 10 mt in each case and with

multiple projects in their hands, each will have significant individual capacity in the

countrys industry. In all such projects, bank and institutional funding will be of

utmost importance and only the ones with greater financial prowess and market

share will be able to draw such large funds.

Overall, large scale steel industry benefits from economies of scale and scope

coming in from all three major components of competitive production Production,

Finance, and Marketing. It is no surprise therefore that firms that were focusing on

limited set of product segments are now broadbasing their product offerings. In

doing so, larger firms do find it easier (and potentially cheaper) to avail finance.

However, these are natural advantages, and should not be considered to be against

the principal of level playing field for all competitors in the industry. Moreover, there

is no one to one correspondence between optimum size of the firms and scales of

operation. For various historical reasons, extent of globalization, availability of

capital, technology, capital intensity, lack of raw materials availability and global

dependence for it, etc. the average size of the firms in the developed countries is

more than those in the developing world. Further, business failures have led to

consolidation.



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All evidence points towards two points. First, there is no evidence of anticompetitive

behavior by the incumbent. However, a level playing field is not being achieved

primarily because, either by design or default, government action favors one set of

units over the others. Second, though the public sector has been a beneficiary of

government bias in the past, it is by no means the only ones. Other private entities

have benefited from favors granted by both central and state governments. It is not

clear whether these can be considered to be anti-competitive, though such actions

do adversely affect free and fair competition.



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Bibliography Annual Report 2009-2010 Ministry of Steel Government of India

PUBLIC ENTERPRISES, GOVERNMENT POLICY AND IMPACT ON COMPETITION-

INDIAN STEEL INDUSTRY report for the competition commission of India

January 2009

Books:

Managerial Economics By Salvatore

Managerial Economics By Samuelson

The Economist Magazine

India Economy Review June 2010


economic report _steel demand supply

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