STRATEGY REVIEW

Group 4: Manu Shankar, Arun Koundinya, Prashant Mishra, Rohit Patel, Ken Sekhar

INDIAN STEEL INDUSTRY- AN OVERVIEW India has emerged as the fourth largest steel producing nation in the

world, as per the recent figures release by World Steel Association in April 2011. In 2010, India was the 5th largest producer, after China, Japan, USA and

Russia had recorded a growth of 11.3% in steel production as compared to 2009. Overall domestic crude steel production grew at a compounded annual growth rate of 8.4% during 2005-06 to 2009-10. Total crude steel production in India for 2010-11 was around 69 million

tonnes and its expected that the crude steel production in capacity in the country will increase to nearly 110 million tonne by 2012-13. The demand for steel in the country is currently growing at the rate of

over 8% and it is expected that the demand would grow over by 10% in the next five years.

INDIAN STEEL INDUSTRY- AN OVERVIEW Our per capita consumption of steel is around 110 pounds as

compared to 330 Pounds for the global average. This indicates that there is a lot of potential for increasing the steel consumption in India Investments at stake are to the tune of $187 billion in the Steel

sector. Increase in the demand of steel in India is expected to be 14%

against the global average of 5-6% due to its strong domestic economy, massive infrastructure needs and expansion of industrial production.

PORTERS FIVE FORCES We have analysed the domestic steel sector through Michael Porters

five force model so as to understand the competitiveness of the sector as well as pointed out the initiatives taken by Tata Steel to safeguard its position from all the five forces of threats, namely: Threats of new entrants Intensity of rivalry among existing competitors

The bargaining power of suppliers The threat of substitute products The bargaining power of buyers

ENTRY BARRIERS HIGHCAPITAL REQUIREMENT Steel industry is a capital intensive business. It is estimated that to set up

1 mtpa capacity of integrated steel plant, it requires between Rs. 25 bn to Rs. 30 bn depending upon the location of the plant and technology used. Tata Steel has already made sufficient efforts to safeguard itself in this

regard. Its has a line up of Greenfield projects which it plans to establish not only in domestic markets( Jharkhand, Orissa & Chhattisgarh but also internationally( Bangladesh , Iran & Vietnam). It has already completed its expansion capacity of its existing plant from

5 mtpa to 6.8 mtpa at Jamshedpur with an investment of Rs. 5,000 crore, while it is in the process of expanding the capacity from 6.8 mtpa to 10 mtpa with an estimated investment of Rs. 15,000 crore. The company has invested Rs. 8,000 crore out it and it expects to

achieve 10 mtpa capacity by 2011-12. It would prove to be very difficult for any new entrant to come up with such huge investment outlays.

ENTRY BARRIERS HIGHECONOMIES OF SCALE As far as the sector forces go, scale of operation does matter. Benefits of

economies of scale are derived in the form of lower costs, R& D expenses and better bargaining power while sourcing raw materials. Tata Steel being an integrated steel company has its own mines for key

raw materials such as iron ore and coal and this protects them for the potential threat from new entrants to a significant extent. Tata Steel owns raw material assets such as coal and limestone mines

through joint ventures or completely, with the assets spread across countries such as Australia, Oman and Mozambique

ENTRY BARRIERS HIGHGOVERNMENT POLICY The government has a favourable policy for steel manufacturers.

However, there are certain discrepancies involved in allocation of iron ore mines and land acquisitions. Furthermore, the regulatory clearances and other issues are some of the major problems for the new entrants. Tata Steel being a century old company under the flagship Tata Sons which is known for its Corporate Social Responsibility already enjoys a respectable position in front of the Indian Government. The Jharkhand government on May,24th 2009, has granted a prospecting licence (PL) to Tata Steel for the Ankua iron ore mines. A senior company official said that Tata Steel has been allocated 1,800 hectares for prospecting in the Ankua area. Another 10,000 acres of land will be allocated to them for their project in Ranchi

COMPETITION-HIGHCONCENTRATION ANALYSIS In Economics the concentration ratio of an industry is used as an indicator

of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market

output generated by the N largest firms in the industry. The 4 firm concentration ratio of the Iron and Steel Industry is 71%. This implies that there is oligopoly in the industry as it is dominated my

few major players. Major percentage of market output is generated by the 4 Largest firms in the industry.

THREAT OF SUBSTITUTE- LOW Plastics and composites pose a threat to Indian steel in one of its biggest markets

automotive manufacture. For the automobile industry, the other material at present with the potential to upstage steel is aluminium. Perhaps the most attractive alternative to stainless is aluminium. Stainless producers themselves are offering their customers a range of alternatives in an effort to prevent business being lost on ferrous or carbon steel materials. Such options include lower-nickel duplex grades and ferritic types. In the meantime, nickels fluctuations will continue to create problems for the stainless industry worldwide. However, at present in India the high cost of electricity for extraction and

purification of aluminium weighs against viable use of aluminium for the automobile industry. Steel has already been replaced in some large volume applications: railway sleepers (RCC sleepers), large diameter water pipes (RCC pipes), small diameter pipes (PVC pipes), and domestic water tanks (PVC tanks). The substitution is more prevalent in the manufacture of automobiles and consumer durables

BARGAINING POWER OF CONSUMERSMIXED Some of the major steel consumption sectors like automobiles, oil & gas,

shipping, consumer durables and power generation enjoy high bargaining power and get favourable deals. However, small and retail consumers who are scattered and consume a significant part do not enjoy these benefits

BARGAINING POWER OF SUPPLIERSHIGH The bargaining power of suppliers is low for the fully integrated steel

plants as they have their own mines of key raw material like iron ore coal for example Tata Steel. However, those who are non-integrated or semiintegrated has to depend on suppliers. An example could be SAIL, which imports coking coal. Since domestic raw material sources are insufficient to supply the Indian

steel industry, a considerable amount of raw materials has to be imported. For example, iron ore deposits are finite and there are problems in mining sufficient amounts of it.

BARGAINING POWER OF SUPPLIERSHIGH Indias hard coal deposits are of low quality. For this reason hard coal

imports have increased in the last five years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal (the remainder is power station coal). India is the worlds sixth biggest coal importer. The rising output of electric steel is also leading to a sharp increase in demand for steel scrap. Some 3.5 million tons of scrap have already been imported in 2006, compared with just 1 million tons in2000. In the coming years imports are likely to continue to increase thanks to capacity increases. Thus backward integration is a key success factor in this industry.

TATA STEEL: AN INTRODUCTION Established in 1907 under the vision of JRD TATA Formerly known as TISCO, now Indias largest steel company Tenth-largest steel producing company in the world Ranked 401st in the 2012 Fortune Global 500 ranking of the world's biggest

corporations Eighth most-valuable Indian brand according to an annual survey conducted by

Brand Finance and The Economic Times in 2010 The company was recognized as the world's best steel producer by World Steel

Dynamics in 2005 It has also been listed as World's most ethical companies by Forbes.

TATA STEEL (INDIA): WHERE DOES IT STAND? Crude steel production at 7.1 million tonnes Approx. 4% higher over the previous year- FY 2010-11. The company is setting up three more Greenfield steel plants in eastern

India in Chhattisgarh, Jharkhand and Orissa for a combined capacity of 23 m.t. p.a. Tata Steel is India's single largest integrated steel works in the private

sector with a market share of over 13%

GROWTH STRATEGY Companys long term strategy is capacity expansion to achieve

economies of scale. New projects are to be established in Orissa, Jharkhand and Chattisgarh. Making European operations competitive. Vigorous pursuit of continuous improvement across all operations. Investment in raw material assets to provide better raw material

security. Quick completion of expansion plans in India.

GROWTH STRATEGY This creates opportunities to gain market share from competitors

who diversify and split their focus. Acquisitions and strategic alliances are also critical to strengthen, refocus and position companies for increased growth and profitability. The Tata Steel Group is strongly pursuing its long-term strategy of acquiring and developing mining projects for its raw material security for iron ore and coking coal. The Group has been concentrating on the geographies that are logistically favourable with respect to its plants in Europe and Asia

RAW MATERIAL STRATEGY Success in the steel business requires a great deal of raw material

security. Iron ore, coal and minerals are the major raw materials required for steel

manufacturing. Tata Steels long term strategy is to maintain control over supply of these

raw materials. Tata steels raw materials division produces over 14 million tonnes of ore

in Orissa and Jharkhand for its own consumption.

RAW MATERIAL STRATEGY Significant investments include enhanced holding in Riversdale

mining limited coal project. Other significant investments in raw materials include a recently

enhanced holding in the Riversdale Mining Limited coal project , development of an iron ore project with New Millennium Capital corporation and Dhamra Port Company Limited a 50:50 joint venture between Tata Steel and Larsen & Toubro to construct a deep-water port on the eastern coast of India. Tata Steel also has several joint ventures in Africa, Australia and

Canada to further increase its raw material security.

R&D A collaborative approach, cross-fertilisation of better practices and

technology absorption through integration of processes have led to measurable and continuous improvement in many aspects of Tata Steels performance. In addition to its on-going drive to improve the quality and quantity of the steel it produces, Tata Steel continues to conduct extensive research with the objective of making its steel production operations more energy efficient, cost-effective and environmentally sustainable The research and development (R&D) centres are located at IJmuiden in

the Netherlands, Rotherham and Teesside in the UK, and Jamshedpur in India. A clear focus on development of cutting edge technology has enabled Tata Steel to become one of the lowest cost steel producers worldwide. Current activities in this area include research on agglomerates chemistry, blast furnace burden distribution, integrated through-process modelling, reduced zinc consumption during tube galvanising, and many others.

R&D Tata Steel patents everything and sees a strategic competitive

edge from its intellectual property rights (IPR). The management sees patents and IPR as products capable of generating revenue streams in the future. The company has designed a comprehensive IP framework that monitors IP activity and creates opportunities. For instance, the patenting of the coal injection process in the

furnace, which was licensed to the Vizag Steel Plant, or increasing the rate of combustion at the sinter plant. The formation of Tata Pigments was a result of the discovery of new pigment from its cold rolling pickling process. Today, Tata Steel is the only Indian company to have an on-going industrial liaison programme with MIT and Sheffield University.