ICRA

ICRA Sector Analysis

STEEL
The Indian Steel Industry
December 2004

Industry Comment

[Link]
 Steel Industry

Contacts:
Rajeev Thakur Research Head
Amul Gogna Executive Director

Date December 2004

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 Steel Industry

TABLE OF CONTENTS
SECTOR OVERVIEW ................................................................................................................................ 2
MARKET SIZE AND SEGMENTATION, INDUSTRY STRUCTURE ............................................................. 2
MARKET CHARACTERISTICS ............................................................................................................ 3
KEY SUCCESS FACTORS................................................................................................................. 6
INVESTMENT CLIMATE ......................................................................................................................... 7
GROWTH TREND ............................................................................................................................ 7
PRODUCTION TRENDS .................................................................................................................... 7
CONSUMPTION TRENDS ................................................................................................................ 11
TRADE TRENDS ............................................................................................................................ 13
MAJOR PROJECTS ........................................................................................................................ 13
INDIA ADVANTAGE / DISADVANTAGE .............................................................................................. 14
REGULATIONS .............................................................................................................................. 14
CRUCIAL ISSUES THAT NEED TO BE ADDRESSED ............................................................................. 14
FINANCIAL PERFORMANCE OF MAJOR COMPANIES................................................................ 15
PERFORMANCE DURING H1 2004-2005 ........................................................................................ 15
OUTLOOK..................................................................................................................................... 17

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 Steel Industry

SECTOR OVERVIEW
Ma r k e t S i ze a n d Se g m e n ta ti o n , I n dus tr y S tr u c tu r e

• The Indian steel industry ranks 8th in the world with an annual production of 31.8 million tonnes per
annum1. It accounts for 3.3% of the world steel production.
• As a market, India presents a good potential with a low per capita consumption level (around 20
kgs as against 80 kgs in China, 405 kgs in Malaysia and 925 kgs in South Korea)
• The structure of the steel industry comprises the following sectors:
! Primary producers – three integrated steel producers (ISPs) who convert iron ore into steel
through Coke oven-BF-BOF route - Steel Authority of India Limited (SAIL), Tata Iron and
Steel Company Limited (TISCO) and Rashtriya Ispat Nigam Limited (RINL), which have
among them nine operational units
! Secondary producers: These are the mini steel plants (MSPs), which make steel by melting
scrap or sponge iron or a mixture thereof in an electric arc furnace (EAF) or an induction
furnace (IF). There are approximately 190 EAF units and 950 IF units.
! Small sector stand-alone processors: These include small stand-alone units for making pig
iron and sponge iron, hot and cold rolling units, re-rollers, galvanising and tin plating units

The Steel sector has a significant importance to the Economy. It not only directly accounts for about
1.3 per cent of GDP, it also has a bearing on how the consumer goods and downstream infrastructure
sectors develop. Further, with a share of approximately 10%, the sector is amongst the largest
contributors to the central excise. The industry provides employment to a large workforce
(approximately 0.4 mn. people directly), with the integrated steel plants accounting for a 40% share.

Sector Type No. of Working Total Capacity Working % of Working Capacity to

Units Units Capacity Total Capacity

Primary Integrated Plants 9 9 18.90 18.90 100

Secondary EAF Units 188 35 12.80 6.70 52.34

IF Units 967 635 10.29 7.19 69.87

Small scale Pig iron Units 21 18 4.83 4.16 86.13

Sponge Iron Units 56 51 7.24 6.88 95.03

Re-rolling Units 1270 743 24.62 14.26 57.92

HR Units 13 8 6.63 6.37 96.08

CR Units 85 54 4.59 3.89 84.75

GP/GC Units 20 16 2.10 1.96 93.33

Tin Plating Units 3 2 0.15 0.09 60.43

Source: Ministry of Steel, Government of India

The integrated steel plants account for around 60% and the large mini mills account for around 15% of
the total value created by the Indian steel industry.

1
Crude Steel Production in 2003

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 Steel Industry

Ma r k e t Cha r ac te r is ti c s

The competitive forces affecting the Indian Steel Industry, as per Michael Porter’s model is shown in
the following chart.
Threat of Substitutes – Medium
Steel faces competition from
substitutes such as Aluminium, Plastic
and Copper. However, high strength of
Steel prevents large scale substitution.

Bargaining Power of
Buyer- Medium to High
Bargaining Power of Supplier – Inter-firm Rivalry – High Diversified set of users
High The steel industry is extremely prevents significant buying
Supplier of Raw Material (Coal, fragmented. In India, apart from the 3 power with buyers.
Iron ore, Scrap) have high integrated players, there are 190 However, individual nations
bargaining power vis a vis non- Electric Arc Furnaces, 950 Induction often initiate actions, which
integrated players. Furnaces and 1500 small scale stand affect global trade (eg.
alone producers. Section 201, USA)

Entry Barriers: Medium - High

Capital investment is the main entry barrier for players who
wish to enter the steel sector as an integrated player. For
example, setting up a 1mtpa blast furnace alone would cost
upwards of Rs.18 bn. However, if the player wishes to operate
in specific segments of the steel value chain on a stand-alone
basis (like sponge iron units, re-rolling units etc.), the entry
barriers would be limited. For example, the cost of setting up a
60,000 tpa sponge iron unit would be just around Rs.0.15 bn.

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 Steel Industry

Key Issues facing the industry are as follows.

Mature Industry
The world steel industry is a mature industry with the world steel production remaining and
consumption witnessing an annual growth below 1.5% during the past three decades. During 1995-
2000, world crude production grew by just about 2.4% annually. However, growth rates have improved
since 2001, and during 2000-2003, world crude steel production grew at an annual average of 4.4%.

World Steel Annual Production Growth--%

0
1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-03
-1

Compiled by INGRES

Cyclical Nature of Industry

The trend in the last few years in steel prices shows that the steel industry is cyclical. While the
demand growth is usually governed by economic growth (because of a large end user demand base),
the steel sector globally has historically been marked by overcapacity. The trough in the steel cycle is
usually caused by deterioration in demand conditions, as was the case in FY2002. The situation is now
changing with supply constraints being witnessed in several regions. The upward movement in steel
cycle during the last two years is the result of improvement in demand conditions (eg. Chinese
demand because of Olympics, recovery in global economic conditions) and/or capacity rationalisation
(by around 20 mt by the OECD nations). The cyclical behaviour has a huge impact on the performance
on steel companies.

Growth in Margins
The steel industry is extremely fragmented both locally as well as globally. Although, some signs of
consolidation (eg. Usinor, Arbed, Arcelia – Arcelor; NKK, Kawasaki; US Steel, National Steel,
Bethlehem Steel; Nippon, Arcelor, Tata Steel) is being witnessed globally, the top 5 companies
account for just around 15% of the industry concentration. In India, apart from the 3 integrated players,
there are 190 Electric Arc Furnaces, 950 Induction Furnaces and 1500 small scale stand alone
producers. High level of competition has historically resulted in low operating profit margins relative to
other commodity industries. However, the margins have shown an improvement during the last few
years due to strong growth in steel prices globally.

Operating Margin (%)

FY2004 FY2003 FY2002 FY2001 FY2000
TISCO 29.51 24.14 17.84 23.02 18.74
SAIL 19.49 10.74 2.4 11.46 7.39
Ispat 15.98 14.52 0.95 10.94 12.99
Jindal 23.11 9.58 7.42 17.43 15.06
Compiled by INGRES

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 Steel Industry

Declining Debt exposure and Improvement in Interest coverage

Most of the steel companies in India have historically had huge debt exposure. The total debt exposure
of the Indian Financial Institutions and Banks to the iron & Steel sector was historically over Rs. 400
bn. Further, these debt (which were taken in mid-1990s) carried high interest of 18-19%. Thus,
pressure on operating profits because of depressed steel prices (till March 2002) had raised concerns
on servicing of debt. With the recovery of steel prices since April 2002, the prospects of servicing debt
appear to be improving. Further, the FIs have worked out a restructuring package for improving the
repayment prospects from three steel companies—Essar, Ispat and Jindal Vijaynagar. Accordingly, the
industry is witnessing declining debt equity ratio and improvement in interest coverage.

Debt-Equity ratio
FY2004 FY2003 FY2002 FY2001 FY2000
TISCO 0.99 1.35 1.13 1.01 1.13
SAIL 2.86 5.02 3.82 2.99 2.95
Ispat 6.62 6.84 5.32 3.49 3.1
Jindal 2.59 2.64 2.06 1.91 1.67
Compiled by INGRES

Interest Coverage (times)

FY2004 FY2003 FY2002 FY2001 FY2000
TISCO 12.74 5.28 2.06 3.14 2.23
SAIL 3.76 0.67 -0.49 0.42 0.04
Ispat 1.17 0.74 -0.49 0.14 1.03
Jindal 2.66 0.42 0.39 1.06 1.1
Compiled by INGRES

Cost advantage/disadvantage due to locations

Because of proximity to raw material sources and the pre-liberalisation industrial policy of the
government, most of India’s ISPs (TISCO and SAIL) are located in east India, at significant distances
from the major consumption centres in west and south India. Thus, producers like Ispat Industries and
Essar Steel, in the west and Jindal Vijaynagar in the south have freight cost advantages over
integrated players like TISCO and SAIL. Also, increasing freight costs in the face of declining import
duties put TISCO and SAIL at a major disadvantage against low- cost imports in west India. Apart from
distances, poor quality of road infrastructure in the country also results in time delays and enhances
the delivery costs of the finished products. Thus, in view of these concerns, the golden quadrilateral
and the other road projects initiated by the government, appear to be steps in the right direction.

High prices and Enhanced Competitiveness likely to counter declining duty protection
The basic import duty on steel has been consistently brought down as shown in the following Table.
This has made the industry vulnerable to international competition. However, as the steel prices are
currently at high levels and the Indian steel companies are increasingly focusing on becoming cost
competitive, the current level of duties are perceived to be high enough to protect domestic players
against imports/international competition in the immediate term.

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 Steel Industry

Basic Custom Duty (%)

FY FY FY FY FY FY FY Mini- February Union 20-8-04
1998 1999 2000 2001 2002 2003 2004 Budget 2004 Budget
(8-1-04) FY2005
HR Coils 25 25 25 25 25 25 25 20 15 10 5
CR Coils 25 30 35 35 35 30 25 20 15 10 5
Plates 30 30 35 35 35 30 25 20 15 10 5
Structurals 30 30 35 35 35 30 25 20 15 10 5
Compiled by INGRES

Ke y S u c c e s s F ac to r s

The key success factors in the Iron & Steel Industry are mentioned as follows:

• Level of Integration and Captive facilities: There are primarily two routes of steel making: The
Primary route (Blast Furnace – Basic Oxygen Furnace route) and the Secondary Route (Electric
Arc Furnace/Induction Furnace Route). While the former route is capital intensive, the cost of
production is relatively lesser as compared to the Secondary route where the manufacturer is
exposed to the volatility in raw material (Scrap/Sponge Iron) prices along with high power tariffs. In
both the cases however, it is important to have an integrated operation (with captive coal/iron ore
mines) so that one is not exposed to the volatility in the prices of the intermediate products.
Integration into downstream value added steel production also enhances the margins and
profitability.

• Product Mix: Higher realisations and margins are associated with Flat products (especially Cold
Rolled or CR products). Accordingly, we are witnessing an increasing share of value added
products in the product mix of the leading players.

• Branding: Branding has started playing an important role in the steel business. Not only does
branding enhance customer acceptance and loyalty, it also allows steel companies to charge a
premium on branded steel. Accordingly, we are witnessing companies like Tata Steel increasingly
focusing on branding steel. For Tata Steel, branded products accounted for 25% share in Flat
products and 31% share in long products sales during H1 FY2005 (as against 21% and 30%
respectively in H1 FY2004).

• Location of Steel plant: High freight costs associated with product movement makes it important
for the manufacturing units to be located close to the consumption centres.
• Cost competitiveness: Steel is a commodity business with significant volatility in prices. Also,
globally it is a relatively low margin business. Accordingly, it is important for players to be cost
competitive so as to be in a position to withstand all phases of the steel cycle. Sources of cost
competitiveness include: large size for economies of scale, high labour productivity, operational
and process cost control measures, and sound working capital management.

• Conservative Capital Structure: As steel is a relatively low margin, capital intensive business
with severe steel cycles, it is important to have a conservative capital structure so as to be in a
position to service debt in time.

• Marketing Alliances: Tie-ups with bulk consumers (such as automobile Original Equipment
Manufacturers) mitigates demand risk and accordingly ensures product offtake and high level of
capacity utilisations.

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 Steel Industry

INVESTMENT CLIM ATE

G r ow t h T re n d

The economic reforms initiated by the Government since 1991 have added new dimensions to
industrial growth in general and steel industry in particular. Licensing requirement for capacity creation
has been abolished, except for certain locational restrictions. Steel industry has been removed from
the list of industries reserved for the public sector. Automatic approval of foreign equity investment
upto 100% is now available. Price and distribution controls have been removed from January, 1992,
with a view to make the steel industry efficient and competitive. Restrictions on external trade, both in
import and export have been removed. Import duty rates have been reduced drastically. Certain other
policy measures such as reduction in import duty of capital goods, convertibility of rupee on trade
account, permission to mobilise resources from overseas financial markets and rationalisation of
existing tax structure for a period of time have also benefited the Indian Steel Industry.

The Growth Profile

(i) Steel
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 " 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. EU, Japan have qualified for the top slot, while countries like South
Korea, USA share the same class as India

(ii) Pig Iron

In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the
secondary sector. Post liberalization, the AIFIs (All India Financial Institutions) have sanctioned 21 new
projects with a total capacity of approx 3.9 million tonnes. Of these, 16 units have already been
commissioned. The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to
5.28 million tonnes in 2002-03. During the year 2003-04, the production of Pig Iron was 5.221 million
tonnes.

P r o d u c t i o n T r e n ds

Overview
The production trends in the Indian steel sector are presented in this section. Production of finished
steel has grown at a CAGR of 8.3% during the past 9 years. During the four-year period from 1997 to
2001, Indian steel industry witnessed a slump. And in 2002, riding the boom in the infrastructure and
automobile sectors, the industry saw a turn around. The demand for two wheelers, passenger cars,
and HCV segment reported high growth, while increased demand from the construction sector
rejuvenated the Indian steel industry.

Secondary producers dominate finished steel production and their share in the total finished steel
production had shown a growing trend till FY2000. It declined marginally in FY2001-03, before
recovering during FY2004. Recessionary conditions appear to have had an impact on the domestic
steel industry during FY2002. Accordingly, FY2002 witnessed modest growth (4.6%) in finished steel
production. However, steel production improved 9.9% during FY2003 and 7.5% during FY2004.

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 Steel Industry

Production Trends of Finished Carbon Steel

Million tonnes
FY Main Producers Secondary Producers Total Share of Secondary Producers
1992 7.96 6.37 14.33 44.5%
1993 8.41 6.79 15.20 44.7%
1994 8.77 6.43 15.20 42.3%
1995 9.57 8.25 17.82 46.3%
1996 10.59 10.81 21.40 50.5%
1997 10.54 12.18 22.72 53.6%
1998 10.44 12.93 23.37 55.3%
1999 9.86 13.24 23.10 57.3%
2000 11.20 15.51 26.71 58.1%
2001 12.49 16.80 29.29 57.4%
2002 13.05 17.58 30.64 57.4%
2003 14.39 19.29 33.67 57.3%
2004 15.19 21.00 36.19 58.0%
Compiled by INGRES

Production of Flats and Non-Flats

The following table details the production of flats and non-flat products by the Indian steel industry.

Product wise Trends of Finished Carbon Steel

Thousand tonnes
FY2002 FY2003 FY2004
Main Secondary Total Main Secondary Total Main Secondary Total
Non Flats 5,459 7,612 13,071 5,978 7,950 13,928 6,246 8,875 15,121
Flats 7,593 9,971 17,564 8,408 11,335 19,743 8,941 12,125 21,066
13,052 17,583 30,635 14,386 19,285 33,671 15,187 21,000 36,187
Compiled by INGRES

The following table details the product wise production trends of finished carbon steel in India.

Product wise Production Trends of Finished Carbon Steel

FY 2000 2001 2002 2003 2004 2005(5M)
Bars and Rods 8,703 9,560 10,037 10,676 11,136 4,802
Structurals 2,543 2,332 2,332 2,368 3,056 1,052
Railway Materials 484 589 702 884 929 392
Non Flats 11,730 12,481 13,071 13,928 15,121 6,246
Plates 1,697 1,768 1,865 1,832 2,155 1,006
HR Coils/Skelp 7,314 7,670 7,208 8,735 9,154 3,573
HR Sheets 520 486 656 519 727 473
CR Sheets/Coils 3,930 4,190 4,648 5,041 5,602 2,192
GP/GC Sheets 1,431 1,920 2,356 2,790 2,549 1,115
Electrical Sheets 117 104 129 158 137 60
Tinplate ([Link]) 129 141 136 148 153 61
TMBP 22 38 25 33 32 6
Pipes (large dia.) 286 469 541 487 557 216
Tin free steel 0 0 0 0 0 0
Flats 15,446 16,786 17,564 19,743 21,066 8,702
Total 27,176 29,267 30,635 33,671 36,187 14,948

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 Steel Industry

During FY2004, while the production of Non-Flats increased by 8.6%, the production of Flats was
relatively lower at 6.1%. Flats accounted for a 58.2% share of total finished steel production during
FY2004, as compared with 58.6% during FY2003, and 57.3% during FY2002. The balance 41.8% of
total steel production during FY2004 (41.4% during FY2003, and 42.7% during FY2002) was
accounted for by the non-flats.

Share of Flats and Non-Flats in Total Production of Steel in India

%
FY 2000 2001 2002 2003 2004 2005
(5M)
Bars and Rods 32.0 32.7 32.8 31.7 30.8 32.1
Structurals 9.4 8.0 7.6 7.0 8.4 7.0
Railway Materials 1.8 2.0 2.3 2.6 2.6 2.6
Non Flats 43.2 42.6 42.7 41.4 41.8 41.8
Plates 6.2 6.0 6.1 5.4 6.0 6.7
HR Coils/Skelp 26.9 26.2 23.5 25.9 25.3 23.9
HR Sheets 1.9 1.7 2.1 1.5 2.0 3.2
CR Sheets/Coils 14.5 14.3 15.2 15.0 15.5 14.7
GP/GC Sheets 5.3 6.6 7.7 8.3 7.0 7.5
Electrical Sheets 0.4 0.4 0.4 0.5 0.4 0.4
Tinplate ([Link]) 0.5 0.5 0.4 0.4 0.4 0.4
TMBP 0.1 0.1 0.1 0.1 0.1 0.0
Pipes (large dia.) 1.1 1.6 1.8 1.4 1.5 1.4
Tin free steel 0.0 0.0 0.0 0.0 0.0 0.0
Flats 56.8 57.4 57.3 58.6 58.2 58.2
Total 100.0 100.0 100.0 100.0 100.0 100.0
Compiled by INGRES

The different product segments in both flats and non-flats have shown different growth patterns during
FY2004. Among flats, while HR sheets, plates, and pipes witnessed a high growth of 40.1%, 17.6%
and 14.4%, respectively, electrical sheets witnessed a decline of in growth of 13.3% and HR coils have
witnessed a marginal growth at 4.8%. Similarly, among non-flats, while structurals have witnessed a
production growth of 29.1%, railway materials and bars & rods have witnessed a nominal growth of
just 5.1%, and 4.3% respectively.

Product wise Production Growth Trends of Finished Carbon Steel

FY 2000 2001 2002 2003 2004
Bars and Rods 6.8% 9.8% 5.0% 6.4% 4.3%
Structurals -6.9% -8.3% 0.0% 1.5% 29.1%
Railway Materials -10.7% 21.7% 19.2% 25.9% 5.1%
Non Flats 2.7% 6.4% 4.7% 6.6% 8.6%
Plates -6.4% 4.2% 5.5% -1.8% 17.6%
HR Coils/Skelp 36.8% 4.9% -6.0% 21.2% 4.8%
HR Sheets 34.7% -6.5% 35.0% -20.9% 40.1%
CR Sheets/Coils 22.8% 6.6% 10.9% 8.5% 11.1%
GP/GC Sheets 17.2% 34.2% 22.7% 18.4% -8.6%
Electrical Sheets 20.6% -11.1% 24.0% 22.5% -13.3%
Tinplate ([Link]) 33.0% 9.3% -3.5% 8.8% 3.4%
TMBP 37.5% 72.7% -34.2% 32.0% -3.0%
Pipes (large dia.) -1.4% 64.0% 15.4% -10.0% 14.4%
Tin free steel
Flats 23.9% 8.7% 4.6% 12.4% 6.7%
Total 13.8% 7.7% 4.7% 9.9% 7.5%
Compiled by INGRES

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 Steel Industry

Main and Secondary Producers

As discussed above, the secondary producers have significantly increased their share of finished steel
production—from 42.3% during FY1994 to 58% during FY2004. During FY2004, the secondary
producers had a production share of 58.7% in non-flats and 57.6% in flat products.

Production of Finished Carbon Steel—main and secondary producers

Thousand tonnes
FY2002 FY2003 FY2004
Main Sec. Total Main Sec. Total Main Sec. Total

Bars and Rods 3,806 6,231 10,037 4,088 6,588 10,676 4,236 6,900 11,136
Structurals 1,041 1,291 2,332 1,091 1,277 2,368 1,176 1,880 3,056
Railway Materials 612 90 702 799 85 884 834 95 929
Non Flats 5,459 7,612 13,071 5,978 7,950 13,928 6,246 8,875 15,121
Plates 1,619 246 1,865 1,627 205 1,832 1,933 222 2,155
HR Coils/Skelp 3,377 3,831 7,208 3,854 4,881 8,735 3,949 5,205 9,154
HR Sheets 354 302 656 310 209 519 302 425 727
CR Sheets/Coils 1,552 3,096 4,648 1,766 3,275 5,041 1,768 3,834 5,602
GP/GC Sheets 521 1,835 2,356 666 2,124 2,790 774 1,775 2,549
Electrical Sheets 50 79 129 65 93 158 71 66 137
Tinplate ([Link]) 34 102 136 40 108 148 41 112 153
TMBP 25 25 33 33 32 32
Pipes (large dia.) 61 480 541 47 440 487 71 486 557
Tin free steel 0 0 0
Flats 7,593 9,971 17,564 8,408 11,335 19,743 8,941 12,125 21,066
Total 13,052 17,583 30,635 14,386 19,285 33,671 15,187 21,000 36,187
Compiled by INGRES

Plates Production and Capacity Utilisation

In India, plates are produced by both the main producers and secondary producers. The producers in
the main sector include SAIL and TISCO. Secondary producers of plates include Essar Steel, etc.
At present, SAIL dominates the production of steel plates in the country. During FY2004, SAIL’s plate
production of 1.84 million tonnes accounted for 95.3% of the plates production by main producers, and
85.5% of the total steel plates production of 2.155 million tonnes.

Plates Production in India

Thousand tonnes
SAIL TISCO Total Main Secondary Total Plates
Production

FY2001 1,373 85 1,458 310 1,768

FY2002 1,457 162 1,619 246 1,865
FY2003 1,572 55 1,627 205 1,832
FY2004 1,843 90 1,933 222 2,155
FY2005 (5M) 839 42 881 125 1,006
Compiled by INGRES

Because of increased demand for plates during FY2004 (discussed below), steel plates production in
India increased 17.6% during FY2004, as compared with a decline of 1.8% during FY2003, and
increase of 5.5% during FY2002. As there has been no capacity addition in steel plates in India during
the last few years, higher production has implied higher levels of capacity utilization. For example, in
Y2004, the Bhilai2 Steel Plant, which has a rated capacity of 0.95 mtpa for plates, produced 1.024 m

2
Bhilai Steel Plant can produce plates up to a width of 3.2 m and thickness of 8 mm to 120 mm. Rourkela Plant can
produce plates up to a width of 2.5 m and thickness of 7 mm to 63 mm. Bokaro Steel Plant can produce plates up to a
width of 1.5 m, and thickness of 5 mm to 10 mm.

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 Steel Industry

tonnes, while Bokaro produced 0.44 m tonnes of plates and Rourkela produced another 0.384 m
tonnes.

Consumption Trends

Consumption of Flats and Non Flats

Apparent consumption (i.e opening stock plus production plus imports minus exports minus closing
stock) in India of finished steel, year-wise, has been shown below. Apparent consumption represents
the actual demand of steel in a particular period/year. It has increased from 15 mt in FY1993 to 30.33
mt in FY2004. Increase in apparent consumption has not been uniform, fluctuating from a high of
21.8% to low of 1.1 % reflecting uneven growth in steel demand. However, demand has increased at a
steady rate over the last few years. During FY2000-04, demand increased at a 5-year compounded
annual growth rate (CAGR) of 5.5%.

Apparent Consumption of Finished Carbon Steel

FY Apparent Consumption of Growth
Finished Steel (mt)
1993 15.00 1.1%
1994 15.32 2.1%
1995 18.66 21.8%
1996 21.43 14.8%
1997 22.12 3.2%
1998 22.63 2.3%
1999 23.15 2.3%
2000 25.01 8.0%
2001 26.53 6.1%
2002 27.44 3.4%
2003 28.90 5.3%
2004 30.33 4.9%
Compiled by INGRES

The following table details the apparent consumption of flats and non-flat products in India.

Consumption Trends of Finished Carbon Steel

Thousand tonnes
FY 2001 2002 2003 2004 2005 (5M)
Bars and Rods 9,210 9,683 10,337 10,621 4,541
Structurals 2,398 2,330 2,420 3,037 1,031
Railway Materials 588 714 882 930 385
Non Flats 12,196 12,727 13,639 14,588 5,957
Plates 1,777 1,934 1,961 2,438 1,039
HR Coils/Skelp 6,782 6,261 7,320 7,442 3,053
HR Sheets 498 689 570 757 478
CR Sheets/Coils 2,918 3,087 3,202 2,978 1,125
GP/GC Sheets 1,393 1,750 1,265 1,199 654
Electrical Sheets 168 176 192 171 79
Tinplate ([Link]) 237 216 189 138 69
TMBP 19 15 10 32 4
Pipes (large dia.) 483 519 497 570 189
Tin free steel 55 65 52 15 8
Flats 14,330 14,712 15,258 15,740 6,698
Total 26,526 27,439 28,897 30,328 12,655
Compiled by INGRES

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 Steel Industry

Steel consumption growth in India has averaged 5.5% per annum during the past five years. Steel
consumption increased 5% during FY2004 to 30.33 million tonnes, as compared with a 5.3% during
FY2003, and 3.4% during FY2002. The following table details the growth in consumption of various
sub-segments.

Consumption Growth Trends of Finished Carbon Steel

FY 2002 2003 2004 3-year
CAGR
Bars and Rods 5.1% 6.8% 2.7% 4.9%
Structurals -2.8% 3.9% 25.5% 8.2%
Railway Materials 21.4% 23.5% 5.4% 16.5%
Non Flats 4.4% 7.2% 7.0% 6.2%
Plates 8.8% 1.4% 24.3% 11.1%
HR Coils/Skelp -7.7% 16.9% 1.7% 3.1%
HR Sheets 38.4% -17.3% 32.8% 15.0%
CR Sheets/Coils 5.8% 3.7% -7.0% 0.7%
GP/GC Sheets 25.6% -27.7% -5.2% -4.9%
Electrical Sheets 4.8% 9.1% -10.9% 0.6%
Tinplate ([Link]) -8.9% -12.5% -27.0% -16.5%
TMBP -21.1% -33.3% 220.0% 19.0%
Pipes (large dia.) 7.5% -4.2% 14.7% 5.7%
Tin free steel 18.2% -20.0% -71.2% -35.2%
Flats 2.7% 3.7% 3.2% 3.2%
Total 3.4% 5.3% 5.0% 4.6%
Compiled by INGRES

During FY2004, while, the consumption of Non-Flats increased by 7%, the consumption of Flats
increased at a relatively lower rate of 3.2%. Flats accounted for a 51.9% share of total finished steel
consumption in India during FY2004, as compared with 52.8% during FY2003, and 53.6% during
FY2002.

The different product segments in both flats and non-flats have shown different consumption growth
patterns during FY2004. Among flats, while HR sheets and plates witnessed a high growth of 32.8%
and 24.3%, respectively, CR sheets/coils and GP/GC sheets witnessed a decline in consumption.
Similarly, among non-flats, while structurals have witnessed a consumption growth of 25.5% during
FY2004, railway materials and bars & rods have witnessed a nominal growth of just 5.4%, and 2.7%
respectively. However, over the last three years, consumption of railway materials has increased at a
3-year compounded annual growth (CAGR) of 25.5%. In flat products, HR sheets and plates have
shown a healthy consumption growth. While consumption of HR sheets increased at a 3-year CAGR of
15%, consumption of plates increased 11.1%.

Plates Consumption
The following table presents the consumption trends for steel plates in India.

Consumption trends for steel plates in India

Op. Stock Production Import Export Cl. Stock Consn.
FY2000 171 1,697 75 328 171 1,444
FY2001 171 1,768 154 145 171 1,777
FY2002 171 1,865 221 183 140 1,934
FY2003 140 1,832 367 279 99 1,961
FY2004 99 2,155 600 355 61 2,438
FY2005 (5M) 61 1,006 150 38 140 1,039
Compiled by INGRES

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 Steel Industry

The increased domestic demand for plates has been manifested in increased consumption of plates in
India. Consumption of plates in India increased from 1.78 mt in FY2001 to 2.44 mt in FY2004.
Consumption of plates increased 24.3% during FY2004, as compared with a growth of 1.4% during
FY2003, and increase of 8.8% during FY2002. However, domestic plate production has not kept pace
with domestic demand. While consumption increased at a 3-year CAGR of 11.1% to 2.44 mt in
FY2004, domestic production increased at a 3-year CAGR of 6.8%. To satisfy the increased domestic
demand, imports have increased at a 3-year CAGR of 57.4% to 0.6 mt in FY2004.

Trade Trends

The trade trends for the last three years are presented in the following table. As can be seen, imports
of both non-flats and flats have increased in recent years. As far as imports are concerned, the
segments witnessing a significant increase in imports include bars and rods, plates, HR Coils/Skelp,
CR Sheets/coils, and pipes (large dia.). The segments witnessing an increase in exports include bars
and rods, plates, HR Coils/Skelp, CR Sheets/coils, and electrical sheets.

Import Export Trends of Finished Carbon Steel

Thousand tonnes
Imports Exports
FY 2002 2003 2004 2002 2003 2004
Bars and Rods 35 103 75 399 515 585
Structurals 66 47 16 35 35 31
Railway Materials 9 0 4
Non Flats 110 150 91 438 550 616
Plates 221 367 600 183 279 355
HR Coils/Skelp 362 318 450 979 1,393 1,716
HR Sheets 9 43 30
CR Sheets/Coils 204 302 200 320 574 972
GP/GC Sheets 97 92 90 695 1,610 1,437
Electrical Sheets 62 52 60 16 19 25
Tinplate ([Link]) 107 72 24 24 33 40
TMBP 7 2
Pipes (large dia.) 27 60 90 49 48 60
Tin free steel 65 52 15
Flats 1,161 1,360 1,559 2,266 3,956 4,605
Total 1,271 1,510 1,650 2,704 4,506 5,221
Compiled by INGRES

As far as plates are concerned, India is a net importer of plates and the net imports have increased
from 38,000 tonnes in FY2002 to 245,000 tonnes in FY2004 – i.e. a growth of 545%.

Ma jor P r o je c ts

Major projects in the pipeline include: Rs.250 bn. capex plan of SAIL, 3.4 mtpa capacity expansion by
TISCO, Rs. 180 bn. capex plan of RINL, 0.6 mtpa HR coil expansion plan of ISPAT, 0.6 mtpa HR coil
expansion plan of Essar and Rs. 1.8 bn. capex plan of the Jindal group.

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 Steel Industry

I n d i a Ad va n ta g e / Di s a d va n ta g e

Advantages Dis-advantages
Low per capita steel consumption Shortage of coking coal and coke
Increasing Infrastructure spending Shortage of Scrap
Increasing per capita income and consumer spending High Energy Costs
Low interest rate and inflation Poor quality of Infrastructure
Low cost Iron Ore Declining trend in duties
Low Labour costs Poor Labour productivity

Regulations

The Steel Ministry is the governing body of the Indian Iron & Steel Industry. The key activities of the
Steel Ministry are as follows.
• Co-ordination and planning of the growth and development of Iron and Steel Industry in the
country (including Re-rolling Mills, Alloy Steel and Ferro Alloy Industries, Refractories) both in the
Public and Private Sectors;
• Formulation of policies in respect of production, pricing, distribution, import and export of iron &
steel, ferro alloys and refractories; and
• Development of input industries relating to iron ore, manganese ore, chrome ore and Refractories
etc., required mainly by the steel industry.
The regulatory aspects of the Indian Steel Industry are mentioned as follows.

• Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. Price regulation of
iron & steel was abolished on 16.1.1992.

• Distribution controls on iron & steel removed except 5 priority sectors, viz. Defence, Railways,
Small Scale Industries Corporations, Exporters of Engineering Goods and North Eastern Region.

• Allocation to priority sectors is made by Ministry of Steel.

• Government has no control over prices of iron & steel.

• Iron & Steel are freely importable as per the extant policy.

• Iron & Steel are freely exportable and India is a net exporter of steel.

• Advance Licensing Scheme allows duty free import of raw materials for exports.

• Duty Entitlement Pass Book Scheme (DEPB) also facilitates exports. The Govt. had temporarily
suspended the DEPB benefits on iron & steel & ferroalloys w.e.f 27th March 2004 as a measure to
increase iron & steel availability in the domestic market. DGFT vide their public Notice No-71
dated 12.7.2004 has restored the DEPB eligibility for steel items.

Cr u c i a l Is s u es tha t n e e d to b e a d dr e s se d

The Indian Steel Industry faces the following constraints, on which remedial measures are desired.
• Rising raw material costs due to lack of availability of good quality raw materials in India. High ash
content of domestic coke forces producers to import at high cost and high basicity index of
domestic ore also makes imports a necessity.
• High cost of basic inputs and services such as electricity and transportation. Cost of electricity in
US is 3 cents and in India it is 10 cents. Freight cost from Jamshedpur (in Jharkhand where
TISCO’s steel plant is located) to Mumbai is $50/tonne as compared to only $34 from Rotterdam
to Mumbai.

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 Steel Industry

• High cost of capital and basic inputs hampers the profitability of the company.
• Poor quality of basic infrastructure like roads, ports etc. add to the problems of the industry. Indian
ports lag way behind in terms of competitiveness when compared with their Chinese counterparts.
Indian Ports have some of the highest tariff rates in the world. The average cost of EXIM trade is
about 10% of landed cost compared to world average of 6%.
• High tariff and non-tariff barriers by developed nations on Indian Steel exports.

FINANCIAL PERFORM ANCE OF M AJOR COMPANIES

P e r fo r m a n ce d u r in g H1 2 00 4 -2 00 5

The Indian Steel Industry has witnessed moderate growth in volume terms during the first 5 months of
2004-2005. Production and apparent consumption were higher by 4.2% and 5.9% respectively. Growth
recorded in production and apparent consumption in the Non-Flat segment were 4.4% and 4.5%
respectively. The corresponding figures for the Flat segment were 4.1% and 7.1% respectively. The
overall exports growth was lower by 22% during 5M 2004-2005 with the non-Flat segment reporting a
higher decline in exports growth of 58%. Decline in Exports growth was 17% for the Flat segment.
Removal of DEPB (Duty Entitlement Passbook) benefits on steel exports (which was subsequently
restored) appears to be the key reason behind this decline. Steel imports witnessed a growth of 23%
during 5M 2004-2005, with the Flat segment reporting a growth of 16.4% as against a much higher
import growth of 316.7% in the non-Flat segment. This high growth in imports of non-Flat was largely
because of a much smaller base in the corresponding period in the previous year.

Steel Production
(‘000 tonnes)
5M 2004-05 5M 2003-2004
Apparent Apparent Growth in Growth in Apparent
Production Consumption Production Consumption Production Consumption
Pig Iron 1931 1852 2243 2011 -13.9% -7.9%
Semis 2951 2917 3388 3080 -12.9% -5.3%
Finished Steel

Bars & Rods 4802 4541 4552 4291 5.5% 5.8%

Structurals 1052 1031 1053 1031 -0.1% 0.0%

Rly. Material 392 385 377 376 4.0% 2.4%

Non-Flats 6246 5957 5982 5698 4.4% 4.5%
Plates 1006 1039 815 942 23.4% 10.3%

HR Coils/Skelp 3573 3053 3779 3037 -5.5% 0.5%

HR Sheets 473 478 210 212 125.2% 125.5%

CR Sheets/Coils 2192 1125 2062 1149 6.3% -2.1%

GP/GC Sheets 1115 653 1099 518 1.5% 26.1%
Elec. Sheets 60 80 66 77 -9.1% 3.9%
Tinplate 61 69 60 63 1.7% 9.5%
Tin Mill Black Plate (TMBP) 6 4 11 6 -45.5% -33.3%
Pipes (Large Dia) 216 189 257 240 -16.0% -21.3%

Tin free Steel - 8 10

Flats 8702 6698 8359 6254 4.1% 7.1%

Total Finished Steel 14948 12655 14341 11952 4.2% 5.9%

Compiled by INGRES

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 Steel Industry

Domestic prices of steel have been moving upwards since the beginning of 2002-2003 in line with
global prices. During the period 5M 2004-2005, steel prices were relatively much higher as compared
to the prices prevailing in the corresponding period of 2003-2004.

Steel Prices at Mumbai

(Rs./tonne)
April- August April - August
2004 2003 Growth
Billets 23400 15940 46.80%

Wire Rods, 8 mm 26910 19120 40.74%

Rounds, 12 mm 26000 18220 42.70%

Plates, 6 mm 30456 21860 39.32%

HR Coils, 3.15 mm 30700 22820 34.53%

CR Coils, 0.63 mm 34410 26980 27.54%

GP Sheets, 0.63 mm 35770 30440 17.51%

Compiled by INGRES

Moderate growth in volume sales coupled with significant improvement in steel prices has resulted in a
large positive impact on the profitability of the steel companies in India. The key financial figures for the
two steel majors (TISCO and SAIL) are presented in the following tables.

Financial Performance of TISCO

(Rs. mn)
Q2 2004-2005 Q2 2003-2004 Growth H1 2004-2005 H1 2003-2004 Growth
Sales 37383.2 26129.9 43.07% 69029.7 48700.9 41.74%
Other Income 570.4 563.5 1.22% 844.9 744.3 13.52%

Total Exp. 21094 18565.7 13.62% 38720.8 34385.7 12.61%

Operating profit 16289.2 7564.2 115.35% 30308.9 14315.2 111.73%

Interest 474.8 570.2 -16.73% 964.3 1334.8 -27.76%

Depreciation 1594.8 1470.3 8.47% 3170.4 2916.2 8.72%

Extraordinary items -257.6 -16.2 1490.12% -500.5 -726.6 -31.12%

Tax 5236.5 2040 156.69% 9767.8 3380.2 188.97%
Net Profit 9295.9 4031 130.61% 16750.8 6701.7 149.95%
Source: TISCO
Financial Performance of SAIL
(Rs. mn.)
Q2 2004- Q2 2003- Growth H1 2004- H1 2003- Growth
2005 2004 2005 2004
Sales 67041.1 50713.2 32.20% 119750 93241.4 28.43%
Other Income 853.1 449.3 89.87% 1414.8 707.8 99.89%
Total Exp. 46037.4 40753.9 12.96% 82597.2 75545.6 9.33%
Operating profit 21003.7 9959.3 110.90% 37152.6 17695.8 109.95%
Interest 852.3 2400 -64.49% 2720.6 5031.8 -45.93%
Depreciation 2773.1 2777.4 -0.15% 5562.5 5593.7 -0.56%
Tax 3099.9 179.6 1626.00% 4036.9 179.6 2147.72%
Net Profit 15131.5 5051.6 199.54% 26247.4 7598.5 245.43%
Source: SAIL

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 Steel Industry

Outlook

Steel prices have increased steadily since Q1 2001 and they have reached historical heights in the
recent months. China has been a major contributor to growth in Steel demand and hence the prices.
However, China has started slowing down and the imports during April – July 2004 actually witnessed
a decline on an Y-o-Y basis. It is expected that the near to medium term growth in China would be 10-
12% against 20%+ growth experienced in the past. However, the decline in demand in China may be
compensated by the expected growth in the US market. Also, China has been witnessing significant
capacity investments. This presents the risk of China becoming a net exporter by 2005 end. This trend
has implications on the moderation of global steel prices. However, a sharp decline may be ruled out
due to shortage in Iron-ore and met-coke and hence their expected increase in price in the near term.
However, in the medium to long term, the expected enhancement of production volumes by the global
mining majors may ease the demand supply position of Iron Ore and Coke.

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