Industry Analysis: Steel Industry

Industry Analysis: Steel Industry

Steel is one of the most crucial materials used in buildings, automobiles, ships, heavy equipment, pipes, tools, appliances etc. Steel plays a crucial role in infrastructure building which is an indicator of economic development. Thus steel industry is often considered to be an indicator of the nation’s progress.

The economic boom in India and China in recent has dramatically increased the steel consumption in recent years and also has seen some Indian and Chinese steel companies gain prominence in the world market.

The world steel market consists of the production of crude steel in the stated country or region. A major share of steel used in infrastructure is manufactured by using Iron Ore from mines as a basic raw material. The use of recycled steel in infrastructure is gaining popularity.

Today the major producers of steel globally are Arcelor Mittal, Nippon Steel, POSCO, JFE and Tata Steel. Arcelor Mittal is the market leader with 10.1% of the market share.

China was the largest producer of steel in 2007 with 489 million tonnes followed by Japan (120.2 mil tonnes), US (97.2 mil tonnes), Russia (72.2 mil tonnes) and India (53.1 mil tonnes).

The Global steel market fetched total revenues of $526.9 billion in 2007 as compared to $489.7 in 2006 and showed a CAGR of 20.9% from 2003-2007.

The steel industry analysis done below is on the basis of the attractiveness it holds for the incumbents by considering various factors such as competitors, entry barriers, exit barriers, substitutes, bargaining power of buyers and suppliers and government regulations.

1: Rivalry among competitors

ATTRACTIVENESS REMARKS

Low High

1 2 3 4 5

No. of competitors

10%  About 30 major producers worldwide. There is a clear market leader.

Industry growth

20%  CAGR – 20.2%

Fixed cost

60%

 High Capital requirement and fixed costs of assets.

Degree of Differentiation

2%  Little or no product differentiation. Competition is greater.

Excess Capacity

3%  Steel industry is characterised by cyclicity which may lead to excess capacity.

Switching cost

5%  No product differentiation. Hence switching cost is less

Weighted Average = (10*3 + 20*5 + 60*5 + 2*2 + 3*3 + 5*2)/ (60+20+10+2+3+5)

= 4.53

Therefore the industry is very attractive.

2: Barriers to Exit

ATTRACTIVENESS REMARKS

Low High

1 2 3 4 5

Asset Specialization

40%

 Very high level of asset specialization with large scale operations.

Cost of Exit

50%  Sunk costs of integrated steel mills are very high.

Government Restrictions

10%  Import restrictions as well as certain restrictive policies for foreign players exist in every country.

Weighted Average = 40*1 + 50*1 + 10*2/ 100

= 1.1

Therefore the industry is unattractive.

3: Barriers to entry

ATTRACTIVENESS REMARKS

Low High

1 2 3 4 5

Economies of scale

20%  Large scale of production and deep distribution network

Product differentiation

2%  Little or no product