05-02-2013, 09:50 AM
Profile of Steel Industry in India
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Introduction
India has acquired a central position on the global steel map with its giant steel mills, acquisition of global-scale capacities by players, continuous modernisation, and improvement in energy efficiency. Steel companies from across the world have shown interest in the Indian steel industry due to its phenomenal performance.
In India, the steel industry plays a significant role in the economic growth. India is world's fourth largest crude steel producer in 2011-12 with 89 million tonnes (MT) as per provisional data and is expected to become the second largest producer of crude steel in the world by 2015-16. India is also the world's largest producer of sponge iron with a host of coal based units, located in its mineral-rich States. The major contribution of the steel industry focuses on strengthening the sectors, such as infrastructure, constructions, automobile, transportation, industrial applications etc.
Tata Steel has been named among the world's most ethical companies by an American think tank, Ethisphere Institute. Ethical business principles and practices have been the key differentiators of Tata Group and Tata Steel since inception, according to H M Nerurkar, Managing Director, Tata Steel.
Market Size
The RNCOS research report titled, 'Indian Steel Industry Outlook to 2012,' highlighted that "Indian crude steel production will grow at a compound aggregate growth rate (CAGR) of around 10 per cent during 2010-2013," whereas the finished steel consumption is estimated to grow at a CAGR of around 12 per cent during FY 2012-14.
For India, growth in apparent steel use is expected to grow by 6.9 per cent in 2012 and by 9.4 per cent in 2013. The Indian steel producers have signed 222 memorandum of understanding (MoUs) with the State Governments for a planned capacity addition of about 275.7 30 MT by 2020.
There is a net increase in foreign direct investment (FDI) inflows into India in the metallurgical sector, including steel sector, highlighted Mr Beni Prasad Verma, the Union Minister for Steel. The amount of FDI inflow into the sector for 2011- 12 was worth US$ 1,765.07 million, as per data provided by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce.
Government Initiatives
The Union Budget 2012-13 is a pragmatic and growth-oriented one. "Infrastructure sector has beengiven due thrust in the budget. Doubling the infrastructure tax-free bond amount to Rs 60,000 crore(US$ 10.66 billion)," reaffirming investment of Rs 50,000 billion (US$ 888.10 billion) in infrastructuresector in 12th Plan are steps that present a scenario conducive for growth of steel industry, accordingto C S Verma, Chairman, SAIL.
The main highlight of the Union Budget 2012-13 for the steel industry was the proposal to reducebasic customs duty on plant and machinery imported for setting up or substantial expansion ofiron ore pellet plants or iron-ore beneficiation plants from 7.5 per cent to 2.5 per cent. The otherproposals relating to the steel sector are as under:
Steel Prices
Domestic steel prices are influenced by trends in raw material prices, demand – supply conditions in the market, international price trends among others.
An Inter-Ministerial Group (IMG) is functioning in the Ministry of Steel, under the Chairmanship of Secretary (Steel) to monitor and coordinate major steel investments in the country.
The Government also took various fiscal and other measures for stabilizing steel prices like significant reduction in import duties o n steel, major raw materials, including mineral products and ores and concentrates in last few years. Also, excise duty for steel is currently at 12%. The government has also imposed export duty of 30% on iron ore fines and lumps in order to control ad-hoc exports of the mineral and conserve it for long term requirement of the domestic steel industry.
For ensuring quality of steel several items have been brought under a quality control order issued by the Government. The matter to bring more steel items under this order is under examination.
Supply and Demand Analysis
The demand for steel was increasing pre 2008,the price of steel started rising and to extract greater profits,the steel plants all over the world went for huge capacity expansion, the supply of steel increased in the anticipation of greater demand and as the recession set in the European countries and Chinese infrastructure demand came to halt, inventory levels rose,steel prices went for a tailspin and the pseudo profits turned into gargantuan losses .
The graphs below explain the supply demand dynamics in the pre-July2008 and post July 2008 of the steel industry: Demand curve of steel pre July 2008.
As we can see in the graph drawn above, the demand for steel shifts towards the right mainly driven byinfrastructure expansion in China and India .As a result ,the price of steel increased and so did thedemand for its raw materials namely, iron ore and coking coal .
Fixed & Variable Inputs:
Primarily, there are two kinds of inputs—fixed and variable. A plant and a factory shed are examples of fixed inputs (or factors) of production. These inputs are called "fixed" inputs as the quantities needed of these inputs remain fixed, up to point, as the quantity produced of the product (the output) increases.
Using the steel industry as an example, a blast furnace used in producing steel is considered a fixed input—Steel Industry can produce more steel by using more raw materials, and get more production out of the existing blast furnace. It should be noted that fixed input does remain fixed for all levels of output produced. As the scale of production increases, the existing plant may no longer suffice.
Suppose that the blast furnace chosen by the steel firm can, at the very maximum, produce 100,000 tons of steel per day. If Steel Industry needs to supply 150,000 tons of steel per day (on average), it has to add to capacity—that is, it has to install a new blast furnace. Thus, even a "fixed input" does not remain fixed forever. The period over which a fixed input remains fixed is called the "short run." Over the "long run," even a fixed input varies.
Inputs that vary even in the short run are called "variable" inputs. In the above example of steel manufacturing, iron ore serves as a variable input. Given the fixed input (the blast furnace in this case), increasing the quantity of the variable input (iron ore) leads to higher levels of output (steel).
Total & Average cost:
A manufacturing firm, motivated by profit maximization, calculates the total cost of producing any given output level. The total cost is made up of total fixed cost (due to the expenditure on fixed inputs) and total variable cost (due to the expenditure on variable inputs). Of course, the total fixed cost does not vary over the short run—only the total variable cost does.
It is important for the firm to calculate the cost per unit of output, called the "average cost." The average cost is made up of two components—the average fixed cost (the total fixed cost divided by the number of units of the output) and the average variable cost (the total variable cost divided by the number of units of the output).
As the fixed costs remain fixed over the short run, the average fixed cost declines as the level of production increases. The average variable cost, on the other hand, first decreases and then increases—economists refer to this as the U-shaped nature of the average variable cost. The U-shape of the average variable cost (curve) occurs because, given the fixed inputs, output of the relevant product increases more than proportionately as the levels of variable inputs used increase—this is caused by increased efficiency due to specialization and other reasons. As more and more variable inputs are used in conjunction with the given fixed inputs, however, efficiency gains reach a maximum—the decline in the average variable cost eventually comes to a halt. After this point, the average variable cost starts increasing as the level of production continues to increase, given the fixed inputs. First decreasing and then increasing average variable cost leads to the U-shape for the average variable cost (curve). The combination of the declining average fixed cost (true for the entire range of production) and the U-shaped average variable cost results in the U-shaped behaviour of the average total cost (curve), often simply called the average costs