final steel

8/6/2019 Final Steel

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STEELINDUSTRY

OVERVIEW OF STEEL INDUSTRY


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IntroductionSteel is crucial to the development of any modern economy and is consideredto be the backbone of human civilization. The level of per capita Consumptionof steel is treated as an important index of the level of socioeconomicdevelopment and living standards of the people in any country. It is a productof a large and technologically complex industry having strong forward and

backward linkages in terms of material flows and income generation. Allmajor industrial economies are characterized by the existence of a strongsteel industry and the growth of many of these economies has been largelyshaped by the strength of their steel industries in their initial stages ofdevelopment. Steel industry was in the vanguard in the liberalization of theindustrial sector and has made rapid strides since then. The new Greenfieldplants represent the latest in technology. Output has increased, the industryhas moved up in the value chain and exports have raised consequent to agreater integration with the global economy. The new plants have alsobrought about a greater regional dispersion easing the domestic supplyposition notably in the western region. At the same time, the domestic steelindustry faces new challenges.

The Indian Steel Industry is in a midst of the worldwide downturn. Prices havebeen under pressure both internationally and domestically as a result ofoversupply, coupled with stagnant demand growth. Though Indian steelexports are exempted from the trade restrictions announced in March 2002 inthe US and EU, it continues to face the earlier trade restrictions in the form ofantidumping and countervailing trade actions. Thus, the prospects ofdeclining exports and rising imports may further deteriorate the demandsupply position in the Indian steel market. Also the restrictive trade policiesmay further delay the recovery of global steel prices. During 2001, it isestimated that global steel production capacity is 1068mt, with globalproduction estimated at 835mt and consumption at 721mt. Of this, Indiansteel production accounts for 3.2%. The major steel producing countries areChina, US, Japan, Russia, Germany and South Korea. In order to come out of20-year low steel prices, a move has been initiated globally to cut-down steelproduction. Also some recent events of internal demand picking up and pricehike points out to a possible recovery.


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The Indian iron and steel industry is nearly a century old, with Tata Iron &Steel Co (Tata Steel) as the first integrated steel plant to be set up in 1907. Itwas the first core sector to be completely freed from the licensing regime (in1990-91) and the pricing and distribution controls. The last ten years haveseen inefficient steel mills with outdated technology perishing, while newcapacities have come up which possess latest technology. At present India is

the tenth largest producer of steel in the world producing nearly 30 mt ofsteel. Two of its companies (SAIL ranks 13th and Tata Steel 57th) figureamong the worlds 80 largest steel producers. With a market capital of Rs.102bn it, gives direct employment to about 0.5m and indirect employment to1.5m people. The Indian steel sector enjoys advantages of domesticavailability of raw materials (iron ore) and cheap labor. This provides majorcost advantage to the domestic steel industry inducing developed countriesto construct or shift their steel plants to India. During the year 2001, Indiahas been a world leader in ship breaking and re-cycling industry.

Some of these relate to the trade barriers in developed markets and certain

Structural problems of the domestic industry notably due to the high cost ofCommissioning of new projects. The domestic demand too has not improvedto significant levels. The litmus test of the steel industry will be to surmountthese difficulties and remain globally competitive.

BackgroundThe demand for steel is derived from other sectors like automobiles, whitegoods and construction/ infrastructure. Being a core sector, it tracks theoverall economic growth. The Indian Steel sector enjoys advantages ofdomestic availability of raw materials and cheap labor. Iron ore is available inabundant quantities. However, Indian steel companies have to bearadditional costs pertaining to power, fuel and freight costs. The domesticindustry continues to witness an oversupply situation. End users import dueto the price advantage and non-availability of certain high quality steelgrades.

The basic import duty on steel has been consistently brought down. This hasmade the industry vulnerable to international competition. Rapid integrationof the global steel markets has begun to affect the domestic steel market.

The current year has been relatively good for the Indian steel industry.Finished steel production has been on an up trend due to buoyant domesticdemand and exports. Primary steel majors have increased the prices of theirproducts on several occasions reflecting the firming up of the prices in theinternational markets.

Historical PerspectiveThe finished steel production in India has grown from a mere 1.1 milliontones in 1951 to 31.63 million tones in 2001-2002. During the first twodecades of planned economic development, i.e. 1950-60 and 1960-70, theaverage annual growth rate of steel production exceeded 8%. However, thisgrowth rate could not be maintained in the following decades. During 1970-80, the growth rate in steel production came down to 5.7% per annum and


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picked up marginally to 6.4% per annum during 1980-90, which furtherincreased to 6.65% per annum during 1990-2000. Though India started steelproduction in 1911, steel exports from India began only in 1964. Exports inthe first five years were mainly due to recession in the domestic iron andsteel market. Once domestic demand revived, exports declined. India onceagain started exporting steel only in 1975 touching a figure of 1 million tones

of pig iron and 1.4 million tones of steel in 1976-77. Thereafter, exports againdeclined to pick up only in 1991-92, when the main producers exported 3.87lack tones, which rose to 2.79 million tones in 1995-96 and 3.3 million tonesin 2001-02. The growth in the steel sector in the early decades afterIndependence was mainly in the public sector units set up during this period.

The situation has changed dramatically in the decade 1990-2000 with mostof the growth originating in the private sector. The share of public sector andprivate sector in the production of steel during 1990-91 was 46% and 54%respectively, while during 2001-02 the same was 32% and 68% respectively.

This change was brought about by deregulation and decontrol of the Indianiron & steel sector in 1991.

A number of policy measures have been taken since 1991 for the growth anddevelopment of the Indian iron & steel sector. Some of the important stepsare (a) removal of iron & steel industry from the list of industries reserved forthe public sector and also exempting it from the provisions of compulsorylicensing under the Industries (Development & Regulation) Act, 1951, (b)deregulation of price and distribution of iron & steel, (c) inclusion of iron andsteel industry in the list of high priority industries for automatic approval forforeign equity investments up to 51%. This limit has been since increased upto 100%, (d) lowering of import duty on capital goods and raw materials etc.

As per the International Iron and Steel Institute, India has emerged as thelargest producer of sponge iron in the world in 2001. Production of spongeiron in the country as an alternative feed material to steel melting scrap,which was being imported hitherto in large quantities by the Electric ArcFurnace Units and the Induction Furnace Units, has resulted in considerablesavings in foreign exchange.

CURRENT GLOBAL SCENARIOThe global production of crude steel increased from 777 million tones in 1998to 785 in 1999. The world steel consumption has also increased by 1%. Theinternational steel trade constituted around 279.6 million tones or 39.8% ofthe production. World steel industry witnessed major ups and downs in thelast two decades and especially over the past five years. The pattern of tradehas been upset by two important developments. These are the collapse ofthe Soviet Union and the severe financial crisis in most South East Asiancountries as well as in Korea and Japan. The Asian crisis and the collapse ofUSSR have transformed importers of steel into exporters. Till the recentfinancial crisis, the Asian countries were large importers of steel. In 1996,eight of the ten largest steel producing nations were in Asia and import bythe region in the mid 1990s was around 80-90 million tones of finished andsemi finished steel per year, which is equivalent of a third of total steel trade.After the Asian crisis, the region got transformed into a net exporter of steel.


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DOMESTIC STEEL SECTOR SCENARIOThe iron and steel sector has been experiencing a slow down in the last fewyears. The growth of the steel sector is dependent upon the growth of theeconomy in general and the growth of industrial production and

infrastructure sectors in particular. The major reasons for the slow growth inthe steel sector during the last few years include: -

(a) Sluggish demand in the steel consuming sectorsSteel being the basic raw material for the construction industry, the capitalgoods and engineering goods industry, as also the auto sector and whitegoods sector, its growth is dependent upon the demand for steel by thesesegments of the industry. Since no major infrastructure or constructionprojects have been implemented in the last few years, demand for steel hasremained low. No major projects in the oil sector, power sector, fertilizersector, where intensity of steel consumption is high, have come up in therecent past.

(b) Overall economic slow down in the countryAll major core sectors of the economy have been facing an economic slowdown.

These include, power, coal, cement, industry, mining and steel. The slowdown phenomenon is not restricted to the steel sector alone. Only when theoverall economy of the country picks up, the steel sector would also showsigns of revival.

(c) Lack of investment by Government/private sector in major infrastructureprojectsDue to budgetary constraints, no major construction activity in mega projectsincluding fertilizer, power, coal, railways etc, have been planned by theGovernment. Despite liberalization of the economy and relaxation in theinvestment norms, private sector investment is yet to materialize in the coresectors of the economy. This has also contributed to slowing down demandfor steel.

(d) Cost escalation in the input materials for iron and steelPower tariff, freight rates, coal prices etc. have been under the administeredprice regime. These rates have been frequently enhanced, therebycontributing to the rise in input costs for steel making.

(e) Continuous reduction in import duty on iron and steelAfter liberalization, import duty rates on iron and steel items have beengradually reduced over the years. This has opened up the domestic iron andsteel sector to international competition. Due to rationalization in the importduty structure in 1999-2000, the rates of basic custom duty have generallygone up.

ACTION BEING TAKEN BY MINISTRY OF STEEL


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The Ministry of Steel has been making all out efforts to help the domesticsteel sector to overcome the problems faced by the steel industry at present.

These include: -

(a) Boosting demand in the steel consuming sectorsTo help the steel industry by way of research and developmental support for

boosting steel consumption and providing technical support and trainedmanpower to steel producing and consuming sectors, the following instituteshave been set up: -

The Institute for Steel Development and Growth (INSDAG), Kolkata(WestBengal);

National Institute of Secondary Steel Technology (NISST), MandiGovind Garh (Punjab); and

Biju Patnaik National Steel Institute, Puri (Orissa).

The Development Commissioner for Iron & Steel (DCI&S) has launched aNational Campaign for increasing the demand for steel, in non-traditionalsectors, particularly in the construction, rural and agro-based industrialsectors.

(b) Reduction in Power & Rail TariffsIn order to make dispatches of iron and steel material more attractivethrough railways, the Railway Board has been requested to consider loweringthe classification of steel, give freight discount to bulk users and to bringdown freight rates of iron and steel commodities.

(c) Reduction in input costs

The Ministry of Steel has been able to rationalize the classification of cokingcoal in consultation with the Coal Ministry so as to reduce the impact ofroyalty payable on this basic raw material. Import duties on several rawmaterials, such as, scraps, ships for breaking, coke, etc. used by the steelindustry have been reduced steadily over the past 4 to 5 years.

(d) Strengthening of Anti Dumping mechanismTo check the increasing trend of cheap imports in certain categories of flatproducts especially from CIS and South East Asian countries, the Ministry ofSteel has suggested a few necessary steps to Department of Commerce tostrengthen the antidumping mechanism so that quick decisions to checkdumping can be taken.

Future ProspectsWith the onset of liberalization, the steel industry has now to gear-up, notonly to domestic competition, but also to global competition in terms ofproduct range, quality and price. The growth of the steel sector is intricatelylinked with the growth of the Indian economy and especially the growth ofthe steel consuming sectors. India has become self-sufficient in iron and steelmaterials in the last 3-4 years. Exports are rising and imports are taking placemostly in a few specialized categories. Production and production capacities


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are increasing. The position needs to be further consolidated and issuesaffecting production and consumption need to be resolved on a continuousbasis. At the same time, productivity of our steel plants must be maintainedat levels close to international standards. The Ministry of Steel continues toplay an active and major role in helping the steel industry to overcomebottlenecks in the growth of this sector.

HIGHLIGHTS

India is the 10th largest producer of steel in the world, but per capitaconsumption is one of the lowest. It accounts for 3.2% of the world steelproduction of 835mt. In FY01, India produced 26.5mt (million tones) of crude steel and29.5mt of finished steel. The demand for steel in India is derived fromother sectors of the economy like automobiles, consumer durables andinfrastructure.

Over the last few years the performance of the Indian steel industryhas been adversely affected due to over-capacity, cheap imports,economic slowdown, declining global steel prices and anti dumping dutyimposed by USA on Indian exports. However, few recent events like the capacity curtailment by the OECDcountries, price and demand hike portend good prospects.

According to the routes of production, the industry can be classified as,Integrated Producers and Secondary Producers with the products beingIron ore, Pig iron, Sponge iron, Flat steel products, Long products andAlloy steel products.

SAIL ranks 13th and TATA Steel 57th among worlds 80 largest steel

producers. TATA Steel is the lowest cost producer in the world as well. During April-October 2001, exports of iron & steel bars/rods andprimary and semi-finished steel reduced sharply by 28% while imports ofiron and steel went up by 6.5%.

The New Industrial Policy, 1991 opened up the sector to the privateplayers. National Steel Policy 2000-01 was framed to inject furthercompetition into the industry and provided a clause of Buy Indian Act.

The Vision 2020 brought out by the Ministry of Steel last year aims atincreasing steel demand by 200% in the country by the year 2020. Thisimplies a CAGR of more than 5.5%. A trust, Indian Steel Alliance, has been formed, who prepared a five-year program for creating demand of steel.


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AUTOMOBILEINDUSTRY


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INTRODUCTIONPeter Drucker called the automobile industry as "the industry of industries".During the last few years, the production and management systems havebeen revolutionized in the automobile industry (Karmokolias, 1990). One ofthe major changes in the industry has been the opening up and growth ofseveral emerging markets. India is one of the most important emerging careconomies in the world today. In 1991, the Government of India embarked onan ambitious structural adjustment program aimed at economic liberalization,based on the pillars of Delicensing, Decontrol, Deregulation and Devaluation.Post-liberalization, the Government of India's new automobile policyannounced in June 1993 contained measures, such as delicensing, automaticapproval for foreign holding of 51% in Indian companies, abolition of phased

manufacturing programme, reduction of excise duty to 40% and importduties of CKD to 50% and of CBU to 110%, and commitment to indigenizationschedules.

The Government of India's new automobile policy attracted a large number ofautomobile companies to India. These include General Motors and Ford, andtwo Japanese, seven European and two Korean companies. Toyota andChrysler are also seeking to enter the country with suitable Indian partners.In addition, there are three existing Indian companies, Hindustan Motors,Premier Automobiles and Telco, and one Indo-Japanese venture, Marutialready in the passenger car market. Maruti is by far the biggest player withabout 70% of the market share. As of April 1997, a total of 7 Automobile

companies (Daewoo, Peugeot, Fiat, Ford, General Motors, Merc, Audi) havealready started selling cars, while another 8 companies (Honda, Mitsubishi,Renault, VW, BMW, Toyota, Hyundai, Chrysler) have either begun operationsin India or plan to start soon.

Some Indian companies like Telco and Kinetic are also working on introducingsmall car models. The number of new entrants and the level of investmentwithin a very narrow time window of two to three years are unprecedentedand seems unique to India. Compared to three major models available in theIndian market until recently, customers can now choose from a wide varietyof products. Some of the entry barriers faced by automobile companies inIndia are relatively high levels of import duties, a promising ancillary industry,

and product modifications required for relatively poor road conditions andhigh levels of heat and dust. On the other hand, a rapidly growing middleclass, rising per capita income, and high levels of latent unsatisfied demandwith customers starved of world class options promise enormousopportunities

As the data shows, the automobile industry does not dominate thetransportation industry. Out of $17 billion fresh investments in thetransportation industry up to the year 2000, only $5.7 billion will be in the


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THE MARKETING QUESTIONSDistribution Channels

The distribution environment for automobiles in India is quite different fromthat of most advanced countries. Such differences exist in type and size ofdealers, number of dealers, car supermarkets, vertical integration, functionsof dealer, bookings, financing, manufacturer-dealer relationship, number of

cars sold per dealer, margins, and market environment.

Market SegmentationThe Indian automobile market is still in its evolutionary or early growth stage.Therefore, no fixed or widely accepted method of segmenting the market hasevolved as yet. Segmentation has mostly been done on product types orprice ranges. There has hardly been any kind of segmentation onpsychographic or behavioral parameters as seen in developed car markets.

The segmentation provided in this paper is based on an understanding of thecurrent state of the industry.

These segments are quite different from the segments known in the US,European or Japanese markets. The following four segments based on priceand type of car have been identified:

Off-road or utility vehicles e.g., Maruti Gypsy, Mahindra Armada, TataSumo. Economy segment, comprising cars priced at less than $ 13,333, e.g.,Ambassador, Premier Padmini, Maruti 800.

Luxury segment, comprising cars in the $ 13,333 to $ 33,333 pricebracket, e.g., Maruti Zen, Premier 118NE, Contessa, Maruti Esteem, TataSierra, Peugeot 309, Opel Astra, Cielo, Ford Escort, VW Golf, Mitsubishi

Lancer, Rover Montego. Super-luxury segment, comprising cars priced at higher than $ 33,333,e.g., Mercedes-Benz, BMW, Audi.

There is a significant variation in demand in the four geographical regions ofIndia. North India is the largest market for cars in India currently with 43%market share. Next come west with 27% and south with 22%. East has thelowest market share at 8%.

PositioningThe positioning of the brands in the Indian passenger car market can beunderstood from the price-power map given in the next page. This map gives

an idea of competition in different segments. Since the Indian car market is ina state of flux, the positioning of most companies in the consumer's mindappears to be confused. However, the companies have developed image-based positioning strategies for their brands. Some of them are :

Hindustan Motors (HM) - enduring, sturdy

General Motors Opel (GM) German engineering

Daewoo - Family car


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Honda - superior aftersale service

Peugeot - sound-free diesel engine

Ford Esteem - smooth drive

Ambassador car of HM is being mostly targeted for the taxi segment and forinstitutional purchases like the Government. 40-45% of the taxi segment inthe country and as much as 55% of this segment in the South is accountedfor by Ambassador cars. The Contessa Classic is a luxury car and is primarilytargeted at corporate sector clients. Only 10-15% of the total purchases ofContessa is by individuals. Opel Astra, the 1995 Opel model, is a leader in theEuropean car market and the largest selling car in Europe. This model isbeing produced in the GM India facility at Halol. Astra is positioned as areliable family sedan in the European market, which has been modified tosuit the Indian market where it is an upmarket vehicle given theunderdevelopedmarket. Around 60 to 70% of Astra's European market is in the taxicabsegment and is regarded as the reliable second car for a family. In contrast,the Opel Astra positioning in India is - " German engineered luxury car withsafety features unmatched by others".

Advertising & CommunicationAdvertising in the Indian passenger car industry hardly existed till the onsetof competition. Today however, the industry is one of the highest spenderson advertising among consumer durables. A sizeable bulk of this has beenspent by the new entrants to create brand awareness. An interesting aspectto not is that the advertising strategies for most of the new entrants havechanged several times within a short period of one year. The advertisingstrategies of some of the companies are given below as illustrative examples:

Hindustan Motors (HM) has traditionally put in advertising efforts for the low-selling Contessa Classic, and not so much for the good old Ambassador. Butwith a plethora of new brands in the Indian market, HM has stepped up itsadvertising budget significantly. The company feels that the importance ofadvertising is set to further increase in this market with greater competition.

The company is also introducing several promotion strategies like ContessaCampaign Scheme, free servicing, shields for no problem performance andcustomer gifts. Advertising has been concentrated to the print media. Thecompany also recognizes that effective PR exercises would be a criticalcomponent of its marketing efforts in future. The advertising communication

for General Motor's Opel Astra handled by McCann-Erichson India has seensome discernible shifts. Initially, it talked of a rare combination of Germanengineering, American management and Indian values. Then, there was adelay in its product launch, and it showed ads showing a pregnant womanand saying: "All good things are worth the wait". Finally, when the car waslaunched, GM advertised its launch and announced the opening of an Astraclub (of customers).

Quality, Technology and R&D


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With increased competition, established automobile manufacturers in Indiaare becoming more conscious about technology and quality. Thesecompanies are incorporating ISO 9000 certification and Total QualityManagement as explicit corporate goals. R&D expenditure in Maruti,Hindustan Motors, Premier Automobiles and Mahindra & Mahindra, the fourcompanies with over 95% of the market currently, is very low and in 1994-95,

the combined budget of these four companies was $1 million or 0.38% ofsales. However, Telco has been building product development capabilities intrucks, light commercial vehicles, and jeeps over the past fifteen years andhas launched the Tata Sumo and Sierra in the market. It has plans to increaseexports of these models. Most of the MNCs entering the Indian automobilemarket are bringing in modern technology. Emission control techniques likecatalytic converters and injection technology are present in most models. Thefuel efficiency of these cars is higher than that of domestic models. Foreignmodels are equipped with vehicle safety gadgets which have never beenseen in Indian cars. In fact, some brands in the luxury and super-luxury.

CHALLENGES FACING NEW ENTRANTS

AND MARKET INCUMBENTSThe type of products in each company's portfolio is interesting to examine.The market leader, Maruti Udyog Limited (MUL), has a small800 cc car in theeconomy segment (Maruti 800), a family van (Maruti Omni), an off-roadvehicle (Maruti Gypsy), a 1000 cc notchback car (Maruti Zen), and a luxurycar (Maruti Esteem). Thus, Maruti has now got a product in each segmentexcept the super-luxury segment. GM currently has only one brand in theIndian market - the Opel Astra. Astra is the third largest selling car in theworld. Ford is currently in the market with the Ford Esteem, and will soonintroduce a second brand - the Ford Fiesta. Daewoo has currently only onebrand on the Indian roads - the Cielo in the luxury segment. Honda isentering the Indian car market with its Honda City, which the company claimshas been `developed' and not adapted for India.

While in India, the main market seems to be in the sub-compact economysegment for quite some time to come, hardly any company is entering thissegment. Therefore, while MUL's Maruti 800 and Maruti Omni continue todominate the largest segment unchallenged, the smaller luxury segment iswitnessing heavy competition with several foreign players and well-knownbrands. There could be several reasons for this. First, while the economysegment is the largest, MUL's sales volumes in this segment and its highlycompetitive cost structure act as effective entry barriers for new entrants.Economies of scale in the sub-compact range occur at volumes greater than150,000 cars per year. Maruti already has a capacity of 250,000 cars whichcould be a deterrent for new entrants in this segment. However, for a firmwith an established portfolio of automobiles, the addition of a sub-compactline could be attractive. Telco has plans to move into this range.

This option is not open to a foreign player planning to introduce a singlemodel. Since none of the foreign companies can match the price of Maruti800 for a similar car, they are preferring to operate in a segment whichvalues attributes other than just price. With the higher end of the market


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likely to generate high margins, these companies plan to slowly move downthe scale to a smaller car in course of time to take MUL head-on on price. Thisexplains to some extent the fact that all new entrants are avoiding the sub-compact car segment. Secondly, the used or second-hand car market in Indiais likely to become more organized in future. The car dealers will themselvesdeal with used cars. It is expected that a used Cielo or Astra will be priced

close to a new Maruti 800. This could put a question mark on the prevalentassumption that a large number of current two-wheeler users in India willgraduate to a Maruti 800 in future with higher incomes.

Consumer behavior studies of Indian buyers seem to suggest that the car isthe ultimate status symbol, and particularly a sedan signifies higher statusthan a small car. Therefore, if the price of a new Maruti 800 is the same asthat of a used Cielo or Astra, the demand for the luxury cars could growhigher than expected. However, the third reason seems to be the mostplausible. An analysis of the world car market shows that no car company inthe world, with the expectation of the Japanese, has a car in its range, whichis directly comparable to the Maruti 800. Contrary to popular belief, the Ford

Fiesta, Opel Corsa and the VW Golf would compete with Maruti Esteem orMaruti Zen, and not with Maruti 800. All these cars, though small by Westernstandards, are high-power cars which would be priced in India in the luxuryrange. Given that only 30% of the market is estimated for cars above 1000ccand with so many companies already in the Indian market, the industryseems to be heading for a shake out.

The firms that would be able to design and properly implement soundmarketing strategies are likely to be the winners. With every company tryingto encourage the Indian car buyer as never before, the industry is undergoinga shift from a supply-constrained market to a buyers' market, with differentcar brands competing on different strategies. Alternately, India could emergeas a manufacturing base for exports. Maruti's experience with the Indiancustomer gives it a better understanding of product and service needs.Moreover Indian firms have established suppliers, and are better at liaisingwith the government. Joint ventures will help but there will be pressure in theinitial stages. The availability of a vendor base is a critical factor in thesuccess of an automobile firm. Given high import duties on components, itcould mean the difference between breaking even in the first or second yearof operation or in the fifth year of operation, depending on the level ofindigenization achieved.

Companies with a developed vendor base might try to create entry barriersby putting pressure on their suppliers not to work with new entrants. Indeveloped markets, customers look for and appreciate various advancedfeatures in a car. Often there is a loyal set of customers. The markets arestructured on sharply differentiated and clearly positioned models. This is notthe case with India. Here, cars enhance social status and there may be astrong association of price with quality and status. The market may take timeto mature and understand the value of advanced features. Given the poorcondition of roads, the management of distribution is a critical function. The


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recent industry trend has been to set up exclusive dealerships. However thiscould be an expensive proposition.

For instance, a showroom in a large city could cost as much as $ 85,000.Since car prices are high compared to incomes, the life of automobiles tendsto be longer than in developed countries. This means a high cost of switching

for the consumer, and this represents a significant entry barrier. However asthe used car market develops, this factor might not be so significant. Aninteresting feature of car sales in India is the use of 'bookings', i.e., gettingcustomers to deposit $500 to $1000 for a car that will be supplied a fewmonths from the date of booking. This method of trying to tie in customers ispossible because of the large amount of unsatisfied pent up demand, severecapacity shortages, and the initial glamour for foreign cars. These bookingsare so successful currently that a company's entire capacity is booked withina month. In anticipation of new product launches by competitors, companieswith established products could create artificial shortages of their product forsome time, and make it available off the shelf when the competitor goes forbookings.

IMPLICATIONSThe market is growing at about 25% for the last three years. In the highlyprice sensitive market, reduction of prices because of lower duties and taxesand progressive indigenization, and rising middle class incomes are likely tofurther increase industry growth rate. Penetration in rural and semi urbanareas is extremely low and could provide fresh markets. New entrants willhave to deal with uncertainty of demand, different and evolving customerneeds, a relatively poor supplier base; a market crowded with competitionand industry wide capacity shortages. However, if there is a shake out asmany analysts expect, further opportunities for survivors will open up.Another implication is that India could emerge as a significant manufacturingbase for exports. The supplier industry is also going through massive growth,although from a small initial base. Except for Telco, product developmentcapabilities are very low among established indigenous assemblers andsuppliers, and the industry has some way to go before it becomes worldclass.


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FERTILIZERINDUSTRY


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OverviewThe continuing growth in population calls for an increase in food grainproduction from its current level of 202 million tones to about 240 milliontones per annum in the next five years. In face of serious limitations on

increasing land area under cultivation which is saturated at 143 millionhectares the only other option appears to be raising farm productivity.Fertilizers are an essential input for increasing productivity of food grains andother agricultural crops.

With installed capacity of about 14 million tones per annum (mtpa), India isthe third largest producer and consumer of fertilizers in the world. Thefertilizer industry in India has played a pivotal role in facilitating the requiredincrease in the use of plant nutrients for achieving the goal of self-sufficiencyin food grains production on one hand and rapid and sustained agriculturalgrowth on the other. At present, there are 64 large size fertilizer units in thecountry, manufacturing a wide range of nitrogenous and phosphatic /complex fertilizers. Of these, 39 units produce urea, 18 units produceDiammonium Phosphate Di-Ammonium Phosphate (Dap) and complexfertilizers, 7 units produce low analysis straight nitrogenous fertilizers and 9of the above units produce ammonium sulphate as a by-product. Besides,there are about 79 small and medium scale units producing single superphosphate (SSP).

The phenomenal growth of the industry during the last two and half decadeswas made possible by an overall conducive policy environment (speciallyduring 70s and 80s) and assured availability of various feedstock viz.,naphtha, natural gas, fuel oil/LSHS. The domestic fertilizer industry hasattained high levels of capacity utilization. The capacity utilization duringFY99 was 99.6 percent for nitrogen and 99.1 percent for phosphate and isestimated at 103.0 percent for nitrogen and 94.2 percent for phosphateduring FY00. The total fertilizer production in terms of nitrogen andphosphate nutrients increased from 1.06 million tones in FY71 to 14.28million tones in FY00.

The growth rate of production in FY00 for nitrogenous and phosphaticfertilizers was 3.8 percent and 7 percent respectively and the consumption


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was up by 4.7 percent, 15.6 percent and 30.1 per cent for N, P, K type offertilizers respectively. The most widely used fertilizers include nitrogenous(N) 70 percent of consumption, phosphatic (P) 22 percent and potassic (K) 7 percent. Potassic fertilizer is not manufactured in India and consumptionis out of imports. urea, the nitrogenous type of fertilizer accounts for 60percent of total fertilizer consumption in India. An appropriate balance in the

consumption of different fertilizer nutrients is critical to productivityenhancements. The appropriate NPK ratio under Indian soil conditions isstated to be 4:2:1 and at present it stands at 10:4:1 which points towards animbalance in consumption.

Although the average per hectare consumption of fertilizer nutrients hasincreased from less than 1 Kg. in FY52 to about 95 Kg. at present, this level offertilizer use is low with reference to the objective of doubling food grainsproduction in the by 2010, as well as the consumption levels prevailing inother countries, including some of the developing countries in Asia likePakistan and Bangladesh. In the wake of rising fertilizer prices due to suddenincreases in crude oil and feedstock prices the Government of India

introduced the Retention Price Scheme (RPS) in 1977 with the twin objectiveof providing fertilizers to farmers at affordable rates without harming theinterests of the manufacturers. Under the scheme the government pays thedifference between the administered price (sale price) and the retention price(cost of production as assessed by the government plus a reasonable returnon net worth) to the manufacturers, which guarantees a post tax 12 percentreturn on net worth.

The Government also sets the farm gate price, which is the price at whichfertilizer is sold to the farmer and the fixing of the retention price is done bythe Fertilizer Industry Coordination Committee (FICC) and pricing policy isdetermined for three-year period. The retention price varies from oneproducer to another and for the same producer from plant to plant. Theretention price broadly reimburses two broad categories of costs thevariable costs and the fixed costs. In addition to the retention price subsidy,equated freight subsidy is paid to the manufacturers of controlled fertilizersto cover the cost of transportation from the production points to theconsumption centres. Since the consumer prices of both indigenous andimported fertilizers are fixed uniformly, subsidy is paid on imported fertilizersin order to bridge the difference between the cost of imports and thestatutorily fixed consumer price. The National Industrial Policy, unveiled in

July 1991 announced the delicensing of the fertilizer industry.

Promoters are now free to set up fertilizer plants in the country withoutobtaining license from the government provided they obtain environmentalclearance. In an another major policy initiative taken in August 1992, with aview to reducing the subsidy, all distribution of phosphatic, potassic andcomplex fertilizers was decontrolled and imports were decimalized andretention pricing scheme thus confined to urea. Consequently, the prices ofthese fertilizers increased sharply leading to fall in their consumption. Inorder to cushion the impact of increase in prices of these fertilizers and toarrest decline in their consumption, the Ministry of Agriculture introduced aconcession scheme on sale of decontrolled fertilizers from FY93 itself at the


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rate of INR 1000 per tone. In another major policy initiative taken by theGovernment on 5th July 1996, the scale and coverage of this specialconcession was substantially increased to give impetus to the stagnatingdemand for these fertilizers and to ameliorate the nutrient imbalance in thesoil which is essential for sustaining the desired growth in agriculturalproductivity.

The scope and coverage of concession scheme have been significantlyenhanced in subsequent years. To encourage investment in the fertilizersector by the domestic industry Government offers confessional customsduty benefit on import of capital goods for setting up of newplants/substantial expansion / renovation / modernization of existing unitsand deemed export benefits to indigenous supplies of capital goods to new /revamped /retrofit / modernization of fertilizer projects subject to thecondition of bidding for them at international market prices.

The fertilizer industry is passing through a critical phase which promises tosignificantly alter the future of the industry. The recent policypronouncements point to a direction, in which even the fittest of the industryare required to stretch themselves to survive. Over and above the currentdomestic scenario, thanks to WTO, the industry has to gear up to a newenvironment where adoption and adaptability to latest technology will proveto be a decisive factor. Not withstanding the turmoil, one factor will remaincertain. The country needs to ensure smooth and timely availability offertilizer to all parts of the country. The marketing divisions of the fertilizerindustry will continue to handle millions of tones of fertilizer material. Greaterresponsibilities will be thrust upon the marketing personnel as they areamong the limited gateways to rural India. New opportunities are likely tounfold in the rural sector which will encourage fertilizer industry to add newactivities for their marketing divisions.

The emphasis will be on efficiency and effectiveness and this will bring intofocus the speed and quality of information flow for decision making. This willcall for a radical overhaul of the existing information systems in the industry.

The contribution of information technology in bringing down costs, increasingefficiency & improving productivity and thereby contributing to the bottomline needs no special emphasis. In the fertilizer marketing context, I.T. canplay a major role in logistics, efficient sales operations, checking themarketing costs, safeguarding market share and providing efficient customerservices. A well conceived I.T. set up can endow decision makers at all levelswith better reflexes to effectively respond to market conditions.

Unfortunately, it may be argued, that information technology has notreceived adequate attention from the major segment of the fertilizer industry.

This is more glaring when it comes to marketing function. It is time for all thecompanies in the fertilizer industry to appreciate the complete potential ofcomputers and communications and to fully tap its benefits to strengthen


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marketing operations. But before proceeding further, it may be useful toreview the present situation with respect to information technology infertilizer marketing.

Present Status of I.T. in Fertilizer MarketingIn a recent Survey (1), interesting factors have emerged on the current status

of information technology in the fertilizer industry with respect to fertilizermarketing. About 16 major fertilizer companies were studied to analyze theextent of I.T. penetration in fertilizer marketing activities, verify theirperception on the existing computerization and to obtain feedback on futurepossibilities with special emphasis on e-commerce. The companies wereselected from public, private & cooperative sectors. Almost 75 % of thesample has recorded turnovers of above Rs 1000 crore, involved marketingvolumes of over 8 lakh tones of various types of fertilizer, with at least 1000people on rolls. All the companies surveyed have marketing operations inmore than three states with about 60% of the sample having operations inmore than 10 states. About 45% of the companies have more than 200 fieldpersonnel while about 50% have from 50 to 100.The sample studied

contributes to a major chunk of fertilizer industrys marketing activities andthe survey provides an insight into the status of usage of I.T in thesecompanies.

Of the 16 fertilizer companies, 13 companies have less than 50 systemspersonnel at various levels. About 60% reported more than 200 computers inthe organization. However, when it comes to deployment of I.T. usage on thefield, the situation is not very encouraging except for a few companies. About60% of the companies have less than 50 computers in the field. Mostimportantly, these are used for simple tasks such as word processing andspreadsheet based jobs. The preferred means of communication still happensto be conventional channel i.e. courier, fax, telephone and postal system. Tenof the companies are using e-mail to a varied extent. Six of the companieshave set up wide area networks to facilitate message and data transfer.While the extent of use of e-mail and electronic data transfer may beconstrained by the availability of access, even where available, most of theindustry is using it in a limited way.

BackgroundFertilisers are basic nutrients supplied to soil which replenish the depletion ororiginal deficiency of nutrients in the soil. India is the third largest producerand consumer of chemical fertilisers and accounts for 12% of world fertiliserconsumption. Owing to importance of fertilisers for agriculture in India andthe focus on affordability to farmers, the fertiliser industry has been undertight Government control. Chemical Fertilisers are commonly groupedaccording to the principal nutrient constituents, viz. nitrogen, phosphate andpotassium. The ideal consumption ratio of N (Nitrogen), P (Phosphorous) andK (Potassium) for the country as a whole is estimated at 4:2:1. However thepresent consumption ratio is 6.8:2.8:1.

Urea is the principal nitrogenous fertiliser with 46% nitrogen content. While,fertilisers other than urea have been made freely importable since 1992,


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import of urea continues to be canalised through MMTC Ltd., State TradingCorporation and Indian Potash Ltd. There are about 30 players in thedomestic nitrogenous fertiliser industry. The prices and distribution of ureaare regulated by the Government to ensure that it is affordable and availableto the entire farmer community. However a few months ago, the Governmentrelaxed a part of the distribution controls. Nitrogenous fertiliser

manufacturers enjoy the benefit of higher and assured subsidy throughRetention Price Scheme (RPS). Natural Gas is the preferred feedstock formanufacture of urea due to economic benefits arising out of lower capital andproduction costs, high energy efficiency, environmental safety, etc. incomparison to other feedstock.

In phosphatic and potassium fertilisers, all aspects relating to pricing,distribution, feedstock, imports and capacities were de-regulated in August,1992. Di-Ammonium Phosphate (DAP)) and Single Super Phosphate (SSP) arethe most commonly used complex phosphatic fertilisers. In the absence ofadequate indigenous availability of Rock Phosphate, the main raw materialused to manufacture Di-Ammonium Phosphate and SSP, it is imported in

large quantities. Muriate of Potash (MOP) is the common potassic fertiliserused in the country which is entirely imported due to insufficient potashdeposits in the country.Demands for hike in farm gate prices of fertilisers continue to be met withstiff resistance from the powerful farmers lobby. With the expected removalof quantitative and price restrictions under WTO, Indian fertiliser industry hasto face stiff competition from imports, primarily urea. Decontrol of phosphaticand potassic fertilisers bolstered the nitrogen consumption and reducedlevels of phosphate and potassium. Excess application of nitrogen led to anadverse NPK ratio and is seen to invite pest to the plant and leech into thesoil. Long term fertiliser policy should aim at providing solution to thebalanced NPK ratio and the domestic industry prospects.

4. FUTURE PROSPECTSWhile the imports of P and K fertilizers have been decimalized, urea importsare still controlled by the government. The removal of all QRs on urea importby April 1, 2001 will put the viability of Indian manufacturers into question, astheir costs of production are higher than the currently prevailing internationalprice of urea. The availability of LNG will play a critical role in determining thecompetitive strength of Indian manufacturers. The existing naphtha and fueloil based plants will have to switch to natural gas to be able to sell atcompetitive rates. The domestic availability of LNG will fall short of thedemand and gas will have to be imported in the form of LNG. But thisrequires the setting up of LNG terminals, which is a very capital-intensiveexercise. The issue of urea selling price is expected to remain sticky becauseof political factors.

On the cost side, urea manufacturers are facing sharp increases in feedstockcosts. Thus, the subsidy burden on the exchequer in the current financialyear i.e. FY01 is likely to be higher than in the previous fiscal. The profitabilityof urea manufacturers would also be affected by the reassessment of


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capacity announced by the Government. Further, the draft of the proposedlong-term fertilizer policy also mentions the decontrol of urea distribution in2000. It is stated that this would save equated freight subsidy by INR 7billion. Removal of freight subsidy will put pressure on the margins ofmanufacturers. The profitability of nitrogenous fertilizers other than urea willcontinue to come under pressure on account of sharp increases in input

costs. For complex fertilizers, the decision by the Government to subsidiesthe nitrogen content in addition to the phosphatic content will improverealizations and profitability.

The issue facing the sector in the short term is the abolition of differentialsubsidy support for the sale of domestically produced Di-AmmoniumPhosphate by April 1, 2001 and low global prices of Di-Ammonium Phosphateand the cost of raw materials in medium term. Excess capacity in (DAP)existing globally is expected to keep the international prices down in themedium term and this along with the commissioning of the Oswal Chemicalsand Fertilizers Ltd. (OCFL) plant in Orissa is likely to lead to a significantincrease in (DAP) supplies in the domestic market. This may result in an

excess supply situation in the medium term till the time the domestic (DAP)demand is able to catch up. The problem is compounded by the fact that thebound rate of duty on imported (DAP) committed to the WTO is as low as 5percent. The re-negotiation of this rate upward is crucial in sustaining theviability of the domestic industry with abolition of subsidy (in form of ad-hocconcessions) support to (DAP) under WTO commitments.

MAJOR SEGMENTS The Indian fertilizer industry is broadly divided into Nitrogenous,Phosphatic and Potassic segments. In addition to these, nutrients arecombined to produce several complex fertilizers. To express the nutrientconstitution of fertilizers, the grade of a fertilizer is expressed as a set ofthree numbers in the order of percent of Nitrogen (N), Phosphate (P) andPotash (K). The straight nitrogenous fertilizers produced in the country areurea, ammonium sulphate, calcium ammonium nitrate (CAN) and ammoniumchloride. The only straight phosphatic fertilizer being produced in the countryis SSP. The complexes fertilizers include Di-Ammonium Phosphate(Dap),several grades of nitro phosphates and NPK complexes. Urea and Di-Ammonium Phosphate(Dap) are the main fertilizers produced indigenously.

HIGHLIGHTS

India is the third largest producer and consumer of fertilizers in theworld with an installed capacity of Nitrogen (N) and Phosphate (P)

nutrients at 14 million tones p.a.

The Indian Fertilizer Industry is broadly divided into Nitrogenous,Phosphatic and Potassic segments. In addition to these, nutrients arecombined to produce several complex fertilizers.


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Urea, a nitrogenous type of fertilizer, is most widely consumed in India.Currently the urea capacity is 20.2 million tones while consumption is 21.7million tones. The demand of urea is expected to grow at a CAGR of 4percent.

Urea segment currently subsidized under the Retention Price Scheme,with controls on distribution, to be decontrolled by 2006. First phase ofreform in this segment initiated through a move towards Group RetentionScheme, as announced in FY02 Budget.

The total production of phosphate in the country was 3.36 million tonesper annum in FY00a 6 percent increase over FY99. Main phosphaticfertilizers produced in India are Diammonium Phosphate (DI-AMMONIUMPHOSPHATE(DAP)) and Single Super Phosphate (SSP).

Entire requirement of potassic fertilizers is imported. The majorpotassic fertilizer Consumed in the country is Muriate of Potash (MOP).

CEMENT


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INDUSTRY

BackgroundThe Indian cement industry (120 million tons per annum) is the fourth largestin the world after China, Japan and USA. However, per capita consumption inthe country is only around 80-90 kg compared to the world average ofapproximately 250 kg. Historically, the Indian cement sector has been highlyfragmented comprising 54 players that operate 124 plants. The majority ofthe plants are small-sized and well spread through out the country. Thecement industry is cyclical and capital intensive. A new plant typically has agestation period of 3-4 years.

The industry is rapidly consolidating with Mergers & Acquisitions (M&A)activity. In the recent past, Gujarat Ambuja acquired control of ACC andGrasim has acquired control of L&T. These two players now dominate theindustry. Amongst MNC players, Lafarge has acquired a capacity of 4.5 mtpaand Itali Cementi a capacity of 2.7 mtpa. Besides the above-mentioned largeplayers, other noteworthy companies include India Cement, Madras Cement,Chettinad Cement, Shree Cement, Birla Corp and JK group.

Demand Supply ScenarioPresently cement demand and supply is balanced at around 120mtpa. Thecapacity can be stretched to 130 mtpa, whereas demand is expected to growat 10% p.a. over the next 3 years. The emphasis laid by the government onthe development of physical infrastructure mainly roads, airports, seaportsand railroads and the boom in housing driven by easy availability of cheaphousing credit have been the key growth drivers for the sector. Government


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is the single largest buyer of cement. Historically, in the last year beforeelections, drive to complete pending infrastructure project has drivendemand growth. One of the major cement consuming projects is the GoldenQuadrilateral Project- 5,846 km(Completed so far 2,500 km), North-South &East West corridors 7,300 km. (Completed so far 1,400 km).

At roughly 3,000 tons per km, assuming 50% of roads to be concrete (restcoal tar), it will require about 10 million tons over the next two years. Besidesconstruction and modernization of four airports and two seaports will boostdemand for cement. Besides, the industry has been witnessing rising cementdemand on account of a boom in the housing sector. Interest rate for housingfinance has plummeted from around 15-16% p.a. to 7.75-8% p.a. Also realestate prices in major and mini metros have been stable for last two years.

This has led to a huge demand for housing units. Last year, housing financedisbursed was around Rs650bn to finance some 5 million units In addition,the government has initiated a number of housing projects. Traditionallyhousing, infrastructure and industrial construction have accounted for 55%,25% and 20%, respectively of total cement demand in the country. In the

recent past, housing sector is estimated to have accounted for 70% ofcement consumption.

Cement Demand (Consumption) Monthly Trend Apr 1989- Jun 2003:

Investment RationaleWith demand set to exceed supply and no new capacity in pipeline, theindustry should witness its best period over the next 5 years. We believecement sector has come out of a dull and financially bleeding phase. Webelieve further consolidation of the sector will help players perform welloperationally. Rising demand supply mismatch will ensure higher realizations.


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Players with well disciplined cost structure; high capacity share and widergeographical spread will outperform their industry peers. Also M&A activitywill provide opportunities of mega returns to investors in smaller companiesas well.

Demand-supply imbalance imminent

We are at a crucial juncture in the evolution of industry. A duopoly has beencreated at a time when demand and supply are evenly matched. Demandgrowth is likely to accelerate on the back of an unprecedented housing boomand government led infrastructure spending as a prelude to elections. TheGolden Quadrilateral Project (5,846km plus 7,300 km of feeder roads) and anumber of other infrastructure projects related to ports and power plantshave commenced. Also export prospects have brightened as India is nearestsource to supply cement for Iraq reconstruction. With supply side constraints(as enumerated above), the mismatch is likely to happen in near future.

The housing boom

It is not without reason, that all leading business magazines are carryingcover stories on the housing boom. Interest rates and cost of servicinghousing loans have halved, and still continuing their southward journey. This,coupled with tax breaks and stable real estate prices, has triggered anunprecedented housing boom. The housing finance industry has estimated alatent demand of 33 million houses and forecasts a growth of 50% pa for next4 years.

When MNCs Are BuyingAlready Lafarge and Itali Cementi have acquired 4 mtpa and 2.7 mtpa ofcapacities respectively, which cannot satisfy their scale requirements.Cement companies are trading at close to historic lows of marketcapitalization per ton of capacity. The current market capitalization is just afraction of replacement value. Promoters have been quietly increasing theirstakes as weary retail investors have been exiting. The dominant Indiancompanies will also find it attractive to acquire cement companies withaccumulated losses as the Indian Income tax act allows them to set off lossesof acquired companies against future profits.

Regional Cement Price Trends

Cement PricesThe charts show that after an up-trend in cement prices in end of 2002,prices have stabilized during the last few months. Output and averagerealization are the crucial determinant of the profit for the sector. We believethere will be price spike in October 2003 as demand picks up post monsoonand a more consolidated industry works towards disciplined production andpricing. Over next 2-3 years, demand supply balance will tilt towards theformer and a more sustained rise in prices.


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The above graphs belong to the different regions. If we study the graphs at atime then a similarity evolves though the variation can not be equal. But thetrend of the line goes almost similar that means the prices in certain timeframe are either decreasing or increasing. For example in the beginning thegraph tends to decline and then it increases for a time period and then itdeclines. The pattern shows that the industry is highly price sensitive and it is

seasonal.


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THE ANALYSIS OF CORRELATION AND REGRESSION ARE GIVEN AND

THEIR LINKS ARE GIVEN BELOW:

FOR CORRELATION CLICK HERE:

FOR REGRETION CLICK HERE:

IN THE LINKS GIVEN THE REGRESSION AND CORRELATION

CALCULATIONS ARE GIVEN WITH GRAPHS.
http://opt/scribd/conversion/tmp/scratch4181/CORRELATION.xlshttp://opt/scribd/conversion/tmp/scratch4181/REGRESSION.xlshttp://opt/scribd/conversion/tmp/scratch4181/CORRELATION.xlshttp://opt/scribd/conversion/tmp/scratch4181/REGRESSION.xls

final steel

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