Profitability Analysis of Steel Industry Essay

Industrial Organization and Competitive Strategy Analysis of competitive advantage of Tata Steel in the Indian Steel Industry. Submitted by:- Himanshu Singh, G12024 Paul Jacob, G12034 Aninda Goswamy, G12008 Objective: This study has multiple goals:- 1. To find out if Tata Steel does enjoy a competitive advantage vis-a-vis other players in the Steel industry in India. 2. To ascertain the source of this competitive advantage. 3. Find out if this competitive advantage is sustainable. Industry Overview India today is one of the topmost producers of steel in the world.

With the industry attributes like low cost manpower and abundance of iron ore and coal reserves India today is a highly competitive market. The reasons for expansion of the sector can be primarily attributed to the huge expansion of the oil and natural gas sectors on infrastructure projects coupled with growth in housing, and the increase in demand for consumer durables and automobiles. According to the World Steel Association, India is the fourth largest producer of crude steel. India has an annual capacity of 80 million tons.

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With the government laying a lot of emphases on the infrastructure space the sector is poised to grow. The 1991 economic reforms has propelled the industry and its growth, and the steel industry has been positively been affected by it. With the licence requirement being removed and the Automatic approval of foreign equity investment up to 100 per cent is now available. Price and distribution controls were removed 20 years ago in an effort to make the steel industry more efficient and competitive. Restrictions on external trade, both on imports and exports have been abolished.

Meanwhile, import duty rates have been reduced considerably. Certain other policy measures such as the reduction on import duty of capital goods, the convertibility of the rupee on trade accounts, the ability to mobilise resources from overseas financial markets, and the simplification of the existing tax structure for a period of time have all benefited the Indian steel industry. There has been focus on setting up of more steel plants and thus 222 memoranda of understanding (MoU’s) in conjunction with state governments have been signed for a planned capacity expansion of around 275. MT by 2020. The construction industry is what amount to 61% of the consumption of steel. Govt expects steel consumption to rise to 120 Mn by 2020 . Government steps to Promote the steel industry * 100% FDI is allowed in the steel industry * Public-Private- Partnership (PPP) mode are being encouraged * R&D in this sector is a prime focus * Custom duty have been reduced * National Steel Policy (NSP) to encourage the steel industry to reach global benchmarks Market Size The current market size at US$55. 1 billion. And SAIL is a dominant market player of 20. % while tata has 10. 2% of the market. Total demand of steel is today looks at 65. 2 million tons during FY11 Investments: * Rashtriya Ispat Nigam Ltd (Visakhapatnam Steel Plant) has announced US$970 million worth of new units through expansion of its plants. * The Steel Authority of India Ltd (SAIL) is to set up processing units in Uttar Pradesh (UP). * India’s largest iron ore miner, National Mineral Development Corporation Limited (NMDC) and Russian steel maker Severstal signed the implementation protocol in Moscow for setting up a joint venture steel plant in Karnataka. Notable overseas investments in the sector include: * JFE (Japan) investment of US$1 billion in JSW Steel – Technology tie-up and acquisition of minority stake * ArcelorMittal (Global) investment in Uttam Galva * Joint venture between Nippon Steel (Japan) and Tata Steel for production of Automotive Steel. * Bao Steel (China) entered in a Joint Venture with Visa Steel for production of Ferro Chrome in India. * POSCO Steel (South Korea) has announced an investment of US$12 billion for setting up a 12 million ton geenfield steel project in India. Future * Indian Crude Steel projected CAGR growth is 10% Availability of raw materials, cheap labor, favourable government policies will continue to drive demand. * International steel conglomerates may look to partner with local players with capacities in the range of 0. 5 million tons to 2 million tons Company Profile: TATA Steel Tata Steel is one of India’s largest steel organizations. Established 1907 in Mumbai as “TATA IRON AND STEEL COMPANY” it has a production capacity of 40 Mn. tonnes a year. It is also world’s sixth largest steel company. With a presence in more than 60 + countries and manufacturing units in 30+ countries the company can be called truly global.

It is india’s largest private sector steel organisation in terms or domestic production. Tata Steel is also India’s second-largest and second-most profitable company in private sector in terms of consolidated revenues. Its main plant is located in Jamshedpur, Jharkhand, with its recent acquisitions, the company has become a multinational with operations in various The company was also recognized as the world’s best steel producer by World Steel Dynamics in 2005. In the year 2000,the company was recognised as the world’s lowest-cost producer of steel.

The company manufactures finished steel, both long and flat products like hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction re-bars, rings and bearings. The company markets its products in brands like “Tata Steel, Tata Tiscon, Tata Pipes, etc. It has captive iron ore and coal mines located in the states of Orissa, Jharkhand, Maharashtra, Gujarat and West Bengal. With its head office located in Mumbai, the company functions through a network consisting of trading arms and operation and projects sites spread across countries in the continents of Asia, Europe and America.

Apart from Steel there are six Strategic Business Units or divisions for Bearings, Ferro Alloys and Minerals, Rings and Agrico, Tata Growth Shop, Tubes, and Wires. With the acquisition of Corus, Tata steel has become the fifth largest steel maker in the world. Analysis: * Competitive Advantage The competitive advantage enjoyed by a firm would manifest itself in higher profits for the firm as compared to the industry average for a period of time. In our context, the industry concerned is the Indian Steel Industry.

For the purpose of our study, we have assumed the composition of Indian Steel Industry to consist of the following companies:- 1. Tata Steel| 2. JSW Steel| 3. SAIL| 4. Essar steel| 5. Bhusan steel. | 6. JSW Ispat| 7. Visa steel. | An analysis of the gross profit margin of these companies was made for the year 2003 to 2012. The results are shown in Table 1. Table 1: Gross Profit Margin (in %) for Steel Companies in India Name of Company| 2003| 2004| 2005| 2006| 2007| 2008| 2009| 2010| 2011| 2012| Tata Steel| 20. 4| 31. 7| 40. 2| 38. 8| 39. 8| 37. 7| 33. 7| 31. | 34. 2| 32. 1| JSW Steel| 7. 3| 20. 1| 28. 3| 22. 4| 28. 6| 23. 4| 14. 5| 17. 3| 14. 1| 12. 1| SAIL| 6. 0| 17. 9| 36. 1| 24. 1| 29. 9| 25. 1| 17. 5| 19. 4| 12. 9| 9. 7| Essar| 7. 0| 10. 5| 24. 5| 19. 3| 17. 8| 14. 8| 14. 4| -| -| -| Bhusan| 12. 2| 13. 1| 13. 0| 12. 4| 15. 1| 14. 9| 17. 2| 22. 1| 25. 2| 24. 0| JSW Ispat| 3. 9| 6. 9| 15. 8| -11. 0| 8. 0| 7. 6| 5. 8| 5. 9| -3. 4| 1. 3| Visa| 5. 1| 3. 7| 6. 0| 8. 2| 10. 0| 12. 8| 5. 9| 13. 2| 11. 7| 2. 1| Average| 8. 8| 14. 8| 23. 4| 16. 3| 21. 3| 19. 5| 15. 6| 18. 2| 15. 8| 13. 5| Source: Moneycontrol. com

A comparison was made between the profit margin of Tata Steel and the Industry for these years. The results are shown below: Table 2: Comparison of profitability of Tata Steel with the Industry Years| Industry Average| Tata steel| 2003| 8. 85| 20. 38| 2004| 14. 82| 31. 65| 2005| 23. 41| 40. 17| 2006| 16. 31| 38. 81| 2007| 21. 31| 39. 84| 2008| 19. 47| 37. 7| 2009| 15. 56| 33. 69| 2010| 18. 22| 31. 36| 2011| 15. 80| 34. 2| 2012| 13. 55| 32. 09| It was decided to test whether the difference in profitability of the two groups is statistically significant or not.

The results are shown below in Table 3. Table 3: Results of Statistical test for difference in profitability Paired T-Test and CI: Industry Average, Tata steel | | Paired T for Industry Average – Tata steel| | N Mean StDev SE Mean| Industry Average 10 16. 73 4. 13 1. 31| Tata steel 10 33. 99 5. 88 1. 86| Difference 10 -17. 260 3. 053 0. 965|  | | 95% CI for mean difference: (-19. 444, -15. 076)| T-Test of mean difference = 0 (vs not = 0): T-Value = -17. 88 P-Value = 0. 000|

The results show that the difference is significant at the 5% significance level as indicated by the P-value which is zero in this case. This suggests that Tata steel does enjoy a competitive advantage over other players as evident in its gross profit margins which are significantly higher. * Source of Competitive Advantage After establishing that Tata Steel does enjoy a competitive advantage, it is now essential to find out the source of this competitive advantage. A research in to the various aspects of the steel production and distribution process suggests the following alternatives:- 1.

Ownership of mines (Resulting in low cost of raw materials). 2. Strong brand image. 3. Superior distribution network. 4. Superior value proposition (Greater benefits to customers). A thorough analysis of each of these factors tells us that although brand image is important, it cannot perpetually be a source of competitive advantage as other players would also endeavour to build their respective brands and eventually may come on par. Also a distribution network can be source of competitive advantage in the short run, however in the long run this is imitable and hence not sustainable.

Moreover steel being a commodity item, it is difficult to only follow the strategy of differentiation and expect long term profits due to this strategy. Hence it is felt that low cost of raw materials could be the source of this competitive advantage. The low cost of raw materials is primarily due to availability of captive mines and these mines being run efficiently. We would like to this hypothesis statistically. To do that we compare the cost of raw materials for the industry with that of Tata Steel and try to see if there is any significant difference.

Table 4: Coats of Raw Materials as a % of Cost of Production Name of Company| 2012| 2011| 2010| 2009| 2008| 2007| 2006| 2005| 2004| 2003| Tata Steel| 26. 16| 28. 67| 31. 71| 30. 91| 26. 99| 28. 93| 27. 33| 27. 76| 28. 77| 22. 79| JSW Steel| 62. 72| 59. 94| 57. 11| 59. 86| 49. 82| 46. 45| 51. 14| 43. 21| 43. 35| 43. 54| SAIL| 47. 10| 45. 81| 43. 32| 45. 47| 37. 21| 40. 46| 43. 21| 34. 59| 36. 96| 41. 47| Essar| | | 43. 39| 32. 49| 33. 70| 36. 52| 31. 60| 30. 98| 35. 28| 31. 80| Bhusan| 52. 70| 51. 30| 60. 17| 61. 29| 63. 89| 67. 02| 71. 27| 73. 55| 65. 24| 60. 52| JSW Ispat| 64. 80| 64. 76| 55. 13| 54. 61| 50. 2| 48. 58| 54. 45| 50. 93| 53. 90| 52. 87| Visa| 93. 35| 77. 10| 74. 10| 75. 22| 68. 38| 74. 68| 70. 33| 74. 38| 81. 64| 73. 77| Average for the industry| 49. 55| 46. 80| 52. 13| 51. 41| 47. 20| 48. 95| 49. 91| 47. 91| 49. 31| 46. 68| Source: Moneycontrol. com We compare the average cost of materials of the industry with that of Tata steel and test if their difference is statistically significant at the 5% significance level. Table 5: Results for statistical test for comparison of cost of raw materials for Tata steel and Industry average Years| Industry Average| Tata steel| 2003| 49. 55%| 26. 16%| 2004| 46. 0%| 28. 67%| 2005| 52. 13%| 31. 71%| 2006| 51. 41%| 30. 91%| 2007| 47. 20%| 26. 99%| 2008| 48. 95%| 28. 93%| 2009| 49. 91%| 27. 33%| 2010| 47. 91%| 27. 76%| 2011| 49. 31%| 28. 77%| 2012| 46. 68%| 22. 79%| Paired T for Industry Average – Tata steel| | N Mean StDev SE Mean| Industry Average 10 0. 48984 0. 01869 0. 00591| Tata steel 10 0. 28003 0. 02498 0. 00790| Difference 10 0. 20981 0. 01759 0. 00556|  | | 95% CI for mean difference: (0. 19722, 0. 22239)| T-Test of mean difference = 0 (vs not = 0): T-Value = 37. 71 P-Value = 0. 000|

We see that the difference is statistically significant at the 5 % significance level as the P-value is 0. So we can conclude that the cost of raw materials for Tata Steel is significantly lesser than for the entire industry. It is also concluded that this low cost of raw materials is the source of competitive advantage for Tata Steel in the Indian Steel industry. * Sustainability of Competitive Advantage By investing in companies like Corus, Millennium Steel and NatSteel Holding, it is seen that Tata Steel has made both manufacturing and marketing network in Europe, South East Asia and the pacific-rim countries.

Another interesting fact is the Tata steel with this kind of scale even today remains backward integrated with own iron ore mines and collieries, The company is also striving for raw material security through joint venture in Thailand, Australia, Mozambique, Ivory Coast and Oman. This is truly a competitive advantage which has sustained over a period of time, and has resulted in effective operations and rampant modernisation of the Tata steel plant. Tata steel is among the lowest cost steel producers today.

Another very important factor is the Research & Development and Scientific Services division of Tata Steel Limited at Jamshedpur, set up in 1937. The research lab is famous for its patents and research capacity across the globe. It has three departments – Research and Development, Scientific Services and Refractory Technology Group which support the Tata Steel group, particularly its operations in India and South East Asia. It has been instrumental in developing new products and processes to create competitive advantage, better environmental performance and enhanced sustainability.

Capacity expansion is a key strategy for Tata Steel in India, it derives much of its competitive advantage as a low-cost producer from the quality and yield of its raw material sources. Work is currently under way to increase steelmaking capacity at Jamshedpur to 9. 7 mtpa of crude steel by 2012. This additional capacity will enable the company to increase its market share in flat products and to use its existing resources more efficiently, including manpower, utilities and its captive mines. Customers are looking for variety of quality products, these products are often tailored individually to their specifications –reliability and lexibility in supply and service; innovation, and technical support to provide them with differentiation and competitive advantage, Tata steel has been in a position to differentiate itself. Another competitive advantage observed is the dedicated and effective staff that ensures the sustained growth Tata steel, with more than 65,000 employees Tata steel is one of the biggest employers today in India. It has developed its own ecosystems which are self sustaining and has grown multi fold over the last few years. Conclusion

The analysis shows that TATA Steel does enjoy a competitive advantage over other steel makers due to its low cost of raw materials. It can be concluded that TATA Steel would be able to maintain this competitive edge over other steel makers primarily because of the following strategies:- * Continual ownership of mines and natural resources. * Acquisition of mines and natural resources in other countries such as Mozambique. * Difficult for other players to acquire mines because of government regulations. * Superior brand image. * Superior product offerings.