Porter's Analysis of Indian Steel Industry

Topics: Steel, Pig iron, Iron ore Pages: 20 (5243 words) Published: February 16, 2012

Post independence, steel industry in India came under the regulatory framework of Government of India, which stipulated that steel industry be reserved under the public sector. It also stipulated that capacity creation and enhancement would require licensing, and that pricing and distribution of steel would be subject to govt. control. Nationalization of TISCO, that existed from before independence could not be carried out due to popular pressure[3].

Economic reforms were started in 1991 with the new industrial policy- licensing requirement for capacity enhancement was withdrawn, and the industry was opened to private and foreign players. Pricing and distribution controls were removed in 1992. import/export restrictions were removed and import duty rates have been slashed. Policies like reduction in import duties for capital goods, convertibility of the rupee on trade account, permission to mobilize resources from overseas financial markets, and tax structure rationalization have helped the industry performance.

In the early 1990s, global prices were high and domestic demand forecast was optimistic, which resulted in addition of new capacities especially by private sector. The later period of 1990s saw a drop in demand for steel on account of recession affecting the automobile sector, tardy progress of infrastructure projects, and an overall drop in investments. The industry also had to face stiff competition on account of a phased reduction in import duties from 100% to 10%.

Today, the Indian steel industry is the eighth largest in the world with 31.8 million tones annual production (3.3 % of world production). The per capita consumption of iron in India is low at ~ 20 kg[3].

The contribution of the steel sector to the GDP is about 1.3%. About 10% of the collection through Central Excise comes from the steel industry. It provides direct employment to about 0.4 million people, of which 40% are in the integrated steel-producing units. Of the total value created by the Indian steel industry, 60% comes from the integrated steel producers, 15% from the mini steel plants and the rest from smaller stand alone units[3].


The Indian Steel Industry was analysed using the Porter’s Five Forces Model[1].


The most common entry barriers include economies of scale and capital requirement, switching costs, access to distribution channels, product differentiation and brand identity.

Economies of scale and capital requirement:
It constitutes a major entry barrier in the steel industry. In the present Indian scenario, the minimum economy of scale required is an annual production capacity of about 2 to 3 million tonnes. The cost of setting up a steel plant has escalated over time. A 1996 Crisil survey put the capital requirement for setting up an integrated steel plant with one million tonne installed capacity at approx. Rs. 3000 crores[2]. Smaller firms have difficulty keeping up with the investment in the R&D activities and tend to follow the leaders regarding the development of new products in steel industry.

The relatively long gestation period of about 3 years, and initial phase start up losses also act as deterrent to firms contemplating entry. The long-term load of interest payments also influences the profitability adversely. The interest cost per tonne of steel is higher in India compared to developed countries. After looking at all the aspect, we would rate the economies of scale and capital requirement 1 on a 5-point scale where 5 indicates the most favorable condition for the entrant.

Product differentiation:
The low and medium carbon steel segments do not show much differentiation. Steel is a commodity item in India still, even though the trend towards customization has begun on account of customer demand. The wide use of ISI / BIS standards in the industry has accentuated...
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