Sydenham Institute of Management Studies,

Steel: Demand and

Research and Entrepreneurship Education
(SIMSREE)
Supply Analysis
Submitted by:
Vishal Bhanushali(M1006)
Sumit
Powar(M1037)
Dhiraj Meshram(P1029)
Steel: Demand and Supply AnalysisOctober 1, 2010

Acknowledgement

We take immense pleasure in thanking Respected Prof. Swaha Shome for having
permitted and helped us to carry out this project work.

We wish to express our deep sense of gratitude to college and Director M.A.Khan to
help us out in making the important databases available for the project work.

Words are inadequate in offering our thanks to classmates and also senior friends
for their encouragement and cooperation in carrying out the project work.

Finally, yet importantly, we would like to express our heartfelt thanks to our beloved
parents and god for their wishes which helped successful completion of this project.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Table of Contents
Introduction................................................................................................................3
Determinants of Demand...........................................................................................4
Own price................................................................................................................4
Income of consumer................................................................................................5
Price of other goods................................................................................................5
Complements.......................................................................................................5
Substitutes...........................................................................................................6
Taste and preference..............................................................................................6
Expectation from future..........................................................................................7
Short term............................................................................................................7
Long term.............................................................................................................8
Advertisement.........................................................................................................8
Distribution of income.............................................................................................9
Climate condition....................................................................................................9
Determinants of Supply..............................................................................................9
Price........................................................................................................................9
Cost of production...................................................................................................9
Technological progression.....................................................................................10
Price of related output...........................................................................................10
Raw material......................................................................................................10
Energy................................................................................................................11
Government policy................................................................................................11

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Steel: Demand and Supply AnalysisOctober 1, 2010

Elasticity analysis..................................................................................................13
Price elasticity....................................................................................................13
Determinants of Elasticity..................................................................................14
Conclusion................................................................................................................15
Bibliography.............................................................................................................16
Bibliography

Introduction
The Indian steel industry was the first core sector to be completely freed from the
licensing regime (in 1990-91) and the pricing and distribution controls. The steel
industry is expanding worldwide. For a number of years it has been benefiting from
the exceptionally buoyant Asian economies (mainly India and China). The economic
modernization processes in these countries are driving the sharp rise in demand for
steel.

The New Industrial policy adopted by the Government of India has opened up the
iron and steel sector for private investment by removing it from the list of industries
reserved for public sector and exempting it from compulsory licensing. Imports of
foreign technology as well as foreign direct investment are freely permitted up to
certain limits under an automatic route. This, along with the other initiatives taken
by the Government has given a definite impetus for entry, participation and growth
of the private sector in the steel industry. While the existing units are being
modernized/expanded, a large number of new/greenfield steel plants have also
come up in different parts of the country based on modern, cost effective, state of-
the-art technologies.

Soaring demand by sectors like infrastructure, real estate and automobiles, at

home and abroad, has put India's steel industry on the world map. Dominating the

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Steel: Demand and Supply AnalysisOctober 1, 2010

Indian horizon is steel giant Tata Steel, whose takeover of the UK-Dutch steel
company Corus is the country's biggest buyout. Meanwhile, the LN Mittal-owned
Mittal Steel acquired French steel company Arcelor to create the world's number
one steel company, Arcelor Mittal; and Korean steel giant POSCO is pumping money
into mines and steel plants in Orissa to emerge as one of the biggest steel plants in
the state.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Determinants of Demand

Own price
Demand is the major driving factor and the decision maker for the Indian
steel price in the domestic market. Though mostly price trend is in line with
the international price index, it varies somewhat based on the demand in the
domestic market (largely from the automobile and infrastructure industry).

Source: India Economy Review – June 2010

In the near past companies have increased prices in the range of Rs.1000-
Rs.1500 (approx. 3 -4 %).Considering the fact that the major steel
consumption is by the follow listed three sectors and hence are major role
player in deciding price.

1. Automobile
2. Infrastructure
3. White goods

Source: India Economy Review – June 2010

Income of consumer
Though in case of steel there is no direct influence of the consumer income
on steel demand, there is certainly indirect relationship exists. The

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Steel: Demand and Supply AnalysisOctober 1, 2010

consumer income can largely push the steel demand in the by the way of
derived demand.

For example consider the increased demand for 2-wheelers or any

automobile product will induce the increase in demand of steel. Analysing
other factors like better infrastructure need, better housing which is greatly
dependent on standard of living of the country population also contributes in
the steel demand. Hence, increase in consumer income have the certain
impact on the steel demand and is one of the fundamental determinant of
steel demand.

Price of other goods

Complements
Steel is the main input to the various industry ranging from Automobile, white
goods to infrastructure like railway, housing, etc. The major problem with steel is, it
is highly prone to corrosion which could lead to high cost of capital loss in case of
machinery where it can hold the whole production line. Below mentioned are few
complementary goods,

Lubricating Oil:

Lubricating oil is highly used commodity in the production or manufacturing

industry where it has the great demand in order to keep production line up and
running. Hence, on long term it will have certain impact on the steel demand. For
instance take high investment machinery which have reduced life due to poor
maintenance or oiling this will definitely have the periodicity of demand for that
machinery and hence steel in turn.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Paint:

Paint is again the complementary goods for steel in industries like automobile,
sheep making, etc. Steel demand will come down on the long time scale if the final
goods(with steel as input) remains working.

Though this have the very limited effect on short term it will have considerable
impact on long term demand of steel.

Substitutes
In case of domestic use:

Plastic and china clay are the close substitutes of steel.

Steel: Steel buckets were replaced by the plastic ones.

China Clay: Steel plates and dishes were replaced by the china clay dishes.

In case of automobile industry:

Fibre is the close substitute for steel sheets for the production of 2-wheelers.

In case of infrastructure sector:

There is no close substitute for steel in this sector.

Taste and preference

Steel industry as explained earlier is mainly driven by derived demand from
various industry. Various industry require the specific form of the steel based
on their field of operations for example sheets are majorly consumed by
automobile industry hence their exists certain relation between demand of
the steel sheets .Steel demand hence is the subjective in case of preference
based purely on the requirement from particular industry. Following table
depicts the production of the various form of steel,

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Steel: Demand and Supply AnalysisOctober 1, 2010

April-March % Change

2010 2009 2010 2009

Bars and rods 22094 20525 7.65 12.02

H.R.Coils/Skelps 11461 11370 0.80 -1.27

Structural 5149 5161 -0.23 12.18

GP/GC Steel 4470 4359 2.54 -0.67

C.R.Sheets/Coils 5325 4520 17.82 -26.96

H.R. Sheets 603 738 -18.28 8.74

Expectation from future

Steel industry as a whole is the important pillar for the economy as it caters
to the various sectors which are key indicator for countries economical
growth. Future outlook for the steel demand can be categorised as short
term and long term.

Short term
Short future expectation is based on the expected demand for the upcoming
2-3 years considering current domestic and international market scenario.
Short term market expectation will definitely act as a catalyst for the steel
demand. Below mentioned are few of the factors,

• Capacity expansion by various steel majors (eg.JSW steel, SAIL etc)

• Production cut in China will increase the demand of Indian steel
products
• Reduction in the raw material (coal and iron ore) prices in international
market

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Steel: Demand and Supply AnalysisOctober 1, 2010

Source: World Steel Association

Long term
A long term future expectation is comparatively more promising on the back
of the growing economy of India and increased focus on the basic
infrastructure. Next 10-15 years will be crucial for Indian economy as it is
expected to go under major changes. Following is the list of some factors
which will hamper the long term plans,

• Huge growth in infrastructure sector (eg. Roads, Railways, Shipyards,

Aviation, etc.)
• Increased demand for housing
• Compounding growth in automobile, white goods sectors with increase
in per capita income

Advertisement
Advertisement in the past had very little role to play as far as the steel
industry is considered but lately there has been a tremendous change
observed in the trend where in publicly owned companies like SAIL spending
a considerable chunk on the advertisement to boost the demand. Similarly
the trend is being followed by private player as well like JSW which is
promoting their product by various means of media. This will certainly boost
the demand as there are many players entering in to this market segment
and competition getting intensified. Firms are working towards increasing
their market share by promoting their product through various channels of
communications.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Distribution of income
Increase and decrease in the income distribution do not have any marginal
effect on the demand of the steel. Steel is largely consumed by the
infrastructure, ship building and various other industries which have very
high capital investment.

Climate condition
Climate conditions have the definite role in steel demand as it is the
important factor which is considered while planning any long term projects
or company strategy. Government undertaken projects are the typical
examples for the scenario. For an instance consider the case of the railway
projects, in large scale projects it is taken in to the consideration that work
will proceed at slow pace and hence it is implicit that steel demand is
expected to remain low in that duration of the year.

Determinants of Supply

Price
Price has very important role to play from supplier point of view as they are the
decision maker of the price in Indian market. Huge demand leads to increase in
price which is largely dependent on the price of the inputs like energy, raw material
etc. Most of the players in the steel industry are working on the marginal range of
profit which is the price deciding.

Cost of production
The average per tonne cost of production in India remained much lower than the
global average cost of production (See chart). Production cost in the india is the
lowest across the globewhich gives immence competitive edge over the
competitor.cost of production majorly depends on the raw material price and
energy prices.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Technological progression
Indian steel industry being lead by major players like Tata, SAIL, JSW and others is
the mixes of the private and public firms. Firms operating from decades follow the
traditional technology and are slow in getting momentum and keep pace with fast
growing technology. This is the major constrain in optimizing the output and need
an attention on priority basis. More and more companies coming up with their
expansion plan have concentrated on this importance and are improving on this
front by coming up with joint ventures with partners who are advanced in
technology. The typical example of this is the

Price of related output

Raw material
A comparative advantage for India’s steel industry is the ready domestic availability
of significant reserves of high quality iron ore (a key raw material input to steel
making), predominantly in the east of India. Although current steel production
capacity is located in both the east (.at products from large producers near iron ore
supplies) and in the west (long products from smaller producers nearer large
construction centres), most significant forthcoming developments are planned in
the east to take advantage of low cost iron ore supply.

Energy
Energy is the important factor in production of steel where in it is used in the
melting of steel through various production processes. Production is mainly done in
the Open hearth furnace or Electric arc furnace. Thus, Energy (Coal or Electricity) is
the factor of high importance which has huge impact on the steel pricing. On close
analysis it is observed that when the price of energy falls, it becomes less costly to
produce steel. Thus the supply of steel increases at all prices.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Government policy
The Government has been making all-out efforts to boost the demand and
consumption of steel, an Institution for Steel Development & Growth (INSDAG) was
set up involving leading steel producers in the country. The Development
Commissioner for Iron & Steel had launched a National Campaign for increasing the
demand for steel in non-traditional sectors, particularly in the construction, rural
and agro-based industrial sectors. Other areas include reduction in power and
railway tariffs, reduction in input costs, strengthening of antidumping mechanism,
setting up a steel exporter’s forum and an empowered committee for research and
development.

In addition to above government of India has rolled out National Steel Policy 2005 to
facilitate the creation of additional capacity, removal of procedural and policy

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Steel: Demand and Supply AnalysisOctober 1, 2010

bottlenecks that affect the availability of production inputs, increased investment in

research and development, and the creation of road, railway, and port
infrastructure. The policy focuses on the domestic sector but also envisages a steel
industry growing faster than domestic consumption, which will enable export
opportunities to be realized.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Elasticity analysis
Overall analysis of the steel demand shows that it has no considerable impact of
price as it is completely based on the demand from various industries. Following
graph depicts the quantity demanded and price of the steel in year 2008-09.It is
clearly indicated by the curve that huge drop in the price had no significant impact
on demand of the steel in the given time frame. Following are various measures of
elasticity

Price elasticity
From the data given in following demand schedule below is the calculated
price elasticity for steel demand for the year 2008-09 the time frame which
seen the huge fluctuation and drop in price but no considerable impact on
demand.

% change in quantity demanded ∆ Q / Q

Price elasticity EP = =
% change in price ∆P /P

=0.077 / 0.267

=0.288 << 1 …………………………………Hence, Highly

Inelastic

Dema
nd Price
2008- 2008-
Month 09 09
Apr 4524 46838
May 4654 47200
Jun 4408 47875
Jul 4516 45410

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Steel: Demand and Supply AnalysisOctober 1, 2010

Aug 4644 45381

Sep 4586 45502
Oct 4524 45375
Nov 4154 43441
Dec 4240 39222
Jan 4546 34795
Feb 4482 33667
Mar 4874 34314
Demand and price schedule of steel for year 2008-09

Determinants of Elasticity
 Price of the product-

Price of the steel doesn’t make any difference to the demand of steel because of
its highly inelasticity.

 Necessity -
Because of its durability, it is the necessary component for the construction of
infrastructure, production of automobiles, railway industry and shipping industry.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Conclusion
The recent announcement of various steel companies of their plans to expand
capacity in the coming years show that if their plans materialize, the steel market
will see significant increase in concentration and emergence of strong oligopoly in
most product categories. It is worth noting that individual project sizes have gone
up from an average of about 3 mt of annual capacity for a large one to about 12-15
mt today. Whereas the largest single site steel mill today has a annual crude steel
capacity of only 5 mt, the projects such as those of POSCO, Arcelor Mittal Steel,
Tata Steel, JSW Steel, Essar Steel, etc. are above 10 mt in each case and with
multiple projects in their hands, each will have significant individual capacity in the
country’s industry. In all such projects, bank and institutional funding will be of
utmost importance and only the ones with greater financial prowess and market
share will be able to draw such large funds.
Overall, large scale steel industry benefits from economies of scale and scope
coming in from all three major components of competitive production – Production,
Finance, and Marketing. It is no surprise therefore that firms that were focusing on
limited set of product segments are now broadbasing their product offerings. In
doing so, larger firms do find it easier (and potentially cheaper) to avail finance.
However, these are natural advantages, and should not be considered to be against
the principal of level playing field for all competitors in the industry. Moreover, there
is no one to one correspondence between optimum size of the firms and scales of
operation. For various historical reasons, extent of globalization, availability of
capital, technology, capital intensity, lack of raw materials availability and global
dependence for it, etc. the average size of the firms in the developed countries is
more than those in the developing world. Further, business failures have led to
consolidation.

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Steel: Demand and Supply AnalysisOctober 1, 2010

All evidence points towards two points. First, there is no evidence of anticompetitive
behavior by the incumbent. However, a level playing field is not being achieved
primarily because, either by design or default, government action favors one set of
units over the others. Second, though the public sector has been a beneficiary of
government bias in the past, it is by no means the only ones. Other private entities
have benefited from favors granted by both central and state governments. It is not
clear whether these can be considered to be anti-competitive, though such actions
do adversely affect free and fair competition.

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Steel: Demand and Supply AnalysisOctober 1, 2010

Bibliography
➢ Annual Report 2009-2010 – Ministry of Steel – Government of India
➢ PUBLIC ENTERPRISES, GOVERNMENT POLICY AND IMPACT ON COMPETITION-
INDIAN STEEL INDUSTRY – report for the competition commission of India –
January 2009

Books:

✔ Managerial Economics By Salvatore

✔ Managerial Economics By Samuelson
✔ The Economist Magazine
✔ India Economy Review – June 2010

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