The steel industry in India is going through a difficult phase. There is excess capacity in the system and that has been the case worldwide, leading to a fall in prices. The international prices remain volatile and the excess capacity is estimated to be 80 million tonnes. India is the eighth largest producer of steel and it currently has an excess capacity of 4 mtpa. Over the last 10 years, the worldwide CAGR has been at 3. 2% and in India it has been 6. 9%, thanks to the general pickup in the economy post liberalization.
This period also saw the entry of many private players including Essar Steel Ltd which is studied in this report. On the whole the industry is unattractive. Refer to Annexure 1 for detailed industry analysis. Essar Steel Ltd is a relatively new company that was established post liberalization. The company has been successful in reducing costs and is one of the low cost producers of HR coils at the operating level. It is also the largest exporter of HR coils. Essar exports 42% of its total sales volume and holds an 8. 2% market share in the domestic market.
Refer to Annexure 2 for detailed SWOT analysis. The per capita consumption of steel in India is way below the world average (Indian – 25 kgs; world – 121 kgs; China – 87 kgs; South Korea – 830 kgs). This projects a huge potential in the Indian market in the years to come and indeed the excess capacity is expected to be wiped out in the near to medium term. Exports showed a strong growth in FY2000 but were stagnant in FY2001 and declined marginally in FY2002. Several other global markets may get closed since countries may retaliate against the US move by imposing restrictions in their domestic markets.
The domestic demand will be a function of the growth prospects of the end user sectors like construction/infrastructure, consumer durables and automobiles. The outlook is hence not very bright. Refer to Annexure 3 for industry outlook based on CRISIL and ICRA industry reports. Plan for Implementation For the short-term recommendations, a core team should be formed for each implementation. The teams will obviously have specialists from each of the function that the recommendations aim to correct. The execution of these will take up management time but will not tie down resources.
Hence these are more of a managerial tweaking and do not require investments or will require minimum investments. The aim is to remove the inefficiencies and bring Essar on par with the best companies are at least to the industrial average figures. This will release a lot of working capital. For the long-term recommendations, the Steel service center concept must be integrated with the company’s plan of increasing distribution centers and web enabling them. Some more investment will be required but it will not be much as shearing and shafting machines are not expensive.
Domestic market focus is a marketing and distribution execution and the existing capabilities are sufficient. Integrating CR requires substantial investment and can be done only after the company starts to make net profits. Timetable The short-term recommendations should be implemented in parallel and aggressive management focus should make it possible to complete in six months. The more involving and investment requiring initiatives can take up to one year. It is essential that the company move fast to ride the next cycle of demand improvement.
The most important long term initiative of “Steel Service Centers” should begun immediately and must be integrated with its current plan of increasing distribution centers and web enabling them. This would take around two years to completely implement the concept in its existing centers and new centers that will be started. Forward integration of CR with HR is a capital-intensive technological change that should be carried out only after the company’s balance sheet becomes healthy. Thrust on long products will help the company ride the budget signals of increasing infrastructure expenditure. Contingency plan
If the industry outlook by various organizations does not work out, the company would be in the same situation for years. Slow turnaround in the steel industry would pose significant problems. The recommended strategy is the best option to improve efficiencies and release working capital from the system. Since the initiatives do not require significant investment, the company stands to benefit regardless of the movement of the industry. In an extreme situation, the company can consider reducing its workforce and cut down capacity. It can divest its power company and use the proceeds to wipe off some more debt from its balance sheet.
Conclusion Even though the industry is in a precarious situation, Indian companies have an inherent advantage due to their low cost of labour, high quality iron ore and a large domestic market. As demonstrated by the competitor analysis, many companies are well below average performers in terms of logistics and other factors that can be eliminated through good management. Many companies already are operationally the best world over. With some help from the banks and financial institutions to restructure their debt, we will have a strong industry making decent profits.