You are on page 1of 2

JSW interim report

Porters Five Forces analysis: -

Threat to Entry in Steel Industry: High (Domestic), Low (Export market)

The entry barriers are high based on following factors :

Financial requirements :
Steel is a capital intensive industry; steel companies in India are charged an interest rate of around
14% on capital as compared to 2.4% in Japan and 6.4% in USA.

Low Productivity :
In India, the advantages of cheap labour gets offset by low labour productivity; e. g, at comparable
capacities labour productivity of SAIL and TISCO is 75 t/man year and 100 t/man year, for POSCO,
Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/man year.

High Power Cost :

Steel production is an power intensive operation. In Electric arc furnace (EAF) 20% of variable cost
consists of Power cost. Among major iron producing nation India has highest power cost. Power cost
is $0.03 per KW in US , $0.05 per KW in South Korea while in India it is 0.08 perKw and this is
increasing by 10% YOY .

Anti Dumping Duties :

India has imposed anti-dumping duties on colour-coated or pre-painted flat products of alloy or non-
alloy steel imported into the country on 13th January 2017.The effective duty rate would be the
difference between the official rate of $849 per tonne and the landed value of the product, provided
the landed value is lesser than $849 per tonne

Foreign Dumping :
China's domestic demand sagged by 3.4% in 2014 prompting the country's state-owned steelmakers to
sell their growing surpluses in foreign markets at throwaway prices. This fall in demand also led to a
sharp fall in global prices. Global steel prices have declined sharply from around US$460/tonne to
around US$260/tonne in line with the glut in supply and the sharp decline in raw material prices.

Buyer Power: - High

Consumers Percentages: -

Capital goods- 5% Consumer Durables- 6% Pipes & Tubes- 9% Automobiles- 12% Industrial

Production- 19% Infrastructure- 20% Others- 29%

The demand for steel is a derived demand and the purchase quantity depends on the end-use
requirements. The majority of the buyers in the steel industry are bulk buyers. They exercise a fair
share of bargaining power over the makers and are thus able to garner price concessions and more
favorable commercial terms. The products are largely undifferentiated in the industry and thus the
buyer doesnt incur any additional cost for switching to another supplier. The Pipes & Tubes buyers
are the most price-sensitive as steel forms a major proportion of their total product cost and they are
not really worried about the quality. Overall, the bargaining power of buyers is definitely on the
strong side.
Suppliers Bargaining Power: - Partially High

The chief raw material inputs for the Steel industry are: Iron Ore, Coking Coal, Dolomite and

Iron ore is a traded commodity and prices are susceptible to volatility. To protect themselves from this
volatility and to lower costs most large steel players in India are backward integrated with captive iron
ore mines. India has rich iron ore reserves in the eastern region with good quality iron (63-65%
average iron content). However government legislation on mining activities has sometimes affected
the ability of the steel industry to access local iron ore. In 2014, 40 mines in Odisha owned by SAIL
were shut down due to leasing issues forcing steel makers to import iron ore. Global iron ore prices
have seen an upswing recently driven by large consumption by China.

Coking Coal is the chief source of energy in steel making. It also has the largest cost component out
of the Raw materials consumed (Annual report 15-16, SAIL, JSW). Due to Indian coal having high
ash content and low quality most steel producers import their coal (SAIL met 14% requirement
indigenously in FY 15-16 and the rest was imported). SAIL Annual report lists Dependence on
external sources for key input - coking coal leads to exposure of the Company to the market risk. as a
weakness for the company. Due to Coking coal being a commodity and lack of captive mines the steel
industry has very low bargaining power.

Steel industry is largely import dependent for Limestone and Dolomite due to unavailability of high
quality material in India.

Other than materials, Steel industry in India has to deal with unreliable power supply. 35% of energy
used in steel production comes from electricity (A brief report on Iron & Steel Industry in India
ASA & Associates LLP). Lack of infrastructure and high freight costs make transportation of material
expensive which is why most steel plants are located close to iron ore mines and ports.

Steel industry in India also faces higher forex costs due to the depreciation in rupee value and the
dependency of the industry on imports.

Reference: - (

Domestic competitors: High

Market cap of major steel producers in India: -

JSW-45,661 cr Sail- 39280 cr Jindal steel- 636 cr Essar steel5900 cr

Tata Steel-70000 cr

Government intervenes through minimum import prices(MIP) and anti-dumping duty protecting
domestic companies from its foreign competitors. Previously the competition was with Chinese
companies as well. As government regulations improved currently most are competing domestically.

Steel industry was involved in price war as some smaller companies and essar steel could not pay
back their loans and became NPAs for banks. So they tried to sell at cheaper prices than MIP to gain
more market share. This put pressure on the big steel companies including JSW steel as they made
huge investments to increase capacity and small companies were lowering prices which is hurting