Industrial Organization of Hot Rolled Steels Industry in India - Research Paper Example

Insight to the Industrial Organization of Hot Rolled Steels Industry in India TABLE OF CONTENTS Number Topic Pages 1 Industrial Organization of Hot Roll Steel 1 2 Hot Rolled Product Description 2 3 Firms in the Indian Industry 3-4 4 Cost Structure of Hot Rolled Industry 5-6 5 Product Demand and Customers 6-7 6 HRC Downstream 7-8 7 Correlation Between Domestic Prices and Landed Costs of Imports 8-9 8 Pricing Problems Within the Industry 9-10 9 Conclusion 10-11 Bibliography 1. Industrial Organization of Hot Roll Steel Industrial organization of hot roll steel in India is the area of economics in steel industry of India that formulates on the premise of the firms operating in the upstream and thus a proper examination of the structure of hot rolled industry can be done by analyzing peripheries lying between firms and markets. Indian Hot roll Steel industry's performance relies on the conduct of its firms, which then relies on the structure i.e. features that resolve the competition of the market. The structure of a hot roll steel industry then relies on fundamental circumstances, for example hot rolling technology and requirement for a hot roll coils or hot roll bars. For instance: in a hot rolled steel industry, a sophisticated rolling technology that minimizes the expenditure of production when production augments, obviously leads to have a small number of firms. As it is already known that hot roll steel is in high demand all over the world and even the country’s growth is measured in terms of its production of steel, therefore components in this hot roll industry including the user demand, production, rate of growth, is always showing a positive trend. As per elasticity of demand, the hot roll steel industry in India is quite stable. Economies of scale, is one of the important reason for success of a firm in hot roll steel industry of India, the larger giants share more market. Raw materials are also one of the important factors in this industry. Steel billets are the major raw material along with other supporting raw materials. Mostly successful hot roll firms have their own production of steel billets, in order to avoid production delays and transportation costs. 2. Hot Rolled Steel Product Description Hot roll steel product is an outcome of a metal rolling process that happens above the re-crystallization temperature of the metal. The raw material is typically big fragments of crude metal, for instance semi-finished casting items known as slabs, blooms, and billets. The metal billets or slabs are rolled from hot working rolls and the rollers produced a flat product that can be formed in coils as well as in hot rolled plates. There are two types of flat products resulting from a hot roll mill i.e. Plates or HR coils. More often plates are utilized directly. The HR coils (HRC) are utilized directly, but in addition to it, most of them are additively rolled and routed to manufacture products for example cold rolled sheets coils, galvanized or gal annealed sheets and coils, pipes etc. Hot rolled metals usually have bit minimal directionality in their mechanical properties and deformation provokes left over or residual stresses. On the other hand, in specific examples non-metallic insertion will convey few directional properties. The hot roll work pieces less than 20 mm thickness equivalent of 0.79 in thickness often have some directional properties. In addition, non-uniformed cooling will stimulate numerous residual stresses, which typically exists in structures that have a distinct cross-section, for example I-beams and H-beams. The hot roll product is of good quality, but the facade is in mill scale. A mill scale is defined as an oxide that creates at high-temperatures. Mill scale is typically extricated though a process called pickling. Dimensional tolerances in hot roll steel are typically two to five percent of the complete dimension. Hot rolled mild steel appears to have a bigger tolerance for quantity of percentage carbon. In addition for metals, hot rolled appears to characteristically be additional costly. Hot roll products have variety of uses mainly to produce sheet metal or simple cross sections. 3. Firms in the Indian Industry It is obvious from the figures obtainable from the Joint Plant Committee (JPC) that concerning 13 million tones of HRCs produced in 2008-09, the five major producers in India are SAIL, Tata Steel, Essar, Ispat and JSW. The five biggest giants in hot roll industry collectively shared about ninety two and half percent in total production of hot roll products in India. Table 1 Source: Joint Plant Committee (2008-09) As evident from the above table the leading firm of producing hot roll steel given in table 1 is SAIL with a total production of 4648,000 tons and sharing more than half of its production i.e. 54.8 % in the total domestic sales, obviously remaining quantity is exported as well as kept in stock. Tata Steel being the second biggest producer with 2846,000 tons shares 45.9 percent of its production in domestic sales, other leading firms has their total production consumed in domestic sales. A fraction of this production was utilized for downstream operations and the remaining were either sold nationally or sold abroad, neglecting stock change. In the perspective of domestic merchant trading of HR coils, eighty nine and half percent of the total consumption in the country (not including imports) was contributed by the above mentioned producers. Table 2 Source: Joint Plant Committee (2010-11) In 2010-11, the contribution of the five big hot roll steel producers augments to ninety three and three tenth percent (Table-2). This is not therefore noteworthy. The account is no dissimilar for local sales as one perceives that eighty nine and six tenth percent of the local commercial sales (not including imports) were contributed from same hot roll steel producers. However each producer has increased the level of production up to some extend. It is vital to note that the five main steel HR coils producers persisted to uphold immense power over the HR coils market even in 2010-11. If the market is analyzed by the production of HR coils and sheets, out of a total production of 7.923 million tones (not including the production of SAIL and Tata Steel), only 1.052 million tons were formed by companies except the big three. If only wide HR coils are considered i.e. above 900mm width, just about the whole production i.e. 98 percent in the country came from the big five only. 4. Cost Structure of Hot Rolled Industry Hot roll steel prices have no official controls or policies and they are to be determined by the market. However, there appears to be market flaws and likely cartelization which has given the manufacturers of HR Coils with larger degree of market authority over the consumers. The users of HR coils, primarily the mills manufacturing cold roll or galvanized sheets or pipes have highlighted to oligopoly pricing performance of the hot roll producing firms. Their main disagreement, as declared by them, is the following: The HR coils manufacturers have intentionally minimize supplies to the local market by selling out abroad considerably high amounts of the product, regardless of the reality that the whole quantity could be consumed in the local market at the cost they are exporting or even at elevated prices. It is quarreled that there was a point when the local HR Coils industry was experienced with surplus capacity coming from a rupture of capacity addition and simultaneous slowdown in local steel requirement. This was the period when the exports were essential. Conversely, the marketplace for buyer of HR coils has transformed considerably in view of the fact that supply has constrained. Scarcity is evident with prospective purchasers following sellers. However, after hard buyer chasing to seller the HR coils are being sold abroad in huge quantities at lesser than the potential/actual domestic market prices to generate synthetic shortages so as to reinforce their own pricing power and continue in that way an “uncompetitive and inflated” price altitude in the local market. This accusation has actually been lifted frequently by users of other steel products as well. () According to the user firms, the HR coils manufacturers place prices in unison in infringement of the standard of a competitive market. The price augmentation had no orientation to any explicit modification in the market, neither in the demand nor supply side of it. They have also established the worth augments as random having no association with their expenses or any modification in them. Numerous have yet blame the hot roll steel producers of contract infringement as prices were amended unilaterally devoid of any prior notification. On the other hand, in the absence of competitive alternatives, the consumer industries are left with no additional options but to submit to the requisites, conditions and prices dictated by the Hot Rolled Coils manufacturers. 5. Product Demand and Customers In 2010-11, the commercial perceptible utilization of Hot Roll coils augments by twelve and six tenth percent over the preceding year, however the local production for sale dropped by 0.65 percent. Simultaneously exports of Hot Roll coils persisted moderately high at 1.39 million tons, even though declined by nearly eight percent from the preceding year as a consequence of government interferences and discouragement through ruling procedures. As per the demand is concerned, it is already established that hot roll products have high demand, since these are used in variety of product manufacturing and additional processing. The hot roll coils is consumed for galvanizing, cold rolling, galvanized profile making, sheet making, pipe manufacturing, drum manufacturing, automobile parts manufacturing etc. Since it was discussed, due to shortage of HR coils in India, the consumers of HR coils have to import HR material from JFE Japan and from other hot roll manufacturers. There is no official manuscript to institute that there is ceremonial or stated accord on price setting between the major producers. There are merely allegations by anxious consumers which cannot be comprehended on a face value. Conversely, pricing performance evidently shows a model replicated at the point of the pricing verdicts and the magnitude of price changes every producer embarks. This widespread performance is, importantly perceived in the scenario of the three companies i.e. Essar Steel, JSW Steel and Ispat Industries Ltd. even though formerly, it was factual for Tata Steel and SAIL also, in the current times, the verdicts of SAIL have been under government administration and those of Tata Steel are founded on their amplified awareness to long-term sales in lieu of merely transactions. 6. HRC Downstream Competition The Hot Roll Coils downstream market is additional competitive, particularly in the case of galvanized coils and galvanized profile sheets and in particular areas of Cold roll Coils. Still, by keeping a price discrepancy unfavorable to the merchant mills, the incorporated mills can maintain the downstream product prices adequately aggressive captivating the benefit of in-house operations and inferior exchange expenses at their possessed plants. Nonexistence of factors like transportation costs, definite not reusable & non-adjustable taxes, minimized material wastage and to much degree economies of scale, have enabled the integrated firms to compete diligently in the market. In addition, they have important communal market share and sometimes can play as price setters. Hence, authority over HR Coils enables the integrated mills powerful in the market for downstream products in addition. HR Coils manufacturers who also produce downstream items like CR Coils and GP/GC sheets etc. preference to differentiating pricing actions keeping little differential between Hot roll coil and Cold Roll Coils or remaining downstream products. If the price variable between these products is inferior to the costs of alteration of Hot Roll Coils into downstream products for a steel mill, the whole finances of merchant production collapse. This is a widespread and planned pricing strategy adopted usually by integrated mills internationally in robustly competitive conditions to obstruct opposition in their downstream products market. Statistical proof can be perceived in the price development in these products worldwide as well as in India. This does not seize participation of smaller entities against integrated production for downstream products and in market areas where they can extort greater revenue. 7. Correlation Between Domestic Prices and Landed Costs of Imports There is a noticeable connection between local prices of steel and the landed expenses of imports with correlation co-efficient calculated at a little above 0.88 in every example when observed between landed costs of imports and selling prices at Chennai is also at Mumbai on a yearly time series data covering a period of 2006 –2011 for a delegated product HR coils of 2 mm thickness. (Chart below). But, this relationship cannot be labeled to be very authentic particularly when the current era statistics are concerned (2010-2011). However, this association itself is not a subject to be of computation in the background of the competition strategy. It is merely when the steel manufacturers are appeared to be operating for a premeditated agreement to make circumstances to allow them to do so. One of the allegation in opposition to the steel industry, particularly those who manufacture HR Coils, is that they sell abroad yet at comparatively minimized prices to generate a synthetic scarcity in the local market, so that they can regulate their prices to the landed costs of imports or more. The subject that exports were made at prices underneath those in the domestic market and more specially that exports were made at a net comprehension inferior to that could be had from the local sales of the similar products requires cautious assessment of the local import and export rates of steel commodities and particularly HR coils. A thorough simple examination of it could not be probable due to well recognized data restraints. 8. Pricing Problems Within the Industry Instituting the reason that the chief HR Coils producers have displayed a pricing performance, that may hoist anti-trust problems, has transformed out to be complicated regardless of recognized declarations issued by producers on rates in unison due be short of referencing data in a rational time series. The government’s authorized institute for price statistics compilation, i.e. Joint Plant Committee (JPC), compiles and scatters merely retail selling price statistics which can fullest be a sign merely as there is constantly a time interval in changes between the manufacturer and the retail prices. Moreover, the selling prices comprise of all levies and traders’ edge. The last can differ considerably founded on the regional circumstances of the market. The retail rates also incorporate brought in products from abroad which may be determined by completely dissimilar factors. The government, on the other hand, obligated the steel manufacturers to accommodate the steel rates either on their websites or issue them on newspapers whenever it is subject to change. Even though this was followed and one could with sure level of intricacy examine a rate list, the similar could not also be measured to be helpful as the similar had orientation merely to a few basic material grades, devoid of the surplus or reductions. The steel hot roll producers also implemented diverse methods to display prices for example prices per piece, and in addition dissimilar mentioned products, complicating the process of comparisons and making it difficult. It was not only established to be tricky in most examples to find the rates on the company’s websites because in some cases even if price list appeared on website it remained at someplace hidden from the main display. There is evidently no transparency in the broadcasting of rate list. 9. Conclusion Hot roll steel industry in India is vibrant, technological advanced and complicated model of an industrial organization, numerous factors continues to influence the market conditions. Despite the fact, that government has tried to interfere in the market to control rate of hot roll steel, the dynamics of the industry has yet kept the government a part from controlling the complete mechanics of the industry. The major players such as Tata Steels and SAIL have integrated structures and operations, enabling them to play with the upstream and downstream of hot roll products, hence they vary numerous factors for their own objectives. The industry is however challenging for the small firms for their existence and sustainability since the big players are gobbling up the big portion and shrinking the space for the small firms and restricting new comers in the industry. Although there is tough environment for small firms, but since the local market implicates demand, there is still a vacuum left for small and new firms to grow and occupy some space in the market. Bibliography A.S.Firoz. Indian Steel : Critical Details, Evolving Structure and Strategic Options,. 2009. —. Policy Issues in the Context of Investment in Indian Steel Industry. 2010. Ginzburg, Vladimir B. and Robert Ballas. Flat Rolling Fundamentals. CRC Press, 2000. Joint Plant Committe. Steel Industry Statistics of India . 2008-09. —. Steel Industry Statistics Publication. Kolkata, 2010-11. Mehta, Pradeep. Towards a Functional Competition Policy for India. Dehli: Academic Foundation, 2006. Reed-Hill, Robert. Physical Metallurgy Principles. PWS Publishing, n.d. Simon, Matthew. Hot Roll Steel Making & Downstream Products. 2006. Vasant Kunj. Steel and Natural Resources Strategy Research. 2011. William, Robert. Hot Rolling of Steel. CRC Press, 1983. Read More