Midterm paper Economics

Effect of Globalization on Indian Iron and steel industry

Suggestions are good, comparative assessment of several steel companies may have added more value. 16/25

Submitted to: Mr. Chandrasheikhar Dogra Submitted by: Kanwar inderpreet singh

Roll. No: R1002A01 Regd. No: 110107

CONTENTS: 1. Introduction 2. Analysis 3. Critical analysis 4. Conclusion 5. Suggestions

INTRODUCTION:
DEFINITION OF GLOBALIZATION:
Globalisation is defined as the reduction of transaction cost of transborder movements of capital and goods thus of factors of production and goods. OR The process of globalisation includes opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNC's, population migrations and more generally increased mobility of persons, goods, capital, data and ideas. The iron and steel industry presents one of the most energy intensive sectors in the Indian economy and are therefore very important for both local and global environmental discussions. The adoption of more efficient and cleaner technologies

in the manufacturing sector will be effective for the achievement of economic, environmental, and social development objectives. I Iron and Steel Production in India Although iron and steel is one of the most important industries in the Indian manufacturing sector, India is only the 15th largest steel producer in the world. Originating from the first set up of a single steel plant in 1911-12, the iron and steel sector included 7 integrated iron and steel plants in 1995-96. Due to the regulatory and political development of the sector only one of these plants is in private hands accounting for about 15% of total steel production. The integrated steel units usually use the blast furnace basic oxygen/open hearth furnace process route for iron and steel production. In addition, there are about 180 secondary producers employing the electric arc furnace process. Another 500 mostly smaller units rely on other processes such as induction furnace process, melting by re-rollers, and ship breaking units. The top five producers of steel in India are: 1. Steel Authority of India Ltd 2. Tata Iron and Steel Company Ltd 3. Jindal Iron and Steel Company Ltd 4. Essar steel

5. Ispat Industries Ltd

Effects of Globalization:
According to economists, the major effects of globalization are: 1. Improvement of International Trade. Because of globalization, the number of countries where products can be sold or purchased has increased dramatically. 2. Technological Progress. Because of the need to compete and be competitive globally, governments have upgraded their level of technology. 3. Increasing Influence of Multinational Companies. A company that has subsidiaries in various countries is called a multinational. Often, the head office is found in the country where the company was established.. 4. Power of the WTO, IMF, and WB. According to experts, another effect of globalization is the strengthening power and influence of international institutions such as the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank (WB). 5. Greater Mobility of Human Resources across Countries. Globalization allows countries to source their manpower in countries with cheap labor. 6. Greater Outsourcing of Business Processes to Other Countries. China, India, and the Philippines are tremendously benefiting from this trend of global business outsourcing. 7. Civil Society. An important trend in globalization is the increasing influence and broadening scope of the global civil society.

ANALYSIS:
EFFECTS OF GLOBALIZATION ON STEEL INDUSTRY:
The effects of Globalization on Indian steel industry are not same throughout the country. The effects depend on the following factors: #type of raw material #market condition #technological advancements #Govt. policies #business activities of steel and iron industry The government played a very important role in the development of the steel industry in India. The India steel industry is experiencing a slow but steady growth. The steel industry in India has huge scopes in the future with massive scale of infrastructural development happening all across the country. The steel industry in India caters to many other industrial sectors such as: #construction industry #mining industry #transportation industry #automobile industry #engg. Industry etc. .

The steel industry in India has further plans of development. Plans are being chalked out on setting up of three pig iron manufacturing units of the combined capacity of 6 lakh tons per year and a steel manufacturing unit of the capacity of producing 1 million tons yearly in West Bengal, with the technical and financial support of China. With all these developments steel industry in India is all set to become one of the most reputed industries not only in India but also in the international market as suggested by experts. In order to survive the immense competition under the globalization, the Indian steel industry plans a reversal of the production of steel industry. The main objectives of the strategy is the derivation of the benefit from the optimum utilization of the plant capacity, the identification of any form of drawbacks, to track the opportunities in order to get the maximum from it and to tackle the possible threats. The reduction of the cost is another major factor in the survival of the Indian steel industry in the age of globalization. The cost reduction would be the main aspect of the improvement pertaining to the competitiveness of the industry. The manufacturers under the steel industry in India have to focus their attention in the areas such as: The reduction in the cost of operations The reduction in the costs pertaining to the working capital The reduction in the costs pertaining to the

production inventory or stock that is not sold The improvement in the economics operating in the technological aspects of production The transposition of basic materials of production

Merits and Demerits of Globalization The Merits of Globalization are as follows: There is an International market for companies and for consumers there is a wider range of products to choose from. Increase in flow of investments from developed countries to developing countries, which can be used for economic reconstruction. Greater and faster flow of information between countries and greater cultural interaction has helped to overcome cultural barriers. Technological development has resulted in reverse brain drain in developing countries. The Demerits of Globalization are as follows: The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries. There is a greater threat of spread of communicable diseases. There is an underlying threat of multinational corporations with immense power ruling the globe. For smaller developing nations at the receiving end, it could indirectly lead to a subtle form of colonization.

SWOT ANALYSIS:
Strenghts: # availability of iron ore #availability of labor at low wages rate Weaknesses: # endemic deficiencies #systemetic deficiencies #high cost of capital #low labor productivity Oppurtunities: Threats: #unexplored rural #slow industry market growth #other sector # technology #export change penetration #price sensitivity

and demand volatility

CRITICAL ANALYSIS:
Current Investments:
The Indian steel companies invested as follows:

Bhushan Steel plans to invest US$ 5.72 billion for building 12 million tonne-capacity in the states of West Bengal, Jharkhand and Orissa. Vedanta Resources, plans to invest around US$

4.79 billion in a 5 million tonne steel plant in Keonjhar district of Orissa and envisages its commissioning by 201213.

Tata Steel is also planning to build a 5 million tonne plant in Chhattisgarh with an investment of around US$ 3.59 billion. The steel major is setting up greenfield projects in Jharkhand, Orissa and Chhatisgarh. While in Jharkhand it is likely to invest about US$ 8.38 billion for a 12 million tonne integrated steel plant, in Orissa it plans to pour in almost US$ 4.39 billion for a six million tonne capacity plant. Mesco Steel plans to invest US$ 2.20 billion for expansion of two of its steel plants in Orissa. Reliance Infrastructure plans to build a 12million tonne steel plant in Jharkhand, which is likely to be completed by 2012. Indian Railways plans to invest around US$ 437.25 million per annum to raise its consumption of stainless steel for adding new alloy-made wagons and coaches to its portfolio. Welspun Gujarat Stahl Rohren plans to increase the capacity of its pipe plant by 75 per cent to

1.75 million tonnes with an investment of US$ 222.52 million.

The JSW group plans an outlay of US$ 40 billion for steel and power projects. These projects will be completed by 2020. Visa Steel has lined up a US$ 1.51 billion US$ 2.02 billion integrated steel project in Chhattisgarh. Sarralle India, a subsidiary of Sarralle Equipos of Spain and one of the largest designers of steel plant equipment, has decided to set up a manufacturing base in Uluberia in West Bengal. Interarch Building Products Private, (the largest player in pre-engineered steel buildings space) plans to set up its greenfield manufacturing facility in Gujarat by 200910.

#COST COMPETETIVENESS OF INDIAN STEEL INDUSTRY:

UNITS IN US$ (AS PER MARCH 1998) countr y Major Other Labou Total materi materi r cost operati al al ng cost Financi al cost

CIS S.KORE A AUS MEXIC O INDIA UK CHINA BRAZIL

117 113 99 108 111 120 179 132

138 109 142 180 170 148 112 122

39 51

294 273

37 62 42 57 70 38 40 75

120 361 62 350 62 114 90 112 343 382 381 366

INTERPRETATION:
The cost of major raw materials like iron ore, coking coal, and other raw materials is less in India among the countries mentioned. The labor cost is low, but it is neutralized by its low level of productivity. The financial cost and the cost of power, oil and some other materials are high. Energy accounts for about 35 - 40% of the cost of steel production in India, whereas it is about 28% in the developed countries. Considering the low wage rate and other economic factors, the labor cost in India makes up

around 15% of the cost of the steel as compared to around 30% in developed countries like Japan and United States. In spite of these advantages, Indian firms could not become cost-effective.

#CONSUMPTION AND PRODUCTION OF FINISHED STEEL(million tones): Year Productio Netimpo Consumpti n rt on 1994- 9.13 1.37 10.5 1995 1995- 8.50 1.36 9.86 96 1996- 8.78 0.77 9.56 97 1997- 10.03 0.73 10.76 98 1998- 10.54 1.34 11.88 99 1999- 11.95 0.86 12.81 2000

200001 200102 200203 200304 200405 200506

13.36 13.4 13.82 14.63 15.51 15.20

0.77 0.28 0.73 0.23 -0.08 -0.28

14.13 14.12 14.55 14.86 15.42 14.92

INTERPRETATION
During the period of 1994-1995 the totol production of finished steel was 9.13 million tones whereas the consumption was around 10.5 million tones. To meet with the demand steel industry had to import more than one million tones from different countries. At the end of year 2000 the net production of steel industry was increased by significant level to more than 13 million tones of finished steel however they were required to import 0.7 million tones of finished steel to meet with their consumptions. With time and the effect of globalization the production of steel and iron industry has improved and can easily fulfill its

consumption needs.

CONCLUSION:
It is universally accepted that Indian economy is growing at a very high rate presently and the demand for steel is also showing an upward trend. For the sake of country and growth of economy, growth of iron industry is a must. This is possible only with the active support of the Government and effect of global industry. The global steel industry has been cyclical and although internal demand is likely to remain high in India for the future, overcapacity in the global market place remains a real threat in the next decade. Overcapacity would bring about increased competition and damage or restrict any opportunity. In addition foreign direct investment is likely to slow down and production needs be re-evaluated. The global industry remains highly likely as the major players aim for a larger global footprint. In doing so the companies are pursuing two objectives:

to lower their costs and increasing their market share. India currently appears comfortable with large raw material deposits, lower wages and favourable energy prices

SUGGESTIONS:
The following suggestions are given to rejuvenate the Indian steel industry: Technology policy is to be so designed by the government that it will generate the thrust to update the technology by the steel producers. Steel companies must assess their core competency and rethink about their strategy to cope with the internal and global competition. R&D focus is to be increased substantially. Expenditure on R&D by steel plants should be increased. With a strong R&D base, organizations will be able to adopt the technology faster.

Organizational adjustments must be made while adopting newer technologies. Effective human resource policy will help faster technology adoption. Training with updated inputs should be a continuous process in steel plants. Firms must do technological forecasting, which is not common in Indian steel industry, to take better decisions on product mix and investment proposals.