Critical Success Factors in Steel Industry

Key success factors

Introduction

The global steel industry is fragmented, resulting in players having little control in deciding the selling prices. The commodity nature of most of the steel products and bunching up of capacity formation further intensifies the price-based competition. Hence, the critical factors for success are ability to offer output at low prices and sustainability through the industry downturns. These could be primarily achieved through controlling costs and keeping them as low as possible. Cost structure is a crucial factor that determines the sustainability of the company through the down cycle in the industry. Factors such as technology, manufacturing route, operational integration and operating efficiency determine the cost structure of a steel company. We would analyse few factors that are critical for the success of the players in the steel industry.

Access to raw materials at low costs

During 2004-05 to 2007-08, the steel industry saw a significant increase in the cost of key inputs like iron ore, coke, and coal — which account for 55-60 per cent of operating costs. Hence, in the long term, players with captive sources of inputs would be much better positioned to withstand pricing pressures, sustain downturns, face competition, and perform better than other players.

Players with captive iron ore mines like Tata Steel and SAIL are insulated from increasing iron ore prices. Similarly, players entering into long-term contract with the miners for procuring iron ore are better-off than players purchasing from the spot market, specifically in case of rising price scenario.

Proximity to inputs and market

In addition to the cost and availability of inputs, the logistics of procuring inputs is also a key success factor. To minimise inward freight charges on procurement of raw materials — mainly iron ore and coal— plants necessarily need to be situated near the mines while proximity to markets helps players minimise delivery costs and attract buyers.

Therefore, most capacity announcements have been in states rich in iron ore and/or coal — like Orissa, Chattisgarh, Jharkhand, and West Bengal. Gas-based capacities are situated on the country's western coast — namely, in Gujarat and Maharashtra. In the case of long products, small induction furnaces have come up in regions of demand such as northern India. Proximity to ports is also a crucial consideration in case of export-oriented units.

Financial structure

The financial structure assumes great importance, especially during the downturn of the industry when the prices and/or the operating rates are low. Low interest burden insulates the producers from the risk of incurring losses. Players with a strong financial structure and balanced debt-equity mix are in a better position to tackle lower operating margins and maintain profitability at the net level.

Diverse product mix and proportion of value-added products

The players having the ability to offer diverse products for diverse industry applications are better positioned vis-à-vis players into single product, as their fortunes are not dependent on the demand growth of single sector. Also, the players with presence in value-added products generally show more stable selling prices than those producing commodity grades. The realisations of value-added products are also higher and are more stable than base grades. The cost of adding value is generally lower than that of base grades, resulting in better margins for such integrated players. Forward integration can provide better scope to improve operating margins, depending on the position in the value chain.

Ability to export

The commodity business usually witness bunching up of capacities, leading to significant demand-supply mismatch in the short-term. If the excess supply scenario is region-specific, as it would be in India for the next few years, then the players should have the ability to export the surplus to maintain their operating rates. The standing of the player in the global cost curve would be the critical factor determining its ability to export. Large Indian integrated players (for example Tata steel) are amongst the few low cost producers of steel across the globe.

In addition to the production costs, other factors that are critical for determining the ability to export are location of the plant and the product mix they are able to offer. The location of plant near the port would be an advantage for the purpose of export and thus, the companies with plants on eastern or western coast are better-off than players having their plant located in the hinterland. The ability to offer variety of products (application specific products like auto grade flat products, precision steel, tin-plate products, etc) is an added advantage for players that enhance their ability to export.

Besides above, there are various other factors that determine the costs and hence, the success of the players, such as labour costs and productivity, technology or process route of production, relationship with consumers, economies of scale, etc. Usually, players with capacity above 3 to 4 million tonnes are better placed than players with lower capacities.