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PORTERS FIVE FORCE ANALYSIS

OF INDIAN METALS & MINING INDUSTRY


Indian metals & mining industry is divided into main segments such as Iron & Steel, Coal,
Aluminum, Bauxite, Base metals, precious metals and minerals. Thus, it gives a better perspective
if porter five force analysis is done for each segment. Since my selected companies under Metals
& Mining Industry – JSW Steel Ltd and Jindal Steel & Power Ltd. both belongs to Steel Sector,
porters five force analysis of Steel Sector is done and presented here.

Threat of
Bargaining power of
new entrants: LOW
suppliers: LOW
TO MEDIUM

PORTER'S
FIVE FORCES
Threat of
substitutes: LOW TO
MEDIUM

Bargaining power of
buyers: LOW

Competitive rivalry:
MODERATE TO HIGH

THREAT OF NEW ENTRANTS:


• Capital Requirement: Steel industry is a capital-intensive business. It is estimated that to
set up 1 mtpa capacity of integrated steel plant, it requires between Rs 25 bn to Rs 30 bn
depending upon the location of the plant and technology used.
• Economies of scale: As far as the sector forces go, scale of operation does matter. Benefits
of economies of scale are derived in the form of lower costs, R& D expenses and better
bargaining power while sourcing raw materials. It may be noted that those steel
companies, which are integrated, have their own mines for key raw materials such as iron
ore and coal and this protects them for the potential threat for new entrants to a significant
extent.
• Government Policy: The government has a favorable policy for steel manufacturers.
However, there are certain discrepancies involved in allocation of iron ore mines and land
acquisitions. Furthermore, the regulatory clearances and other issues are some of the
major problems for the new entrants.
• Product differentiation: Steel has very low barriers in terms of product differentiation as it
doesn't fall into the luxury or specialty goods and thus does not have any substantial price
difference. However, certain companies like Tata Steel still enjoy a premium for their
products because of its quality and its brand value created more than 100 years back.

Hence for above factors, Threat of new entrants can be considered as low to moderate

THREAT OF SUBSTITUTES:

It is low to medium. Plastics and composites pose a threat to Indian steel in one of its
biggest markets – automotive manufacture. For the automobile industry, the other
material at present with the potential to upstage steel is aluminum. Perhaps the most
attractive alternative to stainless is aluminum. Stainless producers themselves are offering
their customers a range of alternatives in an effort to prevent business being lost to non-
ferrous or carbon steel materials. Such options include lower-nickel duplex grades and
ferritic types. In the meantime, nickel’s fluctuations will continue to create problems for
the stainless industry worldwide.

At the present, Steel has already been replaced in some large volume applications: railway
sleepers (RCC sleepers), large diameter water pipes (RCC pipes), small diameter pipes (PVC
pipes), and domestic water tanks (PVC tanks). The substitution is more prevalent in the
manufacture of automobiles and consumer durables.

Hence for above factors, Threat of substitutes can be considered as low to moderate

BARGAINING POWER OF SUPPLIERS:


The bargaining power of suppliers is low for the fully integrated steel plants as they have
their own mines of key raw material like iron ore coal for example Tata Steel. However,
those who are non-integrated or semi integrated has to depend on suppliers. An example
could be SAIL, which imports coking coal. Also, it is an highly regulated industry with
difficult to get the mining permits.

Hence for above factors, bargaining power of suppliers can be considered as low
BARGAINING POWER OF BUYERS:
Unlike the FMCG or retail sectors, the buyers have a low bargaining power. Demand/supply
imbalance determines the price of commodities. Major customers typically negotiate
prices based on current market levels. However, the government may curb or put a ceiling
on prices if it feels the need to do so. The steel companies either sell the steel directly to
the user industries or through their own distribution networks. Some companies also do
exports.
Some of the major steel consumption sectors like automobiles, oil & gas, shipping,
consumer durables and power generation enjoy high bargaining power and get favorable
deals. However, small and retail consumers who are scattered and consume a significant
part do not enjoy these benefits.
Hence for above factors, bargaining power of buyers can be considered as low

COMPETITIVE RIVALRY:
It is medium to high in the domestic steel industry as demand still exceeds the supply. India
is a net importer of steel. However, a threat from dumping of cheaper products does exist.
Commodity prices are set internationally and individual players have no control over it.
Competition is high to identify commodity reserves leading to more market share.
The steel industry is truly global in terms of competition with large producing countries like
China significantly influencing global prices through aggressive exports. The 4 major
domestic rivals are SAIL, JSW, ISPAT and ESSAR STEEL, which the rests are all smallish mills
which together accounts for 30 % of the total market share.
Currently, two Global Steel majors namely Arcelor- Mittal, which is the world’s largest I and
POSCO, are posed to be the biggest threat as they plan to enter the Indian Steel Industry
very soon.
Hence for above factors, competitive rivalry can be considered as medium to high

CONCLUSION:
After understanding all the above view points and the current global scenario, we believe
that the domestic steel industry will likely to maintain its momentum in the long term.
However, the growth may get affected in short run. Investors need to focus on companies
that are integrated, have economies of scale and sell premium quality products

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