Annual Report for 2011-2012 - Vizag Steel

RASHTRIYA ISPAT NIGAM LIMITED
ii.
Increased bargaining power of raw material suppliers. Continuous expansion of the steel industry
has resulted in a greater level of competition for raw materials, including iron ore and coal. Shortages of
supplies in the market have allowed suppliers of iron ore and coal to restructure their pricing mechanisms,
shifting from annual to shorter-term price contracts. These changes expose steel producers to additional
volatility and price risk. While firmness in steel prices has given iron ore producers opportunities to increase
prices in the contracts, steel companies do not always have the option to pass on such increase in input
prices to end consumers due to the fragmented market. Thus, many leading steel companies are looking
to pursue investments in mines as a safeguard measure against rising raw material costs. Steel producers
have responded to these industry trends in past through vertical integration. Chinese steel producers are
also consolidating to become major market participants.
Despite recent consolidations, the global steel market continuous to be highly fragmented. According to
the WSA, the five largest global steel producers in 2010 accounted for approximately 16.7% of total
worldwide steel production, and the fifteen largest steel producers accounted for approximately 30.5%
of total global steel production.
iii. Shift to emerging markets. Steel production and trade have become increasingly globalised, with
production shifting from mature to emerging economies. Developed countries have experienced increased
costs associated with labour, freight and raw materials, which in turn have reduced the economic viability
of basic steel production. In contrast, emerging markets, such as India, have become targets for global
steel producers because of their relatively low steel penetration alongside relatively strong GDP growth
outlook. Global steel producers are still looking to grow and are developing new capacity closer to the
Chinese and Indian markets, including forming joint ventures and setting up green field operations. Leading
steel producers such as Arcelor Mittal, Nippon Steel, POSCO and Severstal are setting up, or have
announced plans to set up, steel operations in India, either through joint ventures or independently.
1.2.5. Global Steel Outlook:
Despite a series of developments in 2011, including the European sovereign debt crisis, earthquakes in
Japan, the political/social unrest in some countries of the Middle East and North African (MENA) region
leading to a related surge in oil prices and the tightening of government monetary measures in many
emerging economies, world steel demand achieved a growth of 5.6% in 2011.
Apparent steel consumption in the United States is forecast to rebound by 5.7% in 2012 and 5.6% in
2013. Consumption in the EU27, however, is expected to decrease by 1.2% in 2012, with a modest
recovery of 3.3% in 2013, bringing it back to 77.0% of its 2007 level. Japan's demand for steel is expected
to decline by 0.6% in 2012 due to the impact of exchange rate appreciation. In 2013, apparent steel
consumption in Japan is expected to further decline by 2.2%, reaching 77.0% of its 2007 level. China, on
the other hand, is expected to witness a continual growth of 4.0% in 2012 and 4.0% in 2013. India is
also expected to increase its steel consumption by 6.9% in 2012 and 9.4% in 2013.
Emerging economies are expected to continue to drive growth. By 2013, steel use in the emerging
economies is forecast to be 45.0% above 2007 levels, and will account for 73.0% of world steel demand;
as opposed to 61.0% in 2007 (the above are as per WSA Report).
1.3. The Indian Economic Environment :
The Indian economy is one of the largest economies in the world, with a GDP at current prices estimated
at US$1.7 trillion ( 52.8 trillion) for 2010, according to the World Bank. Its economy is better insulated
from the global economy than several other Asian countries due to the fact that it does not rely heavily on
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