11.1 – The context

In the previous chapter, Steel (Part 1), we established that steel comes in various grades and forms and has a wide range of applications. We also saw how steel is produced and why value addition is necessary to improve profitability. 

In this chapter, we delve deeper into value addition with respect to its importance in the distribution of steel. I have also created a checklist of parameters you could use to compare steelmakers. The features and the future of the industry will conclude the chapter.

11.2 – How is steel distributed? 

Who buys steel?

Steel is not a retail product. But steel products may be retail products. Let me elaborate. We do not buy a steel rod or slab, but we buy furniture, appliances, utensils, cars, and other products made of steel. So, the manufacturers of these products are buyers of steel. Steel is a raw material for them.

Let’s say a car manufacturer wants steel for its cars. It can buy steel sheets from a steel manufacturer. It will cut and mold the sheets in the required shapes and sizes. Some carmakers might get a third party to do the cutting and molding. Old and established carmakers might do this function in-house, but newer manufacturers could use a third-party service. Even the newer plants set up by established carmakers might want this service.

Some steel makers might offer to do the cutting and molding jobs also. They do so by setting up “service centers” closer to their client locations. These service centers are generally set up as independent subsidiaries. They may be free to buy steel sheets from the parent company or any other steelmaker.

JSW Steel has several such downstream JVs and subsidiaries. Some of its subsidiaries are Anjar Works (steel plates and coils), Kalmeshwar Works (color-coated products), and JSW Vallabh Tinplate Pvt. Ltd. (tinplate), among many others. Tata Steel was awarded an order for a complete seating system for 22 rakes of Vande Bharat Express, which will be delivered from its Khopoli facility in Maharashtra.

Remember how steel manufacturers are always looking to sell value-added products to increase their margins? This is probably the farthest they can go to offer value-added products. Involvement beyond this in the value chain might make them a car or appliance manufacturer. 

Reiterating here that since steel is a commodity, pricing power is low. Value-added products are an easy target to achieve differentiation and pricing power, which leads to better profitability. However, going far down the value chain can be risky. They may not have the know-how to add value. Figuring out could require massive investments and dilute management focus. Creating subsidiaries is a good way out, as the subsidiary’s management will have the sole focus on adding value.

Whether value-addition is adding to a steel company’s competitive advantage and profitability is for you to figure out through your analysis. A simple way would be to look at how the steelmaker’s product mix has evolved over the years. Have the sales of value-added products grown? Has the profitability from those products improved? Has the overall profitability improved?

If the answer to these questions is yes, perhaps value addition is improving the company’s performance. If the answer is no, there could be two possibilities – the company is still figuring out its value-addition endeavors or has failed at them.

Transportation of steel

Large steelmakers maintain a fleet of containers, trucks, and rail wagons. This fleet is used for both bringing in scrap and raw materials and sending out finished goods. The decision to own logistics is again driven by the possible cost savings it could deliver.

    • Tata Steel’s logistical infrastructure handles more than 100 mtpa of materials, including raw materials, finished products, and by-products. Its entire material movement is handled through a combination of seven ports, 24 stockyards, and 37 steel processing units.
      Tata Steel has long-term contracts with two ports and is building one captive port. It is also investing in the private freight train schemes of the Indian Railways to improve rake availability. Tata Steel is transporting about 22% of raw materials and 11% of finished goods through private wagons and rakes.

    • JSW is also investing in its own rakes to improve shipping capacity via rail. Its recently listed subsidiary, JSW Infrastructure, is the second-largest commercial port operator in terms of cargo handling capacity. It operates 9 ports in India and 2 in UAE.

    • APL Apollo’s distribution channel includes warehouses and branch offices across 29 cities. Beyond that, it has a three-tiered distribution network that consists of over 800 dealers.

Depending on the type of steel product and the quantity of purchase, the channel of distribution and mode of transfer will differ. The ownership of the distribution channel further depends on the scale of operations and the demand for value-added products.

11.3 – The Scrap Economy

The advent of Electric Arc Furnace (EAF) technology in steelmaking has led to several mini-mills cropping up across the country. These mini-mills depend on scrap steel as their primary source of raw material.

They are called mini-mills for two reasons. First, they operate at a really small scale to cater to the needs of local businesses. Second, scrap availability is limited. When the primary raw material is limited in supply, the operating scale also will be limited.

Why is scrap supply limited? Scrap is not produced; it is generated.

    • Previously, steel sheets, bars, and rods came in standard sizes. So, cutting them in the required shape and size would generate about 15-20% scrap. Now, appliance manufacturers, carmakers, real estate companies, and other large steel buyers demand steel with custom specifications. Therefore, wastage per sheet or tube has come down to almost 7-10%.

    • Scrap collection happens locally. Collecting more scrap would mean going to farther places, which could increase logistics costs.

    • Competing with other scrap buyers in the same locality would mean offering higher prices, thereby adding to operating costs.

    • As noted at the beginning of this chapter, India’s per capita steel consumption is too low. Only in recent decades our consumption has picked up. Since we did not consume a lot of steel in the earlier decades, there is not a lot that could become scrap today. Even when our consumption has picked up, the lifeline of our steel products is likely to be higher than our Western counterparts. This is because Indians generally do not replace cars, furniture, appliances, or utensils very frequently.

Scrap economics is strange. The more you buy, the higher the prices go. This is unlike other products or materials where bulk buying is generally associated with cost savings.

Why am I discussing scrap so much in detail? Because the larger steel players have also been investing in EAFs. It may not be big today, but it will likely become a primary steel production method in the decades to come. Recycling is imperative in a carbon-neutral world that we are trying to achieve.

11.4 – Features of the steel industry

Several features can be observed while trying to understand the production and application of steel. These features also throw light on the parameters you could look at when studying a steelmaker. Here is a list of features that I observed.

    • Steel is an asset-heavy business. Setting up a steel plant requires massive infrastructure. Spending on this infrastructure happens before any revenues are made. Therefore, steel companies usually have a high level of borrowings on their balance sheets. Maintaining the infrastructure is a major cost. The life of these assets has a bearing on the long-term performance of the business.
      If you are looking for a deeper analysis, you could attempt a cost-benefit analysis of the existing and upcoming plants of a steel company. This exercise could tell you whether or not the markets have assigned a fair value to its assets.

    • Limited pricing power – Being a commodity, steel companies are largely price takers and not price makers. China’s global dominance with over 54% market share further pressurizes Indian steelmakers to maintain competitive prices. Owing to customs, shipping costs, and other levies, Indian steelmakers can sell steel at a premium price to Chinese steel, but pricing decisions cannot be untethered to China’s moves.

    • The focus on value-added products is high to improve profit margins. Value addition gives a steelmaker a chance to differentiate its product from peers. Differentiated offerings can command a premium. Therefore, steelmakers have been investing in value-additive processes.

    • Cyclical nature, core industry – Economic growth improves the purchasing power of consumers. More people buy houses, cars, appliances, and furniture when the economy is growing. Economic growth also motivates businesses to expand and invest in plants and machinery. The inverse is true when the economy is slowing. These products are major consumers of steel. The performance of these products, and thus steel, is significantly linked with the level of economic growth.

    • Energy intensive – The coking coal required in steelmaking needs to be imported. Shipping consumes energy. This coal is burnt to produce heat in first making iron and then steel. The entire process consumes a lot of energy. We have already seen how coal prices impact steel prices more than iron ore prices. Clearly, power and fuel are a major cost center for steelmakers. To control costs better, many have started maintaining captive power plants.
      Steel companies also set up Waste Heat Recovery Systems (WHRS) to channel the tremendous heat emitted from the process into generating electricity. WHRS serves two purposes – cost savings and sustainability goals.

    • Shipping costs – Shipping or freight costs are enormous. Therefore, larger steelmakers own their fleet of trucks, railway wagons, and shipping containers. Some even operate ports. The steelmakers that do not own their distribution might have to offer higher margins to their channel partners by keeping smaller margins for themselves. That is also a cost indirectly.

    • Vertical integration is considered an advantage – With several considerable cost centers along the value chain, vertical integration allows steelmakers a wider scope to control costs. Captive iron ore mines, coal mines, power plants, distribution centers, and transportation are commonplace for larger players. Smaller players might not be able to afford so many captive facilities, so their primary focus would likely be on value-added products.

11.5 – The Checklist

Now that we have discussed the process of steelmaking and the features of the steel industry, let us consolidate all of it into a checklist of factors that could be used as a reference for studying the steel industry.

The first few ratios are about capacity, production, and sales. You must find out how much a steelmaker can produce, how much it produced, and how much it sold. If a steelmaker sold more than it produced, it could be due to two likely scenarios – one, it had excess stock from the previous year or it also or two, it bought from other steelmakers to meet customer demand.

Having captive coal and iron mines is to understand the level of backward integration and, thus, the scope of cost control.

You will notice that input cost ratio, power and fuel cost ratio, and freight cost ratio are the same parameters we studied in the Cement chapter of this module.

While you have studied the debt-equity ratio in the Fundamental Analysis module, I have added it to this checklist because asset-heavy businesses like steel tend to carry large debts. You might want to study other leverage ratios, too.

11.6 – Future of the steel industry

Upon completing 50 years in 2017, World Steel Association laid down three major challenges for the steel industry for the next 50 years. 

    • The world is using steel more efficiently in terms of production and application. Efficiency could eventually taper off the demand for steel. The industry will then have to get used to consistently slower growth.
    • The circular economy pushes for recycling. The industry will have to absorb technologies that are efficient at recycling.
    • Carbon emissions will have to be significantly reduced. Steel will have to prove its commitment to environmental sustainability.

As I write this chapter in 2023, these challenges still remain relevant.

Efficiency in steel could be because of

    • Better production methods that have minimum wastage,
    • Optimum product designs that use minimum steel, and
    • Recycling of steel.

Currently, about 30% of the world’s steel is produced using the Electric Arc Furnace (EAF) method, the one used in producing steel from scrap steel. Rapid industrialization at the global level in recent decades has increased steel usage considerably. In the decades to come, more steel will be available for recycling. The share of recycling will most likely only go up. Existing companies will have to be ready with the technology and capacity to produce recycled steel.

Happy learning. 🙂

Key Takeaways

    1. The distribution of steel goods is a function of the size, nature, location, and requirements of the buyer.
    2. Large steelmakers own the distribution channels far deep into the value chain.
    3. Value-addition can add to the competitive advantage and profitability of a steelmaker. However, going deep into value-addition could create inefficiencies.
    4. Steelmaking is an asset-heavy business. Therefore, steelmakers might carry huge debt.
    5. The process of steelmaking is a massive polluter. Steel companies are always looking to control emissions by optimizing their processes. Installing Waste Heat Recovery Systems (WHRS) is one of the most common measures towards sustainability.
    6. The share of recycling will likely increase as the world moves towards a circular economy.


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  1. Pradhum Chopra says:

    Kind request to cover Retail sector along with FMCG at the earliest

  2. S K BHANJA says:

    APL APPOLLO is not an integrated steel plant (as mentioned).Therefore their business can not be compared with TATA,JINDAL or SAIL.The inclusion of RINL or Essar/Arsenal Mittal would have been more appropriate.Special steel definitely constitute a considerable chunk of steel industry & some similar companies comparison could have taken.
    Tata steel fig.are only in Indian business or including its overseas plants together?Freight cost is a major chunk of steel cost.Developoment of N-E states may create a better opportunity of steel demand.Not to forget the demand of Nepal,Bangladesh (& Afganistan).Water transport may in future play big roles provided planned correctly (effective use of Ganga-Brahamaputra-Bay of bengal).

    • Vineet Rajani says:

      You are right. Ideally APL Apollo should not be compared with the integrated players. But this list is representative, not meant to cover all integrated or specialty steel players.

      All figures are consolidated, meaning they include all operations, Indian and foreign. You should, however, rely on the financial statements released by the company itself for your analysis.

      Yes freight cost is a major cost. Therefore, it is also part of the comparison checklist. You are correct to point out the potential role of North-eastern states. Also, water transport domestically will gain significance. These are dynamic features, they keep changing. Five years later, perhaps, a different set of factors could impact the distribution of steel. The idea of the chapter is to point out all the factors you should be analyzing in the industry. 🙂

      Happy learning!

  3. Parveen Kumar says:

    Hello , sir
    It was a great reading and it seems we have much more to learn from you.
    Keep enlightening the people.
    A big Thanks for your Guidance.💐

  4. Abhishek Mishra says:

    Thank you so much sir for all your efforts .
    Requesting you to please cover renewable energy sector as it has higher expected growth in near future.

  5. Srajan says:

    Previous UI was better, We don’t have to go back to change chapters and also add Updates/renewed chapter section, So that if you guys update any older chapters or add in previous sections, we’ll know

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