Porter five forces analysis for Tata Steel?
Backed by robust volumes as well as realisations, steel Industry has registered a phenomenal growth across the world over the past few years. The situation in the domestic industry was no exception. In fact, it enjoyed a double digit growth rate backed by a robust growing economy. However, the current liquidity crisis seems to have created medium term hiccups. In this article, we have analyzed the domestic steel sector through Michael Porter's five force model so as to understand the competitiveness of the sector.
Barriers to entry: We believe that the barriers to entry are medium. Following are the factors that vindicate our view.
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.
Competition: It is medium 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.
Threat of substitutes: It is medium to low. Although usage of aluminum has been rising continuously in the automobile and consumer durables sectors, it still does not pose any significant threat to steel as the latter cannot be replaced completely and the cost differential is also very 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