The subject of steel is very vast. Its use spreads very far and across different applications i.e. from Infrastructure & Construction, Automobiles to even Consumer Electronics and others. So, learning such a huge industry is tedious procedure. Also, as we discussed earlier that overall steel sector is not as profitable business as we would have liked (Based on Economic Profitability). Hence, classifying the whole Steel Sector into smaller segments will help us to narrow down our research on only that part of whole steel business which is more profitable then general.

There are benefits of classifying the steel sector. The main benefit of classification is to identify the segment which is most profitable and has the best prospect of growth. Studying steel as a whole is almost impossible considering its wide range of use. Our main purpose is to find the best company to invest. Company which enjoys higher profitability along with good growth. But where can we find these lot of best companies? We break down (Classify) the Steel Sector into Segments, and find the most profitable segments with higher growth prospect. There are very high chances that we will find one (or many) such segment(s) which has the best prospect of profitability and growth in the whole steel industry. And when we find such segments, we will be very near in finding the best company to invest within this most profitable segment.

But, how do we classify the steel sector? It is generally very difficult part. Classification can be based on Revenue Model, Core Business, and Future Prospect or even on the application of the final product, etc. Here, as far as most logical way is considered, I have segmented the steel sector based on what it sells i.e. end use or finished products. Steel has many uses and applications. And with different application/use of steel, it demands different shape, size and quality. Just for example, sewage and water transportation requires Pipelines, Builders require long Rods, Railways requires tracks made of steel and so on. Hence Pipe, Long Rods and tracks, etc. are made of different shape, size and quality of steel to achieve its purpose of end use and its application. Hence, even though steel appears as one, it has many branches within itself. And the major part to focus on here is that, profitability of steel depends upon its final use or the application. Where one can use many different logical way to segment the steel sector to identify the most promising segment with prospect of higher profitability, I have segmented this sector based on its end use or Final Product. Also, after segmenting the steel sector, I have made a slight adjustment to alter the segmentation based on group of products mix which a company sells as a whole. For example, look at the segmentation below:

You can find two sub-segment of segment Raw Commodity i.e. Pipes & Tubes and Flats and Longs. Flats and Longs are further segmented. In Flats and Longs you can see 3 different finished goods are bundled into one i.e. example: Wire, Rods and Rebar. Although end-use of each of this products are different but on my research I have found that these products are sold collectively by companies in this segment. Hence, these products although sells differently and are based on different finished goods and application, they can be manufactured collectively by one company. Hence, I had to alter my segmentation based on Product mix which companies sells so that we find segments based on companies final output.

Now that segmentation is done. The next step is to find the overall Segments Profitability and growth prospects. You can see in the segmentation that, Steel Sector is majorly divided into three segments viz. Semi-finished Steel, Finished Steel and Iron. These segments are further divided into smaller & smaller sub-segments. Now that we have segmented the steel business, our job is to find the segment which has highest profitability and prospect of higher growth. For this, we have to pick each smaller sub-segments and find the Return on Invested Capital (for Profitability) of whole segment along with segment’s market size, companies into these segments and their market share in overall segments (for growth prospect). When we perform this exercise, we will discover the best segment in the whole steel sector.

But, there is an issue in finding each segment’s profitability and growth prospect. As steel is commodity business, the industry size is generally considered as a whole. It is very difficult to find the Size of segment differently. Also, due to such a huge product mix followed by many companies, it is like each and every end product can be produced by steel manufacturing companies. So, it is very difficult but still possible to breakdown the overall steel industry sizes into the smaller segment industry sizes, the same will be performed by me in due course as the research progresses. My workings are under process and you can find a Sharable Link of Google Drive which contains the segmental information, the companies into each segment. I will keep updating the sheet to include profitability and market size of each segment as the research progresses and more information is available. Till then, I will keep adding my further research analysis on steel sector.

Thank you!

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.