Economy
 
Pakistan steel production massively declines
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May 11, 2012
Pakistan steel production has witnessed a massive decline in a past one decade as its output of producers reduced on capacity and financial constraints despite high domestic consumption that widened supply and demand gap and enhanced reliance on imports.

Pakistan’s steel production declined from 1.1 million metric ton in FY01 to 0.4 million metric ton in 2011, showing a decline of 64 percent of its output in 10 years. The production drastic cut ultimately led to high imports of crude and finished goods that caused loss of foreign exchange reserves and ballooning imports’ bill.

As per conservative estimate, the local demand of finished iron and steel products (hot-rolled (HR), cold-rolled (CR), and galvanized coils and sheets; and long rolled products, such as bars, rods, angles, and sections), is standing at more than 6 million metric ton
annually for manufacturing of different steel and iron made up besides
construction sector.

The country imported more than 3.2 million metric ton of iron and steel in 2011 amounting close to $2 billion which roughly 5 percent of the annual import bill. Interestingly, the finished steel imports are price competitive despite high import duties (from 10 to 35 percent), 16 percent sales tax, and 3 percent withholding tax.

The prices of various products produced locally by Pakistan Steel Mills vary from Rs 75,000 metric ton to Rs 97,000 metric (including sales tax) ton whereas the prices of imported products ranging from Rs 70,000 to Rs 92,000 products available in the local markets.

One of the reasons why domestic steel prices are high compared to imports is the small scale of production and lack of integration. The large and integrated units have low units costs because they are more energy efficient. Pakistan’s steel industry is highly fragmented, comprising of around 100 melting furnaces and 300 rolling mills. The
average melting unit has an annual capacity ranging from 10,000 to 70,000 metric.

Industry analysts said that low capacity utilization ailing Pakistan Steel Mills (PSM) is the sole processor of iron ore in Pakistan and constitutes a little less than 20 percent of the country’s capacity for finished steel.

The situation emerged as deteriorated in the past four years at times when democratic government took over the affairs of the state-own steel producing company. In better times, the mills supplied raw material (billets and HR sheets) to the private sector as well. But since 2009 as PSM reported huge losses of Rs 104 billions, crude steel production has been going downhill, dropping from 80 percent of installed capacity in 2008 to only 23.8 percent in 2011.

The PSM has since been strapped for liquidity, unable to consistently fund raw material imports. Low crude production has affected production of finished steel by the PSM and the numerous downstream private mills relying on PSM, which now have to import raw material. To date, the PSM has been unable to emerge out of the low funds-low
capacity cycle.

This is distressing given Pakistan’s 1.4 billion metric tone unexploited proven iron ore reserves as well as sufficient domestic capacity of roughly 4.5 million metric ton but owing to incapability of leadership at largest country steel producer, the local production
remains stagnant and not available for local consumption.

The low capacity utilization lowered scale economies because the PSM is a complex of interconnected mills which feed raw material and energy into each other. When functioning at a reasonable capacity, the excess heat generated during coke burning (for making raw steel) is used to generate electricity. This electricity, being low in voltage,
is then swapped with the Karachi Electric Supply Company (KESC) for high-voltage current to runs the rolling mills.

Since the steel is already molten while entering rolling mills, energy costs are conserved but due to below efficient capacity, there is insufficient coking heat to run the captive power plant (CPP), and the mill becomes an electricity buyer, another burden on its weak
finances.

The current local iron ore supply is sufficient to produce only 0.2 million metric ton steel a year. This means that at full capacity, PSM must import at least 1.5 million metric ton of iron ore, which amounts to import burden of approximately $0.2 billion annually (at FY11 price.

The PSM also imports coal for coking that needs superior quality coal and is therefore this component is not substitutable locally. At full capacity, the PSM requires 0.85 million metric tone of coal per year (US$ 0.1 billion at FY11 prices). In short, in order to break even, the PSM must have sufficient funds to be able to run at efficient

capacity. Otherwise, producing at low capacity will only lead to snowballing losses.

PSM is the only truly integrated mill, but even its capacity is believed to be deficient scale economies. Over the past half decade, some consolidation took place between the

private furnaces and re-rolling factories, which improved energy efficiency to some extent. Nevertheless, the capacity of even the largest private mills still remains below 0.5 million metric ton.

After PSM, there has been only one truly large-scale investment in Pakistan’s steel industry: a 1.5 million MT steel complex of Tuwairqi Steel Mill (TSM). Once operational, TSM will reduce the country’s dependence on imported raw material to a great extent by supplying raw material to the rolling industry. Secondly, it will utilize indigenous

iron ore to a greater extent. The mill is expected to come online this year in August.

The TSM was initially planned to start functioning in 2010, but commissioning was repeatedly delayed due to uncertainty over utility supplies. Specifically, the TSM will be a natural gas-based facility, a resource which is already in short supply.

TSM will be energy efficient – for example, to produce the same quantity of steel, it will consume lesser quantity of natural gas. While other industries can use alternate fuels, TSM will be using natural gas a feedstock, which is not substitutable

PSM has been victims of mismanagement, financial irregularities and corruption besides, the insufficient investment; and loopholes in the tax system. If these issues will be addressed properly with professionally sound leadership and investment on capital, the steel industry can play its due role in economy.

On the other hand, the imports of finished goods can drop to as low as 0.1 million metric tone a year with full capacity utilization of production units. In dollar terms, the net saving could exceed $1 billion per year, the State Bank of Pakistan estimated.

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