Money Matters

Nervousness of steel

February 15, 2016
By Hussain Ahmad Siddiqui

At a time when steel demand in Pakistan is increasing manifold,

At a time when steel demand in Pakistan is increasing manifold, particularly in the wake of implementation of massive China-Pakistan Economic Corridor (CPEC) program, the indigenous steel industry is in a shambles. Pakistan Steel Mills, currently on active list of privatization, has ceased its operations since June last year, and there is no likelihood of revival of its production operations in near future. Also, the only other integrated steel-making facility, Tuwairqi Steel Mills in private sector, which was tested for running at full capacity in May 2013, could not commence production in September 2013 as scheduled; resorting to virtual closure in the succeeding year due to apathetic attitude of the government, and now is reportedly in the process of winding up.

The emerging scenario is seen in the business circles per se to serve the vested interests, if not due to the lack of wisdom and vision on the part of policymakers. Till recently, Pakistan’s annual demand of iron and steel was 8.4 million tons, whereas local production varied in the range of 3 to 4 million tons. To meet the demand-supply gap, the country has been importing over 4 million tons of steel a year, mostly from the Chinese sources. Now that the two integrated steel mills are practically closed down with no production whatsoever, reliance on imports would perpetuate and multiply in coming years. It is projected that steel demand would increase to about 10 million tons next year, and jump to 20 million tons by the year 2020.

Iron and steel industry holds the key to the sustained growth of national economy. Expected rise in iron and steel demand is due to upcoming mega projects of motorways & highways, water and energy, investments in infrastructure, transport & mass transit, railways and industry, and growth of construction & housing sector. But the key driver of steel demand in near future will be the 46-billion dollar CPEC projects to be undertaken over a decade or so. In 2014, the world steel (crude) production totaled 1,665 million tons, with Pakistan’s negligible share of hardly 0.2 million tons. In comparison, steel production in Iran was 16.3 million tons, Malaysia 5 million tons and Indonesia 2.8 million tons.

Currently, per capita consumption of steel in Pakistan is about 40 kg, one of the lowest in the world. Steel consumption is termed as an indicator of economic and industrial development. Total installed capacity of iron and steel industry is significant, though mostly underutilized due to a variety of factors. Pakistan Steel Mills has an annual installed capacity of 1.1 million tons. Tuwairqi Steel Mills has an installed capacity of 1.28 million tons of steel annually. On the other hand, installed capacity of some 140 steel melting induction furnaces is around 5 million tons, of 158 medium and large steel re-rolling units of about 10 million tons, and of ship-breakers 1 million tons a year. Aisha Steel Mills, a major Pakistan Steel downstream industry in private sector, has an installed capacity of 0.22 million tons of cold rolled products per year.

Over the years, Pakistan Steel could not cater to projected rise in steel demand. It was planned to increase its installed capacity in phases, first, from 1.1 million tons to in-built capacity of 1.5 million tons by the 1990s, utilizing indigenous technical and financial resources. This however did not materialize. In the second phase, capacity was to be enhanced to 2.2 million tons, with assistance of the Russians or the Chinese, scheduled by 2013. In spite of positive responses from these foreign sources, Pakistan has failed to refurbish, modernize and expand Pakistan Steel Mills as yet. In the third phase, its annual capacity was to be enhanced to 3 million tons.

It was sometime in 2006 that the government realized the need for upgrading steel sector through private sector participation, and initiated to invite foreign investment in setting up the first integrated steel mills in private sector. Al-Tuwairqi Holding of Saudi Arabia thus established Tuwairqi Steel Mills in the Port Qasim Export Processing Zone at a cost of $ 340 million, which was largest investment in Pakistan’s steel industry since 2002.

The state-of-the-art steel mills, based on modern technology of Direct Reduced Iron (DRI), is a joint venture with POSCO (formerly Pohang Iron & Steel Co) of Republic of Korea, which is the fourth largest steelmaker globally. The project has been completed since 2013 but still remains non-operational due to gas price issue with the government. Its captive power plant, a 38-MW combined cycle power plant, has also been completed that was to supply 14 MW electricity to K-Electric. Another significant feature of the project was iron ore processing and mine development in Balochistan with the objective to use indigenous ore on a large scale.

According to an agreement with the government signed in 2004, the mills was to be provided with natural gas, which is fuel and feed-stock, but the government has not been able to decide a preferential rate for supply of gas. Consequently, the mills suffered reported loss of $ 18.6 million in 2013 and additional $ 22 million in 2014, when management informed the government that given the conditions the closed plant would be shifted to some other country, perhaps Saudi Arabia. Since the government has failed to resolve the issue, plant machinery is being shifted; having laid-off already it’s over 1,000 employees. Ironically, the investors had plans to expand its production capacity to 1.5 million tons within few years of successful commercial operations of the mills, making an additional foreign capital investment of $ 900 million.

Alas, also gone are the cherished objectives of the government of self-reliance and import substitution! The closure of Tuwairqi Steel due to non-fulfillment of commitment made by the government has sent wrong signals to the prospective foreign direct investors, of course, other than the Chinese, who are repeatedly being lured to come to Pakistan.

The writer is former Chairman of the State Engineering Corporation