Steel industry faces raw material shortages

ISLAMABAD: Steel industry is in the midst of an unprecedented crisis, with many large producers struggling to stay afloat as costs continue to mount, an industry statement said on Thursday.

At the heart of the issue is the recent decision by the State Bank of Pakistan (SBP) to raise interest rates to record levels as mills are paying over 20 percent Kibor. This move is putting unbearable strain on businesses that are already operating at just 30 percent of capacity. Compounding overhead costs have detrimentally impacted many large steel manufacturers with one of the largest publically listed rebar manufacturer in Pakistan reporting losses in last quarter.

"This is a dire situation for the steel industry," says Wajid Bukhari, Secretary General of the Pakistan Association of Large Steel Producers (PALSP). He said the cost of borrowing is simply too high, and we are seeing many factories close down as a result. More than half the industry has already shut down and this will negatively affect Pakistan’s industrialization for generations to come. The announced increase in the Monetary Policy Committee (MPC) will increase costs by at least 6,000 rps/ton, making it impossible for many businesses to operate.

But that's not all. The industry is also facing a 3.23rps/unit electricity surcharge, which has been imposed in order to adhere to IMF restrictions, making it the most expensive energy in the region for industries. This will increase costs by around 4,000 rps/ton further, adding to the already unbearable overhead costs.

"The situation is rapidly deteriorating," warned Bukhari. "Raw material availability is only guaranteed until End-March, and if LC's are not opened, prices can easily cross 325,000 rps/ton. This will have a severe impact on the industry, as well as on the wider economy, with 7.5 million jobs at risk and 42 allied industries affected."

The steel industry is a vital part of Pakistan's economy, and the government must take immediate action to support it. "We urgently need the SBP to open LC's in order to mitigate this crisis," says Bukhari. "If we don't act fast, industries will come to a standstill, and there will be massive defaults across the allied industries. Further price hikes are irking the end customers, but there will be no steel available after March 23rd if SBP does not act urgently. SBP has all our data for LCs and a force majeure shutdown is imminent if there is no availability of raw material."

Last year Pakistan imported approximately 4 million tons of scrap raw material, whereas to date, the situation has reached a critical level, with imports for the first seven months of FY23 down by 40% from the same period last year, suggesting tight availability of raw material and if there are no LCs available to manufacturers, imminent collapse is foreseen by March 23rd.