Gas cut to steel mills to cost Rs15bln in damage

ISLAMABAD: The blockage of the gas supply to Pakistan’s Steel Mills (PSM) by the government at such a critical time has turned out to be a huge threat for the mills, as the low pressure will damage the critical plants and its comprehensive repair will cost 10 to 15 billion rupees and require three to four years to complete, a senior official told The News on Tuesday.
The SSGC disconnected the gas supply to the PSM on the basis of lack of payment of dues. The PSM's dues to SSGC amount to around Rs35 billion since July 2008.
“Interestingly, the issue of the pending bills of 2012-2014 was settled in by the Economic Coordination committee of the Cabinet, still the Sui Southern Gas Company (SSGC) has not complied with the rulings,” the official said.
The PSM has decided to table a summary regarding the issue in the upcoming ECC meeting. It will also demand Rs 4 billion package, which will include two billion rupees for four-month salaries i.e. June 2015 to Sept 2015 and another two billion for iron ore and coal purchase.
It will also take up the issues of natural gas supply with the committee.
The ECC’s ruling issued on 25th April 2014 stated, “The payment of mark-up and principal outstanding amount of the National bank of Pakistan (NBP) consortium of banks and SSGC may be frozen at least for two years and the principal payment of the banks and SSGC should be rescheduled for 10 years. The mark-up of NBP and surcharge of SSGC should be waived off.”
The ECC also approved Rs18.5 billion, with change in disbursement from three tranches, first being Rs12.5 billion to monthly disbursement with a target to achieve a breakeven of 77 percent capacity utilization in seven months. The first disbursement didn’t include amount for iron ore therefore its receipt was delayed by three months and the seven-month breakeven was taken to April instead of original January 2015.
Moreover, the disbursement was further delayed, pushing the breakeven to May 2015.
In the ‘Caution Clause’ approved in the summary, it was stated that each months delay will entail an additional payment of Rs1.4 billion to make up for the resulting deficits.
Since 2008, the PSM is accumulating losses of around Rs118 billion. It also carries liabilities of Rs126 billion on its balance sheet. Earlier, the losses were due to the mismanagement and lack of capacity, but now it has been experiencing a huge deficit of materials and gas to run the mill and bring it to a desirable level. Currently, the PSM is at zero production level for the last two months.
The PSM at the moment has about nine billion rupees of inventory, in which two billion are finished products. If the government allows, the PSM can also sell the inventory to run the mills, but at the moment, due to a huge dump of products from China, its products have been left less attractive.
Interestingly, at two critical moments when the PSM was on the way to achieve the 77 percent capacity utilization [breakeven], at the very next day the gas pressure was reduced to almost zero. On January 7, 2015, it achieved capacity utilization of 50 percent and next day gas pressures was reduced for ten days and then on March 10, 2015 it achieved 65 percent capacity utilization but again the pressure was reduced which adversely affected the production. This has led to confusion that whether the government is serious in helping the industry stand on its feet.
The PML-N led government has time and again expressed its seriousness in revival of the Pakistan Steel Mills (PSM), but due to the government’s own policies, the mill has remained at zero production, staying heated only in order to avert a complete breakdown and is relying on K-Electric supply.
The official further said that dumping of the import of steel products, particularly Hot Rolled Coils (HRC) as massive import from China starting in Feb 2015 has affected the PSM sales badly.
The billet manufacturers received 15 percent Regulatory Duty (RD) in Feb 2015, while PSM was allowed only 12.5 percent RD on March 9, 2015 on normal HR steel, leaving out Boron mixed alloy steel which nullified 12.5 percent RD effect.
Over one Lac ton of boron alloy steel came into the market at zero duty each month, reducing PSM sales to a level that was insufficient to pay monthly gas, electricity bills and meet other expenses.
“Complete gas halt would shut two blast furnaces and two coke oven batteries at the PSM forever, as such plants cannot be temporarily switched off for any reason at any point of time,” the official said, adding that they need round-the-clock gas to keep them on heating.
He said smuggling and under invoicing are two major issues that are restricting the sale of PSM products.
The government’s grant of concessions to influential importers through Statutory Regulatory Orders (SROs) has also affected the mills performance and made its products costlier than others. Under these SRO’s, imported products and the concessional duties on them make the products less costly than locally produced products.
According to the SRO No 421 that was issued on June 4, 2014, the government has imposed 17 percent sales tax on every type of local iron and steel. Whereas, on import of such scrap, the government has imposed only Rs5600 per ton sales tax, making domestic scrap Rs2000/ton costlier than imported ones.