Large steel production: FBR urged to continue with tariff protection policy

ISLAMABAD: Pakistan Association of Large Steel Producers has urged the Federal Board of Revenue (FBR) to continue with the tariff protection policy and any reduction in tariffs on locally manufactured finished or semi-finished steel products under the garb of tariff rationalization will result in deindustrialization and closure of steel industry as well as massive unemployment in the country.

According to the analysis of the association, the government must realize that reducing tariffs on domestically manufactured items without providing a globally competitive business environment will surely lead to de-industrialization.

Pakistan ranks dismally low (#110) on the Global Competitiveness Index published by the World Economic Forum and this shows that our business environment is not competitive with other countries.

All major steel exporting countries feature much higher than Pakistan in the competitiveness index.

The domestic steel industry has invested billions in recent years to bring in new capacity and world-class technology to improve efficiencies and competitiveness. However, the government needs to do its part to make substantial progress on the much-delayed and much-needed structural reforms to reduce the cost of doing business, enable fair competition, fix tariff anomalies, and facilitate core industry issues before considering tariff rationalization.'

The local industry does not agree with the proposal submitted by the National Tariff Commission (NTC) earlier this year to the Tariff Policy Board for the long steel sector. There is no evidence of any export bias in the local steel industry as there is cut-throat competition and current margins are close to zero. Resultantly, there is no evidence of abnormal profits either. In fact, the domestic steel industry has been successful in bringing new capacity and technology to meet the quality and quantity requirements of the economy. The domestic steel industry creates import substitution in excess of USD 1.2 billion per year.'

This comes at a time when other countries are moving away from reducing tariffs on finished & semi finished steel products and particularly in the steel industry many have moved to increase protection.

This is due to a global oversupply in the steel industry where anti-dumping and anti- subsidy/countervailing investigations have been commonplace over the past 5 years. Reducing tariffs at this point in time will only open the flood-gates for millions of tons of steel to be dumped into Pakistan that is lying surplus in other countries.

It stated that the steel industry has been going through a tough time over the past couple years. Foreseeing mega projects under CPEC and the PM's Naya Housing Project, local business groups have made huge investments in the recent past in hope for a surge in demand - only to have been handed a stifled economy under a strict IMF program that saw massive increases in costs due to unprecedented currency devaluation, uptick in interest rates (now revised), increase in energy costs, increase in taxation (GST) and a nosedive in demand.

'While the government has provided some incentives to real estate developers, we have not seen much of a rise in demand as yet. Projects are being registered under the construction package but there isn't much activity on-ground. We are mostly servicing projects that were already on-going before the Covid-19 lockdown and it is yet to see whether projects in the pipeline will materialize. There may be a gradual recovery in the second half of the fiscal year but this will remain a tough year for steel manufacturers with oversupply in the local market and much pressure on margins, association added.

In a letter addressed to advisor to the Prime Minister on Commerce, Abdul Razzak Dawood as well as Chairman FBR, the

Secretary General of the Association has urged the advisor to link tariff reductions to milestones related to structural reforms that will help provide a more competitive business environment.

This way, the government will be able to safeguard the huge import substitution and jobs the industry provides while addressing tariffs in a logical manner. The milestones relate to reducing the cost of doing business, enabling fair competition, fixing tariff anomalies, and facilitating core industry issues.

"We have studied steel industries in many different countries to understand what specific factors give them an edge. For example, China, India, Iran and Ukraine all have state-owned companies that mine and provide iron ore to the private sector for steel making. Pakistan has large reserves of iron ore but remain unexplored due to issues related to litigation, law and order and capital requirements. Moreover, Pakistan has one of the lowest per capita consumptions of steel of only 37 Kg versus a global average of 256 Kg. Such a small market prevents local companies from achieving the scale required to compete globally. Additionally, the industry remains fragmented and wealth creation is stifled due to various tariff anomalies and lack of enforcement issues that the government has failed to address. The milestones that we have recommended to the government aims to address general issues related to building a competitive business environment as well as these industry specific issues mentioned above."

PALSP believes that the tariffs rationalization should be aimed at 'Make in Pakistan', creating jobs, fostering investment, and making industry competitive. There seems to be a clear consensus that key structural issues must be addressed before attempting to reduce tariffs on domestically manufactured products, especially in the absence of any export bias, abnormal profits or capacity issues. They stated that the Industry does not agree with the tariff proposal submitted to the Tariff Policy Board in April 2020 by the NTC, it added.

Copyright Business Recorder, 2020