Substantial hike in FCA for KE: Step termed ‘disastrous for steel industry’

ISLAMABAD: The Nepra’s decision of increasing energy tariff for K-Electric consumers by Rs11.10 per unit for June 2022 under Fuel Charges Adjustment (FCA) mechanism has created a crisis-like situation for steel sector.

The sector that has already been burdened by decades-high interest rates has faced another blow as they receive record high energy prices for material that has already been sold months ago under the garb of unjustified FCA surcharges.

The overall electricity tariff has increased by 53.68pc in a year (from 18.20 PKR / kWh to 27.97 PKR / kWh) and 39.16pc in comparison to 6 months (From 20.10 PKR / kWh to 27.97 PKR / kWh). On top of that FCAs have increased almost 10 times in a year, the average FCA amount last year was around 1 PKR/kWh, which is now around 10 PKR/kWh.

Electricity is becoming increasingly unaffordable for the steel industry. One of the major causes of higher FCAs are increased input cost of oil & RLNG but notable fact is that KE FCAs are higher due to RLNG cost charges on central power plants which should be partially charged at indigenous gas rates that will give relief to all domestic, commercial and industrial consumers of Karachi. LNG is approximately 3 to 4 times more expensive than normal gas at the moment.

As per gas management and allocation policy 2005, the power sector is mandated as second priority to receive indigenous gas after domestic and commercial consumers. PALSP notes that due to unfortunate mafias, a few select blue-eyed industries among other sectors are being prioritised even against evidenced government orders.

Wajid Bukhari, Secretary General PALSP, slammed the discriminating FCA policy as businesses have to pay FCA on goods that were already sold into the market months ago. During the manufacturing process, they have no clarity on what FCA they will receive in the future for products already sold. Unjust policies will lead to a massive decline in much needed industrialisation for our Nation.

At present, the share of industrial sector in GDP stood at 21pc, while it paid almost 70pc of the total taxes collected. Shutting industries down today makes zero sense when our country needs maximum tax collection and jobs creation.

The long steel manufacturers of Pakistan save our nation with $3.8 billion import substitution through local manufacturing of rebars, a much needed saving for our dwindling reserves. As the nation seeks to rebuild our infrastructure, Pakistan cannot afford another $3.8bn impact on our reserves if the steel industry comes to a standstill.

PALSP strongly protest on the recent increase in tariffs and believes that the decision is the final nail and will have disastrous consequences for the steel industry (especially for Karachi based). This increase would not only cause a surge in the cost of doing business for all the industries including the already suffered steel sector but also this will become counterproductive for consumers and have an adverse impact on the economy. Business community believes that govt has to devise some mechanism for the proper adjustment of FCAs at time and there should be some CAP on the adjustment rates.

Steel industry is heavy reliant on electricity because it is an energy intensive industry in fact cost of electricity is almost 20pc to 25pc of the total cost of producing steel. If it is already getting electricity at approx. Rs38 per unit (including tax) the current rise of Rs11.10 per unit under FCA would cause a hefty increase in electricity bill and increase in steel prices by over 16,000 rps/ton. As the Nation seeks to rebuild its infrastructure after the torrential floods, such policies spell disaster for our fragile economy.

PALSP further states that “cheap electricity is imperative for the survival of steel industry and if we want our domestic industry to compete, the industry must be facilitated with provision of electricity at competitive rates.

The energy tariffs in Pakistan are amongst the highest in world and domestic steel industry is jeopardised by the high electricity prices. In Pakistan the price of electricity for industry is 0.176 $/Kwh. If we compare with other countries in Turkey it is 0.053 $/Kwh, Indonesia 0.075 $/Kwh, China 0.093 $/Kwh, Bangladesh 0.095 $/Kwh and Vietnam 0.076 $/Kwh.

The steel industry is greatly concerned and worried with this current market situation where the cost of inputs is increasing rapidly and it leaves manufacturers with no choice except to pass on the impact to the end consumer.

The increase in oil/petrol prices, surge in energy prices, currency devaluation, high interest rates, additional high taxes and bullish trend in prices of scrap in international market is making situation worse for local steel industry.

The steel sector is appealing and decrying to the government to facilitate rather than to create barriers for manufacturing sector. The input costs are already on the higher side and profit margins of the sector are insufficient.

The steel industry is greatly concerned and worried with this current market situation where the cost of inputs is increasing rapidly will lead to industry wide closures. Where steel industry is one of the highest sources of tax collection and job creation for the government amongst other industries.

Copyright Business Recorder, 2022