According to SBP’s State of the Economy report for FY18, steel manufacturing grew by 22 percent during FY18, and 21 percent in the preceding year; some of the highest growth numbers in Large Scale Manufacturing sectors. Much like twin-industry cement, steel makers experienced a notable boost as the economy expanded.
Demand rose at the back of CPEC-led infrastructure projects, higher development spending, greater housing and real estate activity especially in large housing and commercial projects, and fast growing steel consuming industries like automotives, transportation and light engineering. Anti-dumping duties on Chinese steel, and state imposed regulatory duties allowed steel makers to grab higher market share and raise prices.
Confidence of steel makers on largely positive demand and supply side dynamics pushed steel makers to invest into vertical and horizontal expansions and enter new geographic and product markets (see table). The existing demand of long (bars, rods, sections) and flat-rolled products (HRC: Hot Rolled Coils, CRC: Cold Rolled Coils, GDGC: Galvanized Iron) for the industry is around 6-7 million tons which has been continuously increasing. About 50-60 percent of the demand for CRC and GDGC is met by local manufacturers while the rest is imported. HRC is also entirely imported into the country to make CRC.
The gap between imports and domestic supply has persisted despite the 20 percent on-average annual growth in production the past two years, and the multi layered tariff protection afforded to domestic players. Imports have been keeping up: incoming iron and steel (finished products) have grown by 13 percent and 6 percent volumetrically (in tons) during FY18 and FY17 (as per PBS data). Dollar per ton grew by 2 percent. The space for local steel makers is wide enough. The expansions together with diversification in inputs (e.g. billets) and other finished products could reduce the import bill and save on much needed foreign exchange, but will demand keep up?
For every six tons of cement, one ton of steel is used for construction. That can be a good starting point. By 2022, Pakistani cement industry will have about 70 million tons of capacity. By that estimate, steel capacity should be around 12 million tons, but it is only going to be 4.5 million tons. However, how much of the new cement capacity will be absorbed is a big question mark.
Demand coming from CPEC projects already underway will remain but the new Imran-led government has cut down a lot on development expenditure. Meanwhile, higher interest rates are not conducive for new investments. Real estate development, especially in the commercial sector may become lethargic. It is anticipated that automotive demand will also get affected going forward which in turn would affect steel demand.
On the other hand, this reduction in demand could be met with the Naya Pakistan Housing plan that envisages to construction five million new houses. By BR Research estimates, that should lead to an annual 20-22 million tons of additional cement (proxy: each house on average would require 400 bags of cement). Steel demand should increase by 4 million tons. Of course, these are very liberal estimates, given the plan, or part of it even materializes.
Even so, it seems since nearly half of the market is met with imports; the new steel expansions are not going to be left idle, unless imports become dramatically cheaper, or some drastic change in government policy relaxes import protections, which is highly improbable.
Comments
Comments are closed.