'Revenue is down to a quarter this year due to higher taxes' an interview with Rizwan Dewan Farooqui, Chairman Pakistan Ship-breaking Association (PSBA)

Rizwan Dewan Farooqui has been associated with the ship-breaking industry for many years and has served several terms as chairman of its association. BR Research recently sat down with Farooqui to learn about the impact on the sector of the last budget as well as about the changes that have taken place since the November 2016 fire incident at Gadani. The fire took several lives and the ship-breaking yards were closed down for several months after.
BR Research: Let's start with the history of the ship breaking sector.
Rizwan Dewan Farooqui: Ship-breaking in Pakistan started in 1973 at Gadani. At that time and now, Gadani is an undeveloped area lacking basic amenities located 40 km away from Karachi.
Previously, Pakistan and Taiwan were the sole ship breakers in the region. However, Indians and Bangladeshis visited Pakistan and learnt the business from us. They received government support and over time became market leaders. India and Bangladesh import about 3 million tons of ships each compared to roughly 1.5 million tons of imports by Pakistan.
There are roughly 135 yards which are operated by 34 or 35 ship breakers as most owners have more than one yard.
BRR: What is the contribution of the ship breaking sector to the steel industry as a whole?
RDF: According to rough estimates, Pakistan consumes about 6.5 million tons of steel each year. Last year, we imported ships comprising of 1.6 million tons. This adds about 18 to 20 percent per annum contribution from ship recycling industry to national steel consumption. Historically, ship breaking sector's contribution has been 10 to 15 percent towards the steel needs of the country.
BRR: How many workers does Gadani employ?
RDF: It is a labour-intensive sector with over 20,000 employees directly employed, with many thousands indirectly employed, e.g. truckers, workshops, etc. Since the budget last year, however, the very high taxation resulted in the number of employees declining to 2,000.
BRR: What is the tax incidence on ship breakers?
RDF: There are multiple slabs of taxation: a) there is Rs9,500 sales tax per ton b) 3 percent custom duty c) 2 percent additional custom duty and d) 4.5 percent income tax that has to be paid at the import stage.
We also pay tonnage fees to the Baluchistan Development Authority.
No other steel-related sector faces this level of taxation. Our competitors in India and Bangladesh have far lower taxes imposed on them.
BRR: What kind of competition do you face from imports?
RDF: The products we make are also imported such as roll-able scrap and wire rod. Previously wire rod had 30 percent regulatory duty (RD) imposed on it; it was reduced to 20 percent in the last budget so imports have become relatively cheaper.
BRR: Between the higher taxes and lower RD imposed by the last budget, what has been the loss to the sector?
RDF: In the 1HFY18, we imported 57 ships, but in the same time frame in the current financial year, we have imported just 17 ships.
In the first half of FY18, we had given Rs8 billion in taxes. In the first half of FY19, this figure has come down to Rs2 billion.
BRR: What are the factors that impact demand/supply and prices of ships?
RDF: Price of ships depends purely on market forces, international demand and supply. When international freight levels go down, more ships are scrapped. Operating costs of ships become too high for them to continue being maintained which is why they are recycled.
BRR: Are there any major changes expected in the near future that could impact international supply and demand conditions?
RDF: From 2020, for environmental purposes, the fuel used for ships has to have low sulphur content. Older ships with older version of engines cannot comply with changing fuel requirements so they have to be scrapped.
This will be a boon for a business if we are positioned to make the most of the opportunity. We need lower taxes, better amenities, and a stable exchange rate to benefit from lower sulphur regulations.
BRR: What has the impact of devaluation been on your business given that all your ships, therefore all your raw materials, is bought from abroad?
RDF: Yes, devaluation has impacted the business but the volatility has hurt it more. There is a month to a month and a half lag between the point we buy a ship and when it lands on the beach. The exchange rate applied is on the rate when it is beached so we don't know how much we will be paying to buy a ship in PKR if we buy one today. The uncertainty is highly discouraging to our business.
BRR: Which sectors use the steel obtained from ship building?
RDF: Every time ship breaking sector dries up, steel prices rise because this sector is a source of cheap quality steel. It is not used in high rise but in buildings made for the common man. The plan to build 500,000 new homes by the government will require steel from the ship breaking sector to bring the costs down.
BRR: Are there any expansion plans for Gadani?
RDF: The BDA has gotten a financial package approved by the federal government to develop new yards at Gadani; however, those plans may not be viable. Existing yards are running under-capacity as it is. We can handle 3 million tons easily but we did only 1.6 million tons last year. This year, we may not be able to touch 600,000 tons even, so there is little point in adding more yards.
BRR: As per some media reports circulating there may be another ship breaking yard coming up, at Gwadar. Any thoughts on that.
RDF: It is going to be a ship making yard, not a ship breaking yard. Till 1985, Pakistan's ship yard used to make ships as big as 12,000 tons at West Wharf in Karachi before the industry withered away.
BRR: Media reports paint a bleak picture of Gadani yards' working conditions. Can you tell us about the incidents of fire?
RDF: India and Bangladesh suffer from similar problems because this work consists of fire and water. Accidents happen because of carelessness of workers. It is similar to you being hit by a car if you are walking down the road. Think of all the people who die in mines, yet all the mines are not closed down. One mishap at any one yard, and entire Gadani is closed down.
Besides, when the fire happened in 2016, we paid Rs1.5 million as compensation for every person who died.
BRR: What is the loss to Gadani when the yards are closed down?
RDF: We lose Rs400,000-500,000 per yard per day and that is interest alone. This does not include fixed costs and workers sitting idle.
BRR: Have there been changes that have taken place since the 2016 fire?
RDF: Pakistan was the leader in oil tanker demolition before the fire. After the fire, there was a ban and the requirement of ISO certification was imposed before oil tanker import could be resumed. Generally, oil tankers are bigger and preferred by Pakistan, whereas India and Bangladesh prefer smaller ships.
Several of the yards have gotten ISO-certified which have a lot of fire, health, and safety checks. 25 yards are either certified or in the process of being certified. Every plot has an ambulance now, there is a doctor and first aid dispensary, and fire prevention set up.
We have also provided personal protection equipment (PPE) which is not used by our employees. It is not entirely their fault that they prefer not to use it. It is so hot there that heavy protective shoes and helmets become unbearably uncomfortable. We have provided training and even threatened to terminate their employment if PPE is not used but they still persist in avoiding wearing it.
BRR: The Hong Kong International Convention (HKC) is for the safe and environmentally-sound recycling of ships. Have they been adopted by Gadani yard owners?
RDF: Firstly, Pakistan has not ratified the convention. Despite that, 11 of our yards have already signed up with foreign consultants to work on how these conventions can be implemented in the yards. This is non-obligatory but ship breakers want to remain at par with global standards.
Pakistan has ratified the Basel convention regarding the transboundary movement of hazardous material and that applies to all industries in the country, including ship breaking.
BRR: We have talked about worker safety; what about environmental safety?
RDF: Some things are lacking from the government side. We don't have a landfill site to dispose off solid waste. For example, we remove asbestos from ships but have nowhere safe to store it. If we had a landfill site, it could be safely buried. Right now, solid waste has to be removed to Karachi because there are no incineration facilities at Gadani.
Without solid waste disposal system near Gadani, we cannot be compliant to HKC because it is a two-stage process. One is on the yard, and the other is beyond the yard. We can do whatever is required to do on the yard, but beyond the yard only the government can do it.
BRR: How do you think CPEC will affect your business?
RDF: It depends on the agreements made for raw materials. Logically, yes, CPEC should benefit us because of increase in steel consumption. As yet, Gwadar has used imported raw material and labour, so it is dubious that it will benefit a local industry like ours.