There has been a huge decline of $16.028 million, or 65.17 percent, in Pakistan's imports of scrap ships during July-August 2007, as compared to $46.021 million in the corresponding period of last year due to higher demand for steel in the international market, says a Recorder Report quoting industry sources.
India and Bangladesh have emerged as Pakistan's main competitors, as their importers are offering higher prices than do their Pakistani counterparts. Another reason is the "dollar factor," because one US dollar is equal to around 39 Indian rupees, while it accounts for around 60 rupees in Pakistan. According to industry sources, international ship sellers, therefore, get more attractive profits from the Indian and Bangladeshi markets.
However, analysts perceive a silver lining in the establishment of a cartel in Bangladesh, which has set a target for ship imports. This may prompt foreign ship sellers to turn to Pakistan once they face the quota system in Bangladesh. As a result of the current crisis, Gadani, which used to be the biggest ship-breaking yard in the region in the early 1980s, is today facing an uncertain future partly because of a substantial increase in international prices of scrap ships and partly due to the levy of higher import duty.
While Gadani has fallen on bad days, India and Bangladesh seem poised to fill the gap, as they have promptly lowered the duty on import of ship scrap. The slow-down in Pakistan's ship-breaking industry is meanwhile costing the economy much more than the losses in tax revenue as hundreds of steel re-rolling and re-melting mills owe their very existence to the ship-breaking industry. The decline in Pakistan's ship-breaking industry has been gradual: from one million tonnes annually in the early 1980s, to the drastic low of today is obviously a result of defective policy decisions.
Pakistan's domestic demand for steel billet alone stands at around 500,000 tonnes annually, of which some 200,000 tonnes are produced by Pakistan Steel while the remaining requirement is met through import of the commodity from different countries, including Russia, South Africa, Ukraine and Egypt.
It is true that global steel prices have witnessed an upward swing largely because of the "China factor," which has played a crucial role in the rise of steel prices as well as those of numerous other raw materials. The Asian industrial giant needs these raw materials to keep the wheels of its huge manufacturing sector running.
According to one estimate, about 70 percent of raw material supplies in the global market are lifted by China, which has stopped the export of its raw materials in view of its burgeoning domestic requirements. Although the "China factor" may have been instrumental in pushing up the rates of raw materials and finished products in the global market, this cannot be cited as the main cause of the rising trend in steel prices in Pakistan.
The rates of Pakistan Steel's hot-rolled and cold-rolled products have witnessed large erratic swings in the past as well, which market analysts believe were not entirely justified. One way to provide a cushion to the consumers would to effect tariff cuts.
For instance, a similar crisis in 2005 had prompted the government to cut import tariff on rollable scrap from $430 per tonne to $330 per tonne. Such measures can surely help the consumers absorb the impact of steel price hike. Analysts believe that Pakistan will not be able to sustain its long-term economic and industrial growth targets without adding three to four million tonnes to its steel manufacturing capacity.
Incidentally, global steel trade constitutes about 60 percent of the overall international trade and Pakistan figures nowhere in the global context. The situation can be salvaged by simultaneously increasing our production, keeping the prices low, to give our products a competitive edge in the local and international markets. Hundreds of steel re-rolling and re-melting mills in Pakistan either owe their very existence or depend heavily on the ship-breaking industry for the supply of ship plates.
The small re-rolling mills are the worst hit by the non-availability of ship scrap as they entirely depend on ship plates as compared to the bigger ones which can afford to use a comparatively more expensive iron billet of Pakistan Steel. The small re-melting mills are facing a similar situation unlike their bigger counterparts, which can afford to use iron ingot. This explains the closure of tens of steel re-rolling mills in Karachi over the years.
Non-availability of raw material - the ship plate - has already forced many re-rolling mills, particularly the big ones, to replace the comparatively less costly ship plate with the more expensive Pakistan Steel billet.
Excessive duty on the import of ships for scrap in addition to inconsistent policies has not only delivered a blow to the ship-breaking sector; it is also bound to increase the production cost which will take a heavy toll on the construction industry.
Ship breaking, a highly energy-consuming industry by its nature, today has to absorb the drastic increases in electricity and gas tariffs. Lastly, high import duty on scrap ships makes little sense because scrap is classified as a secondary raw material. The government should accept the legitimate demands of ship-breakers to save the multi-billion industry from collapse.
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