One of the most-oft quoted statistic in the context of steel consumption in Pakistan is that the country consumes significantly lower kilograms of steel per capita (about 48) compared to the global consumption of 228kg/capita. This number is slightly out-dated but can suffice for the sake of comparison. This means, according to the National Steel Advisory Council, an addition of 10kg/capita of steel consumption would require an extra supply of 2 million tons of steel. But while that statistic shows potential, here is a more nuanced statistic for context: Pakistani cement manufacturers sold 13 times more cement domestically last year (on a monthly average) than the quantity long steel manufacturers produced. Typically, this ratio should be around 4-5x (i.e., for every 1 ton of steel, 4-5 tons of cement is used). In the construction of dams where steel is used a lot more, the share is even lower: 1 ton of steel for every 1-2 tons of cement. Why are Pakistani steel manufacturers not producing enough?
Let’s first get definitions out of the way. Long steel products (billets, rebars) are used mainly in the construction and infrastructure industries while flat steel products such as sheets, coils are used in consumer durables, white goods such as appliances and automobiles. For the purpose of this piece, we are concerned with long-steel.
Obviously, the gap in steel production (what we should be manufacturing and what is actually being produced) is being met with imports—in fact, about half of the current demand is being met with imported steel. As is the case with many other industries, domestic steel manufacturers have strong pricing power in the local market. Having made a compelling case with the National Tariff Commission of Pakistan, steel makers have managed to secure anti-dumping duties on billets and rebars on Chinese and Iranian steel till Oct-22. This is on-top of custom duties and regulatory duties (which have no signs of retiring, though by definition regulatory duties are temporary in nature). Essentially, billets and rebars have 50-60 percent tariff protection from imported steel while not producing enough to cater to the entire domestic market. When domestic production cannot meet consumer needs, they no choice but to turn to imports and pay a higher rate for a product that is simply not being made locally.
On a side note, flat steel products (sheets, coils etc.) have lower protection—23 percent to 35 percent than long-steel products. This is in line with the respective importance of the two in a growing economy like Pakistan. Long steel products have a commanding share in total steel production—most growing economies have a higher demand for long steel versus flat as the former is used in construction and infrastructure building of the country while the latter is used in electronics, automobiles and other industries. In fact, a lot of the steel required in the automobile sector comes from very few factories in the world given the high-grade quality requirement.
But whether it is long-steel or flat-steel, both segments are protected from imports while depending heavily on imported inputs. Manufacturers of long steel import iron and steel scrap to produce billets and rebars here at home. Given that scrap constitutes about 60-65 percent of the total cost of steel production, that is a heavy import bill for the country. In FY19, 4.5 million tons of scrap was imported costing about $1.5 billion (the country spent about the same during FY20 with a lower number of imported tons). In fact, Pakistan is the fifth largest importer of scrap in the world. Let’s hold that though for a bit.
The problem is, each time scrap prices go up—which has been the case for the past many months—domestic prices also go up which ultimately increases the cost of construction for end-users. Though steel manufacturers—as free market economic agents—have every right to set their prices, given how protected the industry is, there is no winning for end-consumers. Which is what has happened—due to covid-rated supply shortages and port congestions, scrap prices since Dec-20 have grown by 25 percent (rebar prices are up 28%). Domestic prices for steel—as a result—has also been increased. Since rebar prices are almost always parallel to scrap prices—international prices for rebar have also been on a massive rally (see graph). Finished steel importers have to pay that with protectionary duties on top.
Here is the glass half-full. In a recent webinar held by AKD Securities, major long steel manufacturers believe the grass is really green on this side of the fence. They believe in the immense growth potential of the industry, even without accounting for the burst of demand that could come from Naya Pakistan Housing Program and the PM’s Construction amnesty. It’s true too. Just adding the construction demand coming from Diamer-Bhasa and other hydropower projects in the works, the country could see steel demand increase by 6 million tons in addition to the organic increase in steel demand as the government’s development spending expands and the economy grows. The current demand is around 5 million tons. But that also means that steel manufacturers will have to substantially increase capacity to meet it. With a focus on branding and marketing, graded steel players can easily surpass ungraded fragmented and poor-quality steel products in the market.
But the glass half-empty is this. Steel manufacturers are importing expensive scrap to make steel products that are not enough for domestic consumers who then have to rely on imported steel which too is expensive due to protectionary duties. What would be really fascinating is if domestic steel manufactures start exploring options to use indigenous iron ore (which is in abundance) to make steel products (which would be superior in quality as well) relying less on imported scrap (which is typically not the best route to make steel products), and produce competitive products that would also benefit consumers. They could be exploring a wide variety and grades of steel products that could be made locally, leveraging technology (current production tech leaves much to be desired) and local resources.
Mind you, there is nothing wrong with imported raw material but if domestic production does not provide any great value-addition in terms of quality or price point to the consumer, a radical person might question: why are we producing anything at all? The grass is greener on the other side after all.
Comments
Comments are closed.