Despite its potential, steel production and development in Pakistan has stalled many times, in part due to a lack of consistent growth and in part due to questionable government policies that hindered new investments. That is not to say the industry has not developed. In the post-Steel Mills shutdown scenario, rising demand roused many private-sector steel producers persuading them to increase capacity, install new units, and serve the market. CPEC-related infrastructure projects took off much of the demand in construction, and as a result, demand for steel reinforcement bars (or long steel). At the same time, the growing demand for consumer durables and white goods, automobiles, and parts began to feed the domestic flat steel industry that manufactured Cold-Rolled Coils (CRC) and galvanized sheets. With local players expanding, and the government providing protection to domestic players through anti-dumping duties and regulatory duties on imported finished goods, import value declined.

The industry faces several hurdles still, more so in recent years. Reduced demand in the construction and allied industries is well-documented. Simultaneously, high inflation and higher taxes have caused consumer spending to shrink which has affected demand for all kinds of products that use flat steel. BR Research sat down with Samir Chinoy, Chief Operating Officer of ISL, a major player in the flat steel industry, to talk about demand, challenges to new investments, and how ISL manages to grow in the current economic climate.

Samir Chinoy is a distinguished business leader with a career spanning over two decades between the United States of America and Asia. As COO, Chinoy plays a pivotal role at ISL in leading the Supply Chain, Sales & Marketing, and Information Technology functions of the company. He is a graduate of Babson College, with a Bachelor of Science in Entrepreneurship and Finance. Samir has previously worked at Pakistan Cables as well as Deloitte & Touche and Wells Fargo in America.

Here are edited transcripts:

BR Research: Walk us through how ISL was conceived and what key demand (or even policy) drivers motivated the initial investments.

Samir Chinoy: I was fortunate to join ISL in its early days before the production unit came online roughly around 2008. It was exciting for me as it was the first time a steel product like this would be produced in Pakistan. At the time, there was an ongoing drive happening in the policy circles to promote import substitution. ISL wanted to become a part of this.

ISL came about because its parent company had a few challenges. International Industries (IIL) is the largest pipe and tube manufacturer in the country. One of the main cash products of the company was hot-dipped galvanized pipe. Overnight, they started getting cannibalized by plastics. IIL as any dynamic corporate pivoted and went into plastic tubing to counter that. They went into PPRC tubing (which goes into the plumbing of houses today), other polymer pipes, and stainless steel pipes. However, the revenue loss was colossal from losing market share to a substitute product, and so the management decided it was time to focus on the cold-rolling business separately as they had experience in cold rolling. This is how ISL was conceived. The infrastructure cost was so large that with just an incremental investment, we were able to go into a second product line besides Cold-Rolled Coil (CRC) which was galvanized steel (GI)

Essentially, ISL was borne out of necessity to support IIL because its main product was replaced by alternative materials. In 2007, IIL bought land in Landhi and put up a power plant which started supplying power to KE and opened LCs for machinery to start construction of the factory. In 2010, ISL came into production. Galvanized steel was never produced in the country and while CRC had been produced, it was narrow strip cold-rolled used in pipe manufacturing and not at the scale or variety that could be used in white goods and automobiles.

BRR: Flat steel manufacturing undoubtedly has an important industrial footprint in a country like Pakistan which has a booming consumer market. From a policy perspective, how has the government supported and/or facilitated investment in flat steel manufacturing in your experience.

SC: When we began this project, we had an understanding with the government of Pakistan that there would be a 10 percent differential between the import of raw material and the finished product. In this case, the raw material is Hot-Rolled Coils (HRC) and the finished product is GI and CRC. The day we came into production, we realized the differential was 5 percent, not 10 percent. This was because Pakistan had signed a Free Trade Agreement (FTA) with China where the Chinese galvanized cold rolled product was allowed to be imported at half the tariff (or 50% concession). At the time, the tariff was 10 percent while the raw material could be imported at 0%, but when we came into production, the traders and consumers could import at 5 percent from China. This was very challenging for our business at the outset.

BRR: How did this affect your return on investment and what business decisions led you to keep going?

SC: The thesis of this project was import substitution—we import a low-value product and produce a higher-value product. This benefits the country as the higher-value product imports reduce compared to the low-value product (which is the raw material), the differential of the two is naturally the saving of foreign exchange. It was a shock to the system that we put up a project and invested upwards of a100 million dollars, bringing FDI into the country in the form of equity participation from some of the largest corporations in the world, and left with no protection. A 5 percent differential — after accounting for a myriad of factors such as under-invoicing — meant that both raw material and finished product imports were essentially at the same level.

At this point, we couldn’t roll back—we had already made the investments, and engaged with foreign partners. This brought forth awareness that though subsequent Pakistani governments want to encourage FDI, the lack of consistency in policy has not given the needed confidence to either local or international investors.

As we were contemplating the ramifications of this, the government raised the duty on our raw material to 5 percent, which meant, we would have no differential at all. This was later rectified by imposing a regulatory duty on the finished product that brought the tariffs back to the status quo- a 5% differential.

Now we have two routes to make money: either raise prices or reduce costs. We couldn’t raise prices because we were competing with China so we invested in doubling our capacity at that stage—originally, it was 250,000 tons which was raised to 500,000 tons. The incremental cost of doubling capacity was only $20 million as the upfront infrastructure investments had already been made. The incremental sale from this investment helped us absorb our fixed cost over a larger volume thus allowing us to be more competitive.

It was a defensive move but ended up being the right one. We started to progressively compete with imports and get a bigger market share. We also decided to approach the National Tariff Commission (NTC) to investigate dumping from various countries in order to allow a level playing field.

From there, we kept expanding. We doubled rolling capacity to a million tons by adding a second rolling mill, added a second galvanizing line, and increased our product offering by introducing color-coated steel. I feel we had a mindset of a start-up. Though this was a big industrial unit, we felt that to make our place, we had to be nimble and do things differently.

BRR: Can you elaborate more on your business model, and what made your product unique to the market.

SC: From the beginning, we have tried to run the company on an FMCG model. We built a very robust dealer network throughout the country. We had only three people in sales— I was one of them. I was a product manager looking after the galvanized side of the business. I remember going with samples all over the country, in small towns, marketing our product. Local traders were surprised that the product was being manufactured in Pakistan.

The model was simple. We decided that businesses in Pakistan spend all their energies chasing collections, and we didn’t want to do that. All our domestic sales to this day are on advance payments. It’s a matter of nerves. Steelmaking is a very capital-intensive process and surviving on credit is close to impossible. This is especially true in a country where interest rates are very high and volatile. We also decided that we won’t dispatch the product, but sell it ex-factory. We pay for our raw materials in cash as well.

This all fed into our value proposition. We wanted to make business easy for customers. For instance, we made sure that our product was available at every consumption point with a very transparent pricing mechanism. The buyer/dealer/distributor is able to invest in the product that he requires as and when needed. As I said, this is a capital-intensive business and we wanted to be a catalyst for the downstream industry and reduce our customer’s cost of holding inventory.

Specially during Covid, we changed a lot in terms of efficiency. First of all, we strived to become lean and work on lower inventory levels. We had to work with our people for a mind shift on the levels of inventories actually required to run this business. At the same time, we invested in technologies to allow our people to perform efficiently at these lower inventory levels. The cost of working at high inventory levels in a volatile environment with high interest rates was not conducive to long-term sustainability, especially as 85 percent of our cost continues to come from raw materials.

Efficient inventory management was key. We also reduced our long-term borrowing and slashed our working capital requirements which was possible by maintaining lower inventory levels.

BRR: Talk more about how ISL became, as you put it, a catalyst for the downstream industry?

SC: One of our products, galvanized steel, is predominantly used in consumer products which is mainly used in the rural parts of the country. Interestingly, demand is correlated with the crop cycle. Items that consume this product include Baksay, Paitti, Balti, Dhabray, Sundook, Choukhat, etc.

What we did here was change the mode in which it was bought before. Importers who had the financial muscle would bring in products into the country. Once the product was in the country, distributors would come to Karachi and would be offered this material as a take-it-or-leave-it. With ISL coming into the market, customers were now able to buy directly the product that they required from the mill and in the quantity they wanted.

We changed the complexion of the market. If our customer needs one coil, they can purchase one coil. We saw a budding entrepreneurial ecosystem develop where people who could have once only dreamt of going into business were now able to, as raw material was available locally with a transparent pricing mechanism. As a result, we saw a mushrooming of SME businesses in the steel fabrication space.

On the other side is our product, CRC, which is an industrial product used in automobiles, engineering, white goods products, etc. For example, in the two-wheeler and three-wheeler segments, almost all parts that are assembled to make a rikshaw or motorcycle use cold-rolled steel. From the fender, to the fuel tank, to the muffler to the chain cover, to the seat pan, to the handlebars. There again we were able to supply raw material that was predominantly imported in the past. We continue to do this as and when needed, and in the quantity required by the customer, so they can focus on their core business.

The value that our foreign partners bring in the supply chain and working with us to develop new products is immense. Today, from a humble start in commodity steel, we are producing high-grade steel that includes high-tensile steel, structural steel, low-carbon steel, weather-resistant steel, and tin plate steel, to name a few.

This is a testament to collaboration with world-renowned partners, building the localization capacity of specialized steels due to the transfer of technology, allowing Pakistan to become more self-reliant and to save precious foreign exchange.

BRR: ISL has also started exporting flat steel products. How difficult was it to penetrate exporting markets?

SC: Ten years ago, if you had told someone Pakistan would be a steel exporter to some of the most sophisticated markets in the world, people would have shrugged it off. Today, we are proud that ISL is competing with the best in the world and has developed a strong presence in North America, Europe, Australia, and the Middle East and is exporting close to 100,000 metric tons every year.

Our parent company has been a successful exporter of engineering products for many years. We leveraged their reach to start our export journey. In addition, we partnered with large trading houses such as Sumitomo in promoting our product with their on-ground sales teams in the United States. It was very tough in the beginning- brand Pakistan was not strong. We had to give a value proposition far superior to our competitors. We had to embed ourselves with the on-ground sales teams of Sumitomo and other trading partners and visit end consumers, giving them the confidence that a company in Pakistan would stand behind its product.

End customers and our trading partners became comfortable as trial orders were booked and repeat orders started coming. And the rest is history. Our value proposition ensured that our service offering was better than our competitors, i.e., order to shipment. Meanwhile, our start-up mentality enabled us to provide a service offering better than our competitors in the region. Today, I am pleased to share that there are segments in various markets where we have become a market leader overtaking India, China, and Vietnam.