'CPEC can industrialise the nation or it can simply be a transaction; we must decide,' Hadi Akberali-Director Amreli Steels

Hadi Akberali has been working as Director of Amreli Steels since 2008. Amreli Steels is the biggest manufacturer of steel bars in Pakistan operating since the 1970s and got listed on the Pakistan Stock Exchange a year ago. Hadi has an industrial engineering degree from North-western University and completed his MBA from INSEAD in 2013. He sat down with BR Research for a chat on Amreli's current operations, expansion plans, and the future of the steel industry in Pakistan, specifically touching on subjects such as regulation and policy.

<B>BR Research: Tell us about Amreli's current operations and demand dynamics.</B>

<B>Hadi Akberali:</B> Amreli has been in the steel business since the 1970s. Steel itself is a very generic term, since there are many different types of steel products. We manufacture steel bars, which is a category with a product range including different grades and diameters, and is sold to the construction industry.

Generally in developing countries, 70 percent of the steel demand comes from construction-related activities while the rest is value-added. Pakistan's steel demand is also driven by the construction sector and that is one of the reasons why we decided to focus on the steel-bar category, because the country is on the lower end of the development curve where the focus is on infrastructure and housing.

Amreli started off with a small production capacity of only 30,000 tons per year that has grown to 180,000 tons per year of finished steel bars. Additionally, Amreli also manufactures billets - the raw material used to manufacture steel bars. Our market share is eight percent, which shows that steel is a very fragmented industry with as many as 500 players. We are by far the largest manufacturer and seller of steel bars.

<B>BRR: You are also expanding capacity. Tell us about that.</B>

<B>HA:</B> Yes, Amreli is undergoing a huge expansion that will increase our capacity of steel bars to 500,000 tons per year and steel billets to over 350,000 tons per year. The expansion, however, is not just about increasing capacity, as new technology is being introduced for the first time in Pakistan that will help Amreli maintain its position of premium quality and cost leadership in the industry. We hope to be able to sell the best quality steel bars at even more reasonable prices, which should help us gain market share very quickly. The new facilities are being built in Dhabeji and work is in full swing at site.

The impetus for expanding capacity was the demand from the housing, infrastructure, and corporate sectors. There is a big shortage of housing in Pakistan of about 10 million units, which translates to 15 million tons of steel in the next five years. We have to take a long-term view on the demand since expansion projects take a while to complete, so we have started early to take the first-movers advantage. Some of the key factors driving future demand are the high rate of urbanisation, a very young population that is growing fast, and the big infrastructure gap that needs to be bridged.

<B>BRR: What is the current steel demand and how much of that comes from local steel manufacturers?</B>

<B>HA:</B> Counting all the products, I would say demand is about 5.5 million tons of finished products,, of which about 1-1.5 million tons is imported and the balance is catered to by local manufacturers.

<B>BRR: Steel demand will be driven by infrastructure within which CPEC is a huge part. What challenges do you see in Pakistan going forward?</B>

<B>HA:</B> Infrastructure development is one of the reasons for our expansion and CPEC is really the main impetus. My view is that CPEC has to take off given that politically all parties - and more importantly, the army - is fully backing the initiative. Many power projects that the current government has promised to the nation are also a part of CPEC. If you look at China's One-Belt-One-Road initiative; Pakistan, Iran, and Kazakhstan are all part of it, but China has 73 projects planned with Pakistan, while the number is lower for Iran (17) and Kazakistan (52). So you can see the emphasis they are giving to this route.

We have to decide whether CPEC will be simply a transaction where Chinese come in with financing, build the infrastructure and leave, or are we going to involve the domestic private sector that can provide the goods and services needed. The government should carry out a supply-demand gap analysis for goods and services required under CPEC and invite the private sector to fill this gap while providing the right kind of incentives and policy framework for such investment to materialise. Vocational training will be essential to ensure that our population has the skill set to meet the job demand. CPEC can be a development milestone where we can further industrialise the nation and move toward building a larger middle class, or it can be a one-time and one-sided transaction where our private sector and population don't see sustainable benefits.

<B>BRR: China is the biggest steel manufacturer in the world contributing almost 50 percent of global production and recently it has started dumping across the world, even in Pakistan. How has local industry here been affected by it? Pakistan put an RD of 30 percent on imported steel. Do you think our regulatory environment is efficient enough to tackle dumping?</B>

<B>HA:</B> There have been many anti-dumping and countervailing duties levied against Chinese steel products across the world and as such dumping has also been witnessed in Pakistan. For example, the US has recently levied countervailing duties of up to 236 percent on imported Chinese steel products. Unfortunately, the National Tarriff Commission (NTC) in Pakistan has not been very effective over the past few years due to an incomplete commission or litigation - and such a delay in justice has probably cost the local industry billions of rupees. Recently, the NTC has been reconstituted but it is yet to be seen whether it will be able to work effectively to provide relief for the local industry.

Currently, some anti-dumping applications have been filed with the NTC but not much movement has been seen of late on this front. Moreover, many cases get caught up in litigation for years while local industry suffers. The levy of RD has been very successful in this case as it has given some breathing space to the local industry in the absence of a functioning NTC and has also generated billions in revenue for the government.

<B>BRR: There is an argument that there shouldn't be an RD because Pakistan requires cheap steel right now. On the other hand, there is the local industry that you have to protect to allow it to grow sizably so it can produce cheaper products. How does one reconcile?</B>

<B>HA:</B> Well, we are not asking for protection. We are saying that you give us a fair playing field. Dumping is a hostile act by foreign manufacturers that is considered a trade malpractice and remedial mechanisms must be effective to ensure growth of the local industry and economy. Anti-dumping duties are not to protect the industry but to ensure fair competition and if the government can't ensure fair competition then there really isn't any incentive for investing in the country. The local industry has applauded the government for levying RD to ensure fair competition.

The argument of cheap steel is a short-term view. Imported steel becomes cheaper only during times of global recession where there is oversupply in the international market. This situation won't remain for more than a few years - after which imported steel becomes expensive and scarce. Local businesses are the ones that ensure supply and price stability in the long run and this should be taken into consideration during policy making.

Secondly, the local industry is a stable source of revenue for the government and provides employment year in, year out. We have to see it in terms of our development goals as a country. The only way to build a middle class and provide jobs through industrialisation, not by substituting industrial output by trading. The difference between Amreli as a trading company and Amreli as a manufacturing concern is over 1,000 direct jobs and billions of rupees worth of direct investment in the economy and the multiplier effect that comes with it.

The government at the end of the day is a key player. They set the policy, they create the environment, and a lot depends on them.

<B>BRR: What is your sales distribution pie locally and internationally, and who are your primary competitors?</B>

<B>HA:</B> Of the 500,000 tons we will be producing, 60-65 percent will be sold in the south and 30-35 percent in the north region, since our margins are better in south. We have to compete in the north in terms of matching competitor prices.

We don't export. Our margins are better when we do business locally. Although we supply throughout the country, we want to increase our distribution channel and presence in Pakistan in order to cater to the retail consumer. Right now, 65 percent goes into corporate sales such as infrastructure/ government projects and big housing societies; 30-35 percent is retail sales.
Our direct competitors don't manufacture more than 100,000 tons of steel bars per year while we manufacture about 180,000 tons per year. There is a currently a significant gap between us and our competition and this will widen once our expansion comes through. We also have a locational advantage being near the port, which enables us to compete all over the country.

<B>BRR: You also plan to spend on marketing. How does that translate into sales and what is your unique selling point (USP) given there are 400 players in the industry?</B>

<B>HA:</B> We are transforming the way steel is marketed, which is important not only from a sales point of view but also in order to build our brand while gearing up for much bigger presence in the country. Our USP would be our quality; the quality of our product is unchallenged and customers generally pay a premium for our product. We also differentiate ourselves in terms of service. Since we have a large manufacturing capacity, we can produce different sizes and grades on customer demand and have ready stock available of all sizes and grades, which is not as easy for factories with smaller manufacturing capacity. We are also increasing our retail footprint and opening regional offices across the country.

Quality is a major concern in steel. The regulatory mechanism on the quality and safety front is non-functioning, which is very unfortunate for the end customer. As per existing regulations, certain government institutions are supposed to ensure that steel manufacturers make steel bars that meet certain standards. However, due to ineffective regulation, majority of the steel bars found in the market are not safe to use in any structure. Due to lack of customer awareness and the fact that these sub-standard bars are cheaper in price, they take a substantial part of the steel bar market. We hope to build more awareness in consumers going forward so that they do not fall for purchasing steel bars that do not even meet basic standards.

<B>BRR: Where do you see your top line in the next five years?</B>

<B>HA:</B> Top line depends on prices, cost-push, and demand-pull. After expansion, if we sell around 500,000 tons of steel, at say Rs70,000 per ton, we can take our revenues up to Rs35 billion.

<B>BRR: How do you see the movement of steel prices play out in the next few years and your margins?</B>

<B>HA: </B> I don't think there will be a significant shift in steel or raw material prices as commodities will generally stay range-bound in the short term. Our margins have been good given the demand but we are still playing with limited capacity and so our approach has been margin-focused. Coming next year, we will change that approach, going for a market share-based approach.

<B>BRR: Is there a cyclical market effect that sometimes in the year margins are better than others?</B>

<B>HA:</B> Usually, toward the end of the year is better but it's not set in stone. There are too many factors. The weather is different up north compared to south. In winters, work gets slower. Then, during the monsoon season in the south or during Ramadan, there is a slowdown.

B<B>RR: What about the past three months? Has the new real estate tax curbed construction activities?</B>

<B>HA:</B> Not with the projects that are currently under construction, as they are already underway. However, the issue seems to have somewhat resolved by now and real estate activity will start to pick up once again. Generally speaking, real estate activity is a lag indicator of demand for construction materials in the future. I do think the real estate tax will be good for society as it will help whiten money and reduce the speculative part of investment in the real estate sector, which should make real estate more affordable for the average citizen. Nobody wants to be forced out of the city where they have grown up because real estate is too expensive - this is a problem in major cities of the world.

<B>BRR: How many companies in the steel industry would you say are informal?</B>

<B>HA:</B> Depends on your definition of informal but majority of the sector is represented by small companies that are run as sole proprietorships or partnerships. Going forward, I hope to see more consolidation in the industry that will enlarge the formal and documented sector as companies gain scale and visibility.