‘Industry survival depends on government protection’

An interview with Towfiq H. Chinoy, founder International Steel Limited

Towfiq H. Chinoy is a renowned businessman with extensive executive experience spanning several decades. He has been associated with International Industries Limited (IIL), from where he retired after having served as its Managing Director (MD) for 37 years. Chinoy founded International Steel Limited (ISL) in 2007 where he served as MD until 2015. He is currently serving as an Executive Director on ISL’s board and as Advisor to both IIL and ISL.

Chinoy is also a non-executive Chairman of Jubilee General Insurance Company Ltd. and Packages Limited; a Director at National Foods Limited and a Trustee of the Mohatta Palace Gallery Trust and Habib University Foundation. He has earlier served as Chairman of the Board of Governors at Indus Valley School of Art & Architecture, Chairman of Pakistan Cables Limited and PICIC Commercial Bank Limited and as Director of National Refinery Limited, Linde Pakistan Limited, Jubilee Life Insurance Co. Limited and Pakistan Centre for Philanthropy. Chinoy is a former Vice-Chairman of the Pakistan Business Council and has also served on the advisory boards of the Ministry of Communications, Engineering Development Board and Port Qasim Authority-Government of Pakistan.

BR Research sat down with him for a chat at the ISL offices in Karachi about the current steel demand in Pakistan, its outlook over the next decade and the role local manufacturing will play in developing the steel industry. Here are edited transcripts.

BR Research: In a presentation at the latest Pakistan Economic Forum, you mentioned Pakistan’s per capita steel consumption has the potential to grow five times. What is the basis of this assumption?

Towfiq Chinoy: Basically, numbers for Pakistan’s steel consumption are at best a good guess. However, an analysis of import estimates indicate domestic steel consumption is 9 million tons per annum or about 45kg per capita in comparison to the world average of 228kg per capita. Major investments have taken place in the domestic steel manufacturing sector as steel production has doubled in the last five years. In steel terminology, long products refer to bars, structural sections, rails and girders. Flat products include steel sheets and plates. Currently 60 percent of Pakistan’s steel consumption is in long products whereas 40 percent is in flat products. We estimate that the consumption trend will continue and double to 18 million tons over the next five years and the ratio of long to flat products will start correcting itself to the world norm of 52 percent long and 48 percent flat.

BRR: What factors explain this substantial growth in steel production in recent years? Based on your numbers, production actually fell to 0.8 million tons in 2010 from the million tons in 2000. This was the Musharraf era where our economy was growing fast, but the corresponding growth in steel is not there. However, between 2010 and 2017, there has been substantial steel production but the economy has slowed down.

TC: Effectively there was a time lag between planning and implementation. The housing, infrastructure and automobiles sector (and within autos, we should include two wheelers) have grown at a phenomenal rate. The substantial growth in long products, rebar’s mostly was at a CAGR of 15 percent owing to the expansion in the infrastructure and building sectors.

BRR: In Pakistan, long steel and flat steel products have 60:40 ratio, but global steel production mix has 55 percent in flat and 45 percent in long products. What is the reason for this reverse ratios?

TC: Pakistan has an inverse ratio in comparison to the rest of the world because it is a developing country and we are still expanding our basic infrastructure, which accounts for the long product consumption. The white goods and automotive sector, which are large consumers of flat products is not nearly as developed in Pakistan. As these sectors expand in Pakistan, the ratio will correct itself.

BRR: Our understanding is that the cold rolled coils (CRC) and galvanized iron (GI) used by the automotive sector and the engineering sector are mostly imported. Do we not have the technology in Pakistan to cater to the quality that these industries require?

TC: The total consumption of cold rolled steel (CRC) in Pakistan is 800,000 tons per annum and of galvanized steel (GI) is 600,000 tons. ISL has a capacity to produce 500,000 tons of CRC and Aisha Steel has a capacity of 250,000 tons annually. Aisha Steels is currently expanding its production facilities by an annual 500,000 tons. The total local manufacturing capacities will be 1,000,000 tons in CRC and 750,000 tons in GI annually. This exceeds and can cater to the country’s present demand. But there will be imports wherever commercial importers seek to import inferior quality products and evade import duties.

As far as the motorcycle sector is concerned, I would say, pretty much all of their requirements of CRC is produced locally. As far as the four wheelers are concerned, apart from the outer skin, which represents about 30,000 tons per annum, all of their requirements can be met locally. The outer skin quality is produced only by a dozen steel mills in the world and this product sells at almost double the price that commercial quality CRC sells for. Even a country like India who is the second largest producer of steel in the world cannot produce all of their requirement of auto outer skin.

BRR: If the PSQCA was playing its role to ensure quality, we wouldn’t be importing inferior steel.

TC: Yes if properly staffed, PSQCA can be used as a non-tariff barrier. However, as PSQCA wants 0.5 percent of our turnover every year for certification, this is an unreasonable charge.

BRR: We recently met the HVACR society and they claimed that Pakistan does not manufacture any galvanized steel and they have to import most of it. But ISL does and Aisha steel is now getting into it. Why are we still importing?

TC: We exported 50,000 tons of galvanized last year—everywhere from America to the Middle East. Pakistani companies are importing secondary quality from China at lower international prices and evading import duty through surreptitious means.

BRR: Locally manufactured steel is more expensive than imported steel. If we remain perennially uncompetitive in producing steel, wouldn’t it be better to import steel and produce something we are competitive in.

TC: There is no question, if you produce steel locally, it will cost more than importing from China who currently accounts for 55 percent of the world’s steel output and have the economies of scale on their side.

Let me tell you this. There is 229 percent anti-dumping duty imposed by the US on Chinese steel and similar is the case for Europe. Almost every country in the world has a protective duty on Chinese steel. And it is not just steel. China has humongous over-capacity and has become virtually the workshop of the world. How do we compete with that? The only way to create jobs is to protect your own industry.

BRR: One could argue that since steel feeds into many downstream industries who are also job creators, higher steel costs affect their costs of production. Does that seem fair?

TC: Ford came out with a report recently that said that their profits had fallen by $2 billion because they had to buy higher price American steel. You have your answer. And it’s not just US specific, it is a global phenomenon. All that talk on globalization is over; everyone’s protecting their own.

BRR: Speaking of protection, can we talk about the regulatory duties we have on steel. It is our understanding that RDs are meant to be temporary, but in Pakistan, regulatory duties are used as long term policy measures. Why? Shouldn’t there be an import policy in place so as not to rely on these stop-gap solutions?

TC: I’ll talk about CRC and GI, which is what we produce. Between Aisha Steel and ISL, we cater to pretty much all the local demand. About eight years ago, the import duty on our raw material, which is HRC (HS: 7208) was zero, and on our finished goods was 10 percent. We had an FTA with China in 2006 that brought down the import duty on finished goods to 5 percent. For some reason, the FBR then put a 5 percent duty on the raw material that we used. Our protection became zero for Chinese imports only. For imports from the rest of the world, duty on raw material was pegged at 5 percent and finished goods at 10 percent. So except for with China we had a 5 percent protection. We talked to the government and they decided to put a regulatory duty of 5 percent since they said they could not change the tariffs or the FTA.

That’s for our case, but there are many other products on which RDs are imposed to correct imbalances.

BRR: Currently, we import HRC to make CRC and Galvanized steel. What technology is required and why aren’t local players manufacturing HRC?

TC: There are two ways to manufacture steel. One is through blast furnace steel making where the basic raw materials are iron ore and coal or the second one is the electric arc furnace method where steel scrap, pig iron or direct reduced iron (DRI) are melted in an electric arc furnace to produce the molten metal. In both cases the molten metal is cast into slabs subsequently and rolled whilst red hot into hot rolled coils (HRC).

Pakistan Steel until they shut down a few years ago used to manufacture HRC through the blast furnace method. Its blast furnace could only produce one million tons annually, which is considered an uneconomical size today. The blast furnace technology that Pakistan steel mills uses can only be economical with an output of over 3 million tons per annum. Whilst their infrastructure is excellent and is suited to support this level of production substantial subsidiary equipment would require replacement.

Even if Pakistan Steel Mills was refurbished and expanded to 3 million tons annually, an additional 6 million tons per annum of expanded capacity would have to come from within Pakistan’s private sector to keep imports at bay. Local manufacturing can come provided the government protects local industry.

BRR: What is your outlook for steel prices globally?

TC: I believe the prices internationally will remain stable to downwards. HRC today is about $545 and I believe it will stay on this level or drop by $20. The steel mills of the world are making money though. Don’t forget price of iron ore has gone to $90, which is the highest price in two years. That should bring up all the steel prices. China seem to have understood that bringing prices down to below cash costs as they did in 2014 is not the answer and have therefore remained firm in raising prices and keeping them high.

BRR: Going on a tangent, majority of the housing in Pakistan is made from actual brick and mortar. Do you think there is an appetite for pre-fabricated buildings?

TC: Yes, in fact, our parent company IIL has started these projects across the city. We built an entire 2-storey steel structure of the building for the Institute of Architects of Pakistan in just four weeks. The cost is 10 percent higher, but the construction time is significantly less. There are also other light gauge steel structure options.

BRR: Have you pitched to the PM’s Naya Pakistan Housing Plan and can we provide low-cost housing using prefab?

TC: A low-cost house has been developed by our parent company IIL and constructed with their new HSS pipe technology. The combination of steel and concrete allows for the quick construction of a single storey house of 308 sq.ft. in seven days for Rs300,000.

BRR: Do you see new players entering the steel making space? We were hearing about Chinese Bao coming to Gwadar and they have extensive plans.

TC: There is one company in Lahore that is supposed to have bought a second-hand Chinese rolling mill under the name of Hadeed Pakistan. Also, Siddiqsons is thinking about putting up a CRC mill. If new players come in, the market will become more competitive and the industry export oriented. Industry survival will continue to depend on government protection.