The Federal Cabinet at its meeting on Wednesday (March 24) approved a reduction in the rate of import duty or re-rollable scrap from the existing 25 percent to 10 percent with immediate effect.
The decision is aimed at improving the supply of raw material at reduced cost to the steel re-rolling industry, thereby enabling it to appropriately reduce its prices of re-rolled steel products, specially M.S. bars that are widely used in residential housing and construction activity in the industrial and agriculture sectors.
It may be recalled here that a sharp, multiple increases in the prices of M.S. bars and other steel products in recent months had been causing a severe setback to construction activity, including housing construction.
As a result, it was feared that the overall development efforts were likely to come to a grinding halt in all sectors of the economy, construction being the largest and crucial part in any development project.
At the same time, the industries using steel as the main raw material such as the automobile and auto-related vendor units were hit hard by the sharp rise in steel prices. The situation therefore warranted quick remedial measures from the government.
The Cabinet decision, however, was announced after unduly long delay with the result that the damage from the high prices of steel products has already taken its toll in that those in the middle income group engaged in the construction of their residential houses, were compelled to purchase iron bars at substantially increased cost or to suspend construction.
Now, the re-rollable scrap imported at reduced custom duty will also take about four months to arrive in the market and thus the entire construction activity would remain in doldrums for some more time. Nevertheless the cabinet decision may be seen as better late than never.
The Cabinet also discussed proposals to waive the levy of three percent withholding tax on the import of ships for scrapping together with withdrawal of six percent withholding tax on import of other raw materials and intermediary products.
Additionally, it was also proposed to waive withholding tax on the import of raw materials by Pakistan Steel and other industrial manufacturers. However, these proposals were deferred for the time being.
As to what impact there would be of the reduction in duty on re-rollable scrap in other segments of steel industry besides steel melters, is yet to be seen. It was previously decided by the government to allow import of billets by Pakistan Steel with a view to adequately improving the supply of the item in the local market and thus ease the upward pressure in prices.
The latest decision does not indicate proportionate duty cut on the import of billets by Pakistan Steel. If a decision has not yet taken by the government, it needs to be expedited.
The steel prices have risen from Rs 19,000 per ton in January 2003 to Rs 33,000 in December 2003 and further to new highs at Rs 55,000 in March 2004. As a result, all the projects specially in the public sector assigned to private contractors, have run into jeopardy because the contractors could not be expected to sustain huge losses on steel products purchases.
The government needs to appreciate that the core issue is the shortage of raw material that has resulted in price increases above the international market level.
This situation demands a quick fix and under these circumstances the demand from the contractors and others associated with the construction industry that permission may be given to import all types of steel and billets and re-rollable scrap from any country, including India, should be accepted by the government.
Moreover, the government should not rule out the possibility of zero rate of import duty in case the prices of steel do not come down to a level where the projects put on hold by the contractors in the public sector can be revived with some minor adjustments.
Pakistan Steel alone cannot meet the demand from its regular buyers; therefore if its tariff protection is temporarily suspended to ease availability in the market it may help in quickly bridging the yawning gap between supply and demand. The protection can be restored thereafter.
The Cabinet also decided to increase the support price of phutti or seed cotton by Rs 75 per 40 kilograms to Rs 925 from the existing price of Rs 850. Thus the ginners will henceforth be bound to pay not less than Rs 925 per 40 kilograms to the growers.
The Cabinet has sent directives to the TCP to ensure that this decision is effectively implemented.
The involvement of TCP would imply that the incremental price of phutti would be paid by the TCP to the growers in case ginners refuse to buy phuttis at higher prices.