Struggling steel sector: Increase in prices of raw material creating crisis-like situation

ISLAMABAD: The drastically increasing prices of raw material are creating a crisis-like situation for the struggling steel sector of Pakistan.

During the last two years, when major players declared heavy losses, largely the steel sector absorbed the impact of increase of inputs without passing it on to the end consumer. However, it is becoming extremely difficult for the steel sector to absorb the latest impact of growing price of raw material internationally.

In this situation, the Pakistan Association of Large Steel Producers (PALSP) urged the government to remove all duties on the raw material to offset the impact of drastic increase in the cost of raw material, which is crossing $400 per ton. Contrary to the misleading statement on the part of a body of developers, the PALSP representatives in a statement said that the domestic steel bar prices have dropped over the past two years by 8pc in dollar terms, from $806 in 2018 to $746 today.

The reason that the steel prices have increased since 2018 in PKR terms is primarily due to a 45pc depreciation of the PKR against the USD, which resulted in increased prices of imported raw materials.

The last few years have been incredibly tough for the steel industry, facing massive increase in costs. The PKR has depreciated by 45pc against the USD since January 2018, having a massive impact on raw material and energy costs for the steel industry. Since 2018, electricity costs have risen by 56pc and the cost of gas has risen by 116pc. Between January 2018 and early 2020, interest rates had doubled from 6pc to 13pc, increasing financial costs of an industry that is highly leveraged by nature. Finally, the Covid-19 lockdowns exaggerated the losses made by the steel industry and led to a large increase in trade debts, resulting in higher borrowing and financial costs.

Despite the above challenges, the steel industry did not pass through a large portion of these cost increases but reduced profit margins to continue supplying steel bars at a competitive price to the construction sector. This is evident from profit margins of steel bar manufacturers that shrunk from approximately 8pc to 3pc between 2018-2020.

While facing severe challenges, industry leaders have also invested billions in bringing the latest European technology to reduce energy consumption and improve product quality. Many players have increased capacity to attain benefits of economies of scale and cater for the local demand. These are some examples of how the steel industry has been able to reduce steel prices in USD and is now in discussion with various government ministries to start exporting steel bars to regional countries as well.

Looking forward, it seems that steel prices are on the rise the world over. Due to the global supply chain disruptions owing to the second wave of Covid-19, raw material supply is becoming increasingly constrained and steel scrap prices have risen from USD305 in August 2020 to USD405 today. This translates to a cost increase of over PKR15,000. With industry margins as low as 3pc, companies have no choice but to pass on these increases to consumers. However, steel companies also believe this is a temporary phenomenon. As the Covid-19 disruptions ease, raw material prices will also normalise. With over 300 companies manufacturing steel bars, the steel bar market is highly competitive and reduction in costs are very rapidly translated into lower prices in the local market.

Even amidst an increasing pandemic, everything is not doomed. The industry is upbeat over the rising steel demand from the housing and infrastructure sector, which has been spurred by the government’s resolve to kickstart the economy. Steel bar manufacturers have spent billions to increase capacity in anticipation of catering to the increased demand from projects such as the PM’s Naya Pakistan Housing initiative.

The steel sector claimed that the industry is working on extremely low margins to provide cost effective steel bars to the construction sector. In order to make the construction industry more cost effective, the PM’s office should undertake an analysis to see what profit margins the builders and developers are working on and whether some further regulation in this area will help reduce housing prices.