The strength of steel

LAHORE: Steel scrap trade denies the exchequer a staggering Rs72 billion annually being in complete control of the informal sector. Globally steel products are made from iron ore, but after the closure of Pakistan Steel Mills, the industry uses steel scrap instead.

Even when PSM was operative its effective production capacity was one million tonne per annum while steel consumption in Pakistan ranges from 6.5-7 million tonnes. Half of this scrape (3-3.5 million tonnes) is available locally and an equivalent amount is imported.

Imported scrape is subjected to 17 percent sales tax and 1.5 percent advance income tax. Steel millers do not get sales tax adjustment on local scrape purchases and are forced to pay the government levies instead of the informal sector.

Current rate of local steel scrap is Rs130,000 per tonne. The informal suppliers save Rs22,100 per tonne on avoided sales tax and Rs2,000 advance income tax. Thus, on one tonne, the informal sector saves Rs22.10 million sales tax and Rs2 million advance income tax.

On sales of 3 million tonnes scrapped, the informal sector saves Rs66 billion sales tax and Rs6 billion advance income tax. The state should devise a plan to bring these informal and rich suppliers into the tax net.

Almost 70 percent of the steel scrap is used to produce steel bars of different dimensions for the construction industry. A leading still miller Mian Rehan Aziz Chan said the steel industry is operating under immense pressure due to various factors.

It includes the broken supply chain of the steel sector due to dominance of the local informal sector in its value chain. Secondly, it is at a disadvantage due to the steel mills established in FATA and PATA that are exempt from all government levies and their products are flooded in Islamabad and Lahore market. The third factor is the entrance of sugar mills in steel rebar production.

Steel re-rolling mills are charged sales tax and income tax based on their power consumption. All the mills consume grid power.

The Federal Board of Revenue (FBR) has calculated that one million tonne of billet (secondary raw material for steel rebar) consumes 700 units of electricity and for rebar the consumption is 811 units. The millers have no objection to this arrangement.

However, the industry feels the pinch when the FATA and PATA mills supply their non-tax paid products in the markets where other mills are taxed.

This gives them an advantage of 18.5 percent over the taxpaying mills. The concession granted to FATA and PATA mills may be legal, but it denies a level playing field to the mills that pay all government levies.

The case of sugar mills needs the attention of the revenue authority. All the sugar mills produce their own power from the wastage of sugarcane after extraction of sugar and ethanol.

They are not connected to the national power grid. Some 10-15 sugar mills have replaced their low-pressure inefficient boilers with high pressure boilers that highly enhanced their power generation capacities.

These mills have commissioned steel-making plants in line with the excess power available with them. Since these plants are not connected to the national power grid, the FBR has no way to judge their steel production.

It must rely on the production that the sugar mills declare. The steel mills are apprehensive as it is customary in Pakistan that businesses under report production if it is left to them and there is no check.

The FBR should resolve this issue. One possible solution is to tax them on plant capacity (accounting for average capacity use as November 15 to March 15 are lean periods, otherwise all mills operate on full capacity).

Bringing them into the proper tax net would be an uphill task because sugar millers have powerful clout in the power corridors. Gradually, all the sugar mills would upgrade their boilers and consume the excess power in other ventures commissioned inside their mill premises.

It is essential that a fair solution is found before things go out of hand. In India, some sugar mills are producing up to 100MW by installing high tech pressure boilers.

Bulk of steel scrape is imported (mostly from Europe). It is packed in a container. Post Covid-19, the cost of containers has increased almost three times from $200 to $550.

Landed cost of imported steel scrap comes to around Rs160,000 per tonne. The re-rolled bars are retailed at Rs195,000-205,000 per tonne. Millers prefer imported steel scrap because local scrap contains impurities like sulphur and other chemicals.

Steel production in Pakistan is one of the lowest in the world being 48kg per capita against average global consumption of 228kg per capita. Pakistan is the fifth largest importer of steel in the world.

Still, Pakistanis use less steel in construction than global norms. On every one tonne of steel, 4-5 tonnes of cement is consumed. In Pakistan 13 times more cement was used than the steel consumed. Pakistan imports around $1.5 billion worth of steel scrap per year.