Setting the bar high

From 850 in 2000 to 1630 million tonnes per annum in 2016, the global steel production has nearly doubled since the turn of the century. Pakistan though has trailed well behind on the growth trajectory, its low per capita consumption of steel remaining pegged to 38-40 kgs per annum – about one-fifth of the global average of 198 kgs, as reported by Pak-China joint Chamber of Commerce and Industry Research and Development Cell.  To keep things in perspective, the per capita consumption of steel in the US is around 394 kg,for an emerging country like China it is 338 kg, and across the border, in India, around 63 kg per capita.

There are four major steel manufacturing companies in Pakistan: Aisha Steel Mills, Ittefaq Group, Pakistan Steel Mills, and Tuwairqi Steel Mills. This quartet – along with a few other smaller companies – produces a total of 3.6 million tonnes of crude steel, making Pakistan the 37th largest in world steel production ranking.

The CPEC spawns growth

With the advent of CPEC, the construction industry is booming, and with several infrastructural projects still in the pipeline, the steel industry is finding itself in a market transformed.

Dost Steels CEO Jamal Iftikhar saw this surge coming, and tried to position himself as the market leader by establishing the largest and technologically most advanced steel manufacturing plant in the country.

To Jamal, the population growth and improved business milieu was bound to have a bearing on steel consumption. “The pressure of 200 million people is there. Since we are at the bottom of the pyramid, the only way to go is upwards,” said he, while speaking to Profit on his company’s state-of-the-art plant and the potential of growth in the steel industry.

Profit: Would Dost Steel be catering to the demand or just be there when it is there?

Jamal Iftikhar: We are positioning ourselves to be there when the demand rises, and it is already on a growth trajectory. Our capacity shall be 0.4 million tonnes per annum.

Pakistan has not seen any big steel mill as yet. Dost Steels is the first of its size, while others are one third capacity or even lesser. Among others, a year behind us, two new mills of our size are in the pipeline with similar capacity, identical suppliers, same raw material and comparable products – everything selfsame.

We are depending on a supplier for steel billet, but we produce them into steel bars ourselves. The target is primarily construction industry. We are operating in B2B and B2C both.

Profit: Generally businesses start small but you are starting big?

JI: The size of this kind of mill is similar globally, irrespective of whether it comes up in Lahore or in Russia or in Italy.

Profit: Who are you targeting as your marketing audience – builders or homeowners or others?

JI: We shall be projecting ourselves only through social media and our mill shops. Our marketing approach, since we have a particular sector to target, is not that of consumer products. Hence, no TV ads.

Profit: As paint industry recently has shifted its target focus from homeowners to the construction workers and painters, how do you plan to address your B2C marketing?

JI: We have yet to develop a strategy, but we shall be looking at people with the power to sway clients, by establishing a fraternity with the structural engineers, the civil engineers, the construction fraternity, builders etc. – those who know the attributes of steel. Since you can’t teach a homeowner on how to evaluate steel, there is no mileage there. Still we will enable a B2C interface on our website that will facilitate the consumers directly. Our intent is to bypass the local seller by facilitating the customer to buy directly from us.

Profit: How much investment have you ploughed into this mill, and how is it split between equity and borrowing?

Around $50 million, with Rs930 million being the debt, financed by a syndicate of banks. We are already a public limited company, with the shares showing mobility once the mill is commissioned.

Profit: What is your expected revenue per annum and how long do you think will it take you to recover the investment?

JI: We will be having a revenue of Rs 30 billion-plus per annum. As for recovering the investment is concerned, it is a market dynamics position. In the best case scenario, it may come back in three years but if it takes longer, up to five years.

Profit: The CPEC is expected to create an influx into the construction industry but what if the Chinese procure the inputs from home instead of taking it from the local producers?

JI: As far as I am aware, the current CPEC policies do not allow steel and cement to be imported. So, they have no option but to procure these from the local market.

Even though steel does not have the same issue as cement that it’s difficult to transport but generally it is observed that it is prepared from the closest points to the user point. Since our plant is in the Punjab, we are in closer proximity because the growth is primarily taking place here. In Sindh and Balochistan too but primarily in the Punjab.

Profit: How cost effective will it be for you if you intend to serve customers that are not in close proximity to the plant?

JI: Our command area will include 400-500 km radius. We are not looking at the south of the country. Our focus is middle and not brain areas. The plant location was decided with the intention that we should be closer to the user market.

Profit: Why is there a delay? Is it the usual one, the government permissions, holding you back?

JI: There are some site issues. Then we also need to take a connection from the grid. To go through the permissions, with various statutory agencies involved, is a tricky thing but we are in the process.

Profit: Did you go through this complex web the legal way or, as a real estate tycoon said, you had to grease palms for the files to move?

JI: We complied with all the legal requirements and procedures. The only things remaining now are the LESCO connection and NHA’s approval of physical infrastructure. I am a fourth generation industrialist, and was in textile spinning before exiting that. So I am familiar with these bureaucratic obstructions and delays and I know how to handle these.

The textile spinning we exited because our other businesses were more lucrative, and not because the industry is going down. Textile is an important industry in Pakistan and it’s contributing a lot to the economy.

Steel is a good sector, which is likely to grow in the next 10 years, and we happened to be the first to start on this scale.

Profit: Why do you think that other steel mills have continued to operate below par to the global standards?

JI:  In the market, quality awareness is conspicuous by its absence. Our government is indifferent. The watchdog, the PSQCA  – supposed to be the model agency for maintaining quality – is there, the law is there to empower it, the list of 38 products under their purview makes it crystal clear. Yet nothing is being done to protect the consumers except in oil and mineral water, with everything else on the list being produced and sold without any intervention on their part. This is how compromising we are when it comes to enforcing standards. If a natural disaster strikes, we are doomed.

For steel, there are only two standards and building codes in the world, the ASTM and the British – the first is from the US and the second from Europe. Since the yardstick is the same, the only difference is the label. Our mission is to make grade compliant steel and make it available to every sector in the economy with convenience – including online buying. You can buy our product online and be assured that quality is our responsibility. And on the scale of production Dost Steel would be at the very top.

Profit: One practice you want to do away with in Pakistan’s industry?

JI: The biggest tragedy here is that the laws are passed, only to be consigned to the books. Our institutions either cannot or do not implement them. There is another element to it, our attitudes. We won’t spread litter in our houses but would do so in the streets without giving it a second thought. If that mindset is changed, everything will improve.

Profit: How do you think it can be improved?

JI: In Dubai the police has the authority and the capacity to check the quality of concrete and steel during transit. The movement of steel and concrete is allowed only after 10 pm. The PSQCA has the authority backed by the law to carry out similar checks – evaluating the chain from the producer to the stockist and to the end user – yet they don’t. And as a consequence incidents like collapse of the Margalla Tower and the Karachi flyover happen.

Until quality is enforced, not just in steel industry but overall in the economy, the end users and the civil society will have to live with the consequences. When accidents happen, responsibility is pinned on nobody, as there are so many factors that could have caused it. When everyone has already been paid, nobody bothers. This has to come from the public mindset too. If I stop trying to get out of a traffic challan by paying a bribe, the traffic would never improve.

Profit: Providing better quality means higher expenditure. How would you give premium quality and yet stay competitive?

JI: Not necessarily. Our plant shall produce better quality steel without the additional cost. In addition, operating at economies of scale with the consistency in quality is the most important thing.

Profit: How is this new technology different from the one prevalent in Pakistan?

JI: Set up over three decades ago, the existing steel manufacturing plants are either manual or semi-automatic. Neither called upon by the consumers nor the government, the producers are carrying on with the sub-compliant quality, with their products bereft of global standards.

As the economy grows, so is the steel’s demand, and as the difference between production and demand widens, newer companies like ours will come into play. And compared to smaller mills, it is easier for bigger plants to produce high quality steel.

If you visit a small mill and then a big mill, and see the production processes, you will find out yourself.

Profit: Were you guided into steel through market research?

JI: No, but we have data from different sources. Also market itself speaks: in the last two to four months, this market has moved considerably. Builders are having problems in procuring supplies. There has been an increase of Rs2,000-3,000, taking it over Rs78,000 per tonne. And it is purely because of supply shortage that prices are now higher by Rs18,000 per ton.

Profit: Since you are based in an industrial area, are there any environment-related issues?

JI: As I said earlier, we shall be completely compliant company, with standards similar to global steel mills, and this includes environment. Whether the plant is somewhere in Europe or as in our case in Kasur, the environmental features – the prescribed air quality, water quality and discharge level etc. – are built into it at no extra cost.

We are recycling all our water. We have our own internal closed loop system and all our water will be recycled and reused by the system.

Profit: How much experience do you and your team directly has in steel manufacturing?

JI: Collectively we have on average around 15 years experience, and it is better for senior management. Our employees are overwhelmingly Pakistani, though we have some Turkish technicians on board. In Turkey, green mills like this are all over the place.

Profit: Considering the volatility in Pakistani market, coming up with such a major investment, how satisfied are you at this being the right decision?

JI: We didn’t arrive at this decision abruptly. We have been planning this while the market was changing at a steady rate. Now we are close to commissioning and surprisingly in the last 45 months the change has been quite apparent.

The steel industry has global standards. Even among the industries that are not at the global level, in this country steel was far behind. Sooner or later, these would be need to measure up to the global standards and when that happens we would have already set the benchmark.

Profit: While you were in planning stage, was the market even prepared for such a change?

JI: Back then our promise was that there was no such mill in Pakistan to begin with.

If you look at other industries – be it textile or any other – in one way or another, these are at par with the global standards. Just because the government, or environment agencies, are not doing their job, mills operating for more than 30 years have not changed. But when new mills with better quality steel at the same or lower price get into the business, these old mills will have to shut shop. It is a process that has to take place.

Profit: When your mills start rolling, whose market share would you want – the competition or meeting the excessive demand that now exists?

JI: We will be doing both. Effectively we would be taking the share of existing players but at the same time the pie is also growing.

Profit: Which company do you think is your competitor?

JI: I won’t name any one, because then it becomes personal. Anybody who needs to go to a consultant or an architect to get a design or a structural engineer, whether it’s for a small house or a huge dam, is my customer. But no matter who he goes to, he would have shortlisted three to four suppliers. Our target is to be on that shortlist. Naturally we would be approaching the biggest consumer as our first priority and then smaller ones. So, if it’s a highway or a big dam project, it would receive greater attention from us but someone building his own house is equally important if he wants to buy quality steel. Our responsibility is to educate the customer and the market.

Profit: How many employees would you have?

JI: Around 300 – 150 or 200 for the plant, and other professionals including PLC engineers.

Our plant is automatic so we won’t be needing too many employees. But this is part of an economic cycle, retraining and restructuring keeps taking place for employment level to continue. There is a hierarchy in our business and it is very professional.

I bought the project from Siemens and they told me already how to achieve efficiency. Everything that is there to know about global standards and maximum productivity, I just have to ask them. They are from Italy and for us it is a learning process. We are in touch with them and supported by them because they have installed hundreds of mills like this.

Profit: Since you would neither be exporting nor employing on a sizable scale, what would you be contributing to the economy?

JI: We would be producing steel at a very competitive price. It will benefit the public sector through guaranteed delivery of the product with ease and with information to make decisions based on quality.