Raw material shortages, overhead costs drive steel industry to brink of collapse

ISLAMABAD: Steel industry is in the midst of an unprecedented crisis. With the surging costs, many large producers are struggling to stay afloat, as they informed Profit on Thursday.

According to the details shared by the representative body of large steel industries, the Pakistan Association of Large Steel Producers (PALSP), “at the heart of the issue is the recent decision by the State Bank of Pakistan (SBP) to raise interest rates to record levels while the steel mills are paying over 20% Kibor. This move is putting an unbearable strain on businesses that are already operating at just 30% of their capacity.”

Compounding overhead costs have detrimentally impacted many large steel manufacturers, with one of the largest publicly listed Rebar manufacturers in Pakistan, reporting losses in the last quarter. 

“This is a dire situation for the steel industry,” says Wajid Bukhari, Secretary General of PALSP.

Bukhari explained further, “the cost of borrowing is simply too high, and we are seeing many factories close down as a result. More than half the industry has already shut down and this will negatively affect Pakistan’s industrialization for generations to come. The announced increase in the Monetary Policy Committee (MPC) will raise the cost by at least 6,000 rps/ton, making it impossible for many businesses to operate.”

But that’s not all. The industry is also facing a 3.23rps/unit electricity surcharge, which has been imposed in order to adhere to IMF restrictions, making it the most expensive energy in the region for industries. This will additionally increase costs by around 4,000 rps/ton, aggravating the already insurmountable overhead costs.

“The situation is rapidly deteriorating,” warns Bukhari adding. “Raw material availability is only guaranteed until end-March, and if LC’s are not opened, prices can easily cross 325,000 rps/ton. This will have a severe impact on the industry, as well as on the wider economy, with 7.5 million jobs at risk and 42 allied industries affected.”

According to him, the steel industry is a vital part of Pakistan’s economy, and the government must take immediate action to support it. “We urgently need the SBP to open LC’s in order to mitigate this crisis. If we don’t act fast, industries will come to a standstill, and there will be massive defaults across the allied industries. Further price hikes are irking the end customers, but there will be no steel available after March 23rd if SBP does not act urgently. SBP has all our data for LCs and a force majeure shutdown is imminent if there is no availability of raw material,” he added.

Last year, Pakistan imported approximately 4 million tons of scrap raw material, whereas to date, the situation has reached a critical level, with imports for the first seven months of FY23 down by 40% from the same period last year, suggesting tight availability of raw material. If there are no LCs available to manufacturers, imminent collapse is foreseen by March 23rd. 

It’s time for the government to step up and support this vital industry, which is on the brink of collapse. The consequences of inaction are too severe to contemplate. The Secretary-General of PALSP calls for immediate action to save the industry. “We urge the government to take immediate action to ensure the availability of raw materials, reduce the interest rates and provide energy at reasonable rates, to save this vital industry from a complete collapse”.