ISLAMABAD: Following the restriction on imports for non-availability dollars, the country has now started facing a severe shortage of steel rebars as the State Bank of Pakistan (SBP) is unable to open Letters of Credit (LCs) for raw material of the industry. The situation is being exacerbated by the recent confirmation of energy price increases and a hike in the General Sales Tax (GST) as part of the International Monetary Fund (IMF) conditions.
As per a letter sent by Pakistan Association of Large Steel Producers (PALSP) to ministries concerned, the prevailing state of affairs of the steel industry is grappling with a constantly intensifying situation. “The steel sector is in the midst of an unprecedented turmoil, with massive currency depreciation, shortage of raw materials, high inflation, and increased energy prices. The situation is extremely difficult and unviable for the steel industry to survive,” said the association.
As per the letter under various heads including quarterly tariff adjustments, deferred fuel price adjustment, and imposition of a surcharge of Re1 per unit on big power consumers, the government has approved a revised circular debt management plan (CDMP) where the tariff would be hiked around Rs7-8 per unit till August 2023. This will have a direct inflationary impact of 7,000 Rs/ton, whereas the increase of GST from 17% to 18% would further have an impact of 3,000 rps/ton.
Currently the prices of deformed rebars are around 305,000 rupees/ton, whereas inflationary pressures will warrant for further price increases. According to PALSP, the steel sector has been hit hard due to problems with the opening of LCs and the rapidly depleting foreign exchange reserves, which have resulted in a shortage of raw materials.
“The manufacturers are forced to operate on very low capacities or to close their units, which has raised the cost of production and made it unviable to operate. The increase in prices of steel is also due to massive rupee devaluation and demurrage and detention charges on containers stuck at ports,” PALSP’s Secretary General, Wajid Bukhari said.
The devaluation of the PKR by 24% over the last two quarters, coupled with a 16% increase in inflation and from 23.8% to highest ever 27.6% and financial charges raised by 13% from 15% to 17% have put the industry in severe crises. Bukhari further stated, “The sudden depreciation of the rupee has caused losses worth billions of rupees to the industry, and stakeholders fear an unprecedented change in prices of imported finished and raw materials in case landed costs continue to rise. The government’s removal of the dollar cap to meet the International Monetary Fund’s demand has resulted in the Pakistani rupee falling to a historic low and the steel industry is on the brink of collapse.”
The massive devaluation of the PKR against the US dollar and the increase in petroleum prices have started to cause an inflationary impact on steel prices. The industries are forced to increase prices due to the devaluation of the local currency, uncertain economic conditions, and high inflation. The industry fears that this is just the beginning and that consumers will face even more shocking price hikes when the stuck imported containers stricken with heavy demurrage and detentions are released from the port.
The shortage of raw materials is a result of problems with the non-opening of LCs due to the rapidly depleting foreign exchange reserves and a weakening rupee. The shortage has forced many steel manufacturers to operate at very low capacities of 30% to 40%, using local scrap that is of poor quality. The cash-strapped industry is on the brink of collapse as the cost of doing business is increasing due to the massive devaluation of the rupee.
“The steel industry is a crucial contributor to the economy as one of the highest tax paying industries in Pakistan, and we need immediate intervention from the government to resolve this crisis to have our LC’s open effective immediately. The high interest rates, devalued rupee, and shortage of raw materials are putting unbearable pressures on steel makers and we urge the government to address these issues and provide support to the struggling steel sector,” the association added.
