High energy prices burn steel industry

ISLAMABAD: As prices of electricity rise for industrial consumers along with domestic consumers, large industries are starting to feel the heat. The country’s massive steel industry is one of many facing the heat. 

Early on Monday a representative association of the steel sector issued a dire warning regarding an imminent surge in steel rebar prices driven by soaring energy costs. The increase in price could be a major blow to the country’s construction industry and negatively affect factory workers, labourers, and cause the loss of jobs.  

According a letter of Pakistan Association of Large Steel Producers (PALSP) to concerned ministries, the steel sector, a cornerstone of Pakistan’s economic infrastructure, heavily relies on electricity as a primary input, with power costs accounting for over 50% of production expenses. Escalating electricity prices have already forced several steel units to close their operations, leaving the remaining ones operating at a fraction of their capacity. PALSP has repeatedly called on the government to provide the steel industry with electricity at reduced rates, promoting maximum capacity utilization instead of incurring payments to independent power producers (IPPs) for unused electricity.

The size of the pie 

The size of the steel industry in Pakistan has seen significant growth over the years. As of 2019, the steel industry in Pakistan consists of approximately 600 smaller and larger mills with a production capacity of 3.3 million tons. This production capacity accounts for 0.18 percent of the world steel production. Additionally, Pakistan’s steel industry has 20 major players in the organized sector, such as Amreli, Agha, Mughal, Frontier Foundry Steel, Razaque, Bilal, and Aitamad Steels, which collectively make up 80 percent of the2 total market share. These entities generated a combined revenue of PKR 150 billion in FY 2020.

It’s worth noting that while the industry has made significant progress, there are still challenges and issues it faces, including underutilization of capacity, rising costs of utilities, energy shortages, financial difficulties, lack of raw materials, and outdated plants.

Electricity woes 

Despite the industry’s many cries and complaints they are only the first of many industries that will feel the burden of rising power costs. 

In the fiscal year 2023-24, consumers collectively face a staggering burden of Rs. 2.025 trillion in capacity charges, exacerbated by the presence of idle power plants. The industry grapples with unfavorable agreements with these power plants, stipulating that capacity charges must be paid even if government utilities fail to draw electricity from them. Adding to this crisis, the National Electric Power Regulatory Authority (NEPRA) has recently approved a Rs3.28 per unit increase in electricity rates for all consumers nationwide.

Currently, the average base tariff stands at Rs. 29.78 per unit. When considering taxes and additional charges such as fuel adjustments, quarterly adjustments, and surcharges, the cost of one unit of electricity soars to over Rs. 50. NEPRA previously determined a Power Purchase Price of Rs. 22.95 per unit, comprising Energy Purchase components of Rs. 6.73 per unit (including fuel and variable operational & maintenance charges) and Capacity Charges of Rs. 16.22 per unit (71%). This translates into a consumer-end tariff of Rs. 29.78 per unit, with Rs. 3.1 for Discos’ Margin, Rs. 17.01 for Capacity Charges, and Rs. 7.62 for Energy Charges, among others.

As a direct consequence of these mounting power tariffs, steel prices are on the brink of a staggering increase of over Rs. 10,000 per ton, warns Wajid Bukhari, Secretary General of PALSP. Presently, branded G-60 rebars are priced between 285,000 to 288,000 Rs. per ton. However, impending energy tariff hikes, including fuel and gas surcharges, will exert immense pressure on customers to accept higher prices.

PALSP reveals that due to exorbitant energy costs, many steel producers have been compelled to reduce their capacities or shut down their plants. This, in turn, has led to power distribution companies imposing exorbitant capacity charges on consumers.

Secretary General Wajid Bukhari emphasizes the gravity of the situation, highlighting that petrol prices have surged to Rs. 331.38 per liter, electricity costs have risen to Rs. 50 per unit, and financial charges have escalated to 23.5%.

Over the past year, from June 2022 to August 2023, steel bar prices have increased by a modest 31%, while other price determinants have witnessed staggering hikes of more than 65%. During the same period, electricity prices have surged by 73%, the Pakistani Rupee (PKR) has devalued by 70%, petrol prices have climbed 70%, and financial charges have risen by 67%.

Comparatively, Pakistan’s energy tariffs are now among the highest globally, placing a stranglehold on the domestic steel industry. While Pakistan’s industrial electricity costs stand at 17 cents per kWh, China and Bangladesh offer rates at 8 cents per kWh, Vietnam at 7 cents per kWh, and Ukraine at 10.7 cents per kWh. This makes Pakistan’s electricity prices 58% higher than Vietnam’s, 53% higher than Bangladesh and China.

Wajid Bukhari urges the interim government to acknowledge the economic instability and the ongoing downturn in industries, businesses, trade, and exports. Immediate pro-business measures are imperative to avert a complete collapse of the industry and the broader economy.