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International steels set to achieve greater capacity utilization with maximum production

International Steels Limited (ISL) is a subsidiary of International Industries Limited (IIL) and was incorporated in 2007 to manufacture and sell flat steel products in Pakistan. The company has an investment of $165 million with equity contributions from Sumitomo Corporation, JFE-Japan and the International Finance Corporation (IFC) helped the company kick off into a hi-tech manufacturing segment.

The company manufacturers cold rolled steel galvanized steel and color-coated steel. The company has had an annual capacity of 500,000 tons of steel with a product mix of 100,000 tons for cold-rolled product, 350,000 tons for hot-dip galvanized and 50,000 tons for color-coated steel offered in coil or sheet form.

The company also exports about 10-12 percent of its total sales to various international markets.

GROUP ACTIVITY, COMPANY STAKES AND SHAREHOLDERS

ISL is a subsidiary of IIL that was established in 1948. IIL was initially a trading company but went through several stages of expansions where in 1965 it started manufacturing welded steel pipes and tubes. It went public in 1984.

Today, IIL is a leading producer of steel and polyethylene pipes. Over the span of 40 years the company has grown from a small pipe manufacturer with equity of Rs1.6 million to become Pakistan’s largest pipe and tube manufacturer with consolidated equity of nearly Rs9 billion.

Aside from ISL, the group established IIL Stainless Steel Pvt Limited which locally manufactures stainless steel tubes; has stakes in Pakistan Cables Limited (PCL) that manufactures copper rods, wires and cables.

Back to ISL, the company got listed on the Pakistan Stock Exchange in 2011 and as at June 2016, IIL held majority of the stakes in the company-holding 56.3 percent of the shares.

The initial investors Sumitomo Corporation holds 9 percent of the shares, International Finance Corporation holds 4.65 percent of the shares while JFE Steel Corporation holds 4.7 percent of the shares.

EXPANSION AND INVESTMENTS

ISL has its own electricity power generation facility that is 19.2MW gas fired co-generation power plant that generates electricity for its cold-rolled steel and galvanized steel production units.

The excess electricity it produces is sold out to K-Electric under an agreement that was signed in 2007 and is valid for 20 years. This helps the company generate an additional income.

The company also has an effluent treatment plant that helps in collection, neutralization and filtration of the entire solvent based wastages generated during the process of production and makes them re-usable.

The used hydrochloric acid from the strip pickling line is re-generated so that 98 percent is re-used and only 2 percent neutralized is discharged, according to an explanation offered in the company’s annual reports.

The reverse osmosis generates over 100m3/hr of water to meet industrial requirements, which allows the company to not rely solely on Karachi’s over loaded water system.

This investment in essence reduces industrial waste, improves water availability for local residents by makes industrial water reusable and helps to reduce water usage.

During the outgoing year, ISL successfully completed capacity enhancements for the conversion of its compact cold rolling mill to a twin-stand reversing mill, and added a second galvanizing line while also commissioned a color-coating steel line.

The expansion was carried out at an approximate cost of Rs3 billion and has enhanced ISL’s capacity for cold-rolling mill capacity from 250,000 tons to 500,000 tons, increased galvanizing capacity from 150,000 tons to 400,000 tons. This investment in expansion will go a long way for the company’s future in the steel industry.

OPERATIONAL AND FINANCIAL PERFORMANCE

ISL may soon become a force to reckon with but the journey to getting on the path to growth was not with hurdles.

Reportedly, the company was producing around 166,000 tons of steel products in FY11 and FY12 but by FY14, production went up to over 280,000 tons, growing by 70 percent.

Capacity utilization also went significantly up and the expansion during FY16 has come just in time.

Production reached over 370,000 tons in FY16, this was a 55 percent increase compared to the last fiscal and it included approximately 118,000 tons of cold-rolled products and 253,000 tons of galvanized steel

The company reached its peak revenues in FY14 clocking at Rs17.6 billion, up from Rs3.6 billion just three years prior in FY11. This is a huge jump. However, production went down in FY15 and so did revenues. The company earned sales of Rs20.5 billion at historic high production levels partly due to falling international steel prices.

The steel dumping from China and under-invoiced steel made the ISL’s brand more expensive and prices had to be cut down, according to an explanation provided in the annual report.

The sales to K-electric declined during FY16 due to increased internal consumption as a result of higher output.

Over these years, gross margins have gone up from 9 percent to 14 percent between FY11 and FY16-FY16 being the year margins peaked.

These are historic high margins and speak for the company’s growth in such a little time. With greater cost efficiency and productivity, margins will further be squeezed.

The company was in losses until FY12 and bounced up with an after-tax-profit of Rs363 million in FY13, jumping to Rs1.2 billion in FY16.

Q1FY17 AND OUTLOOK

In Q1FY17, already massive improvements are evident. Sale revenues are up by three times from Rs2.8 billion to Rs6.5 billion. Margins are up from merely 5 percent to 16 percent between the first quarters of FY16 and FY17.

The company earned a loss in the first quarter last fiscal but during FY17, the company promisingly boasted after-tax-profit of Rs565.7 million; profit margin moving up to 9 percent. Finance cost was largely limited during these two time periods.

The expansion for the company has nearly doubled; production is going up while the kick-off of this fiscal looks in good spirits.

With demand forecasts for steel in mind given the growth projections in the construction sector driven by housing and infrastructure overhaul in the next five years, the company is in a sweet position to enjoy the fruits being one of the few large private sector companies those are stable enough and have strong investments in place.

With profit more than tripling between FY15 and FY16, the company’s stock also skyrocketed upward with investor confidence in ISL moving up.

The stock outperformed the index during the last few months by a wide margin and has been doing phenomenally well. It was a top performer on the stock exchange when the year 2016 closed down.

After its record performing outgoing year, there is plenty more to come for ISL. The anti-dumping duty is in place for dumped steel from China, the company will be better placed to achieve greater capacity utilization now more than ever and maximize its production driven by the industry demand dynamics.

Industry largely remains uncompetitive because of a lack of mechanism for quality standards, influx of under-invoiced and smuggled steel products mainly from China, and a higher tax burden and cost of doing business because of energy shortages.

Unless the industry becomes competitive and quality standards are enforced across the board, one cannot expect significant new investments in steel production in the near future.

The government needs to come up with a policy framework to woo investment in this industry to meet the new demand for steel being created in the country.

In the absence of fresh investment in quality local steel manufacturing, new demand for steel will have to be met through imports, bringing the country’s current account under pressure.

CLEAR-CUT FUTURE POLICY NEEDED

Pakistan’s steel imports had cost the country $2.6 billion in FY205 and $2.2bn in FY2016.

Indeed, some quality steel producers like Agha Steel, Amreli Steel, International Steel, Mughal Steel and Aisha Steel have either increased their production and sales or are expanding their capacity, with a view to grabbing new opportunities being created by heavy public infrastructure development spending and the initiation of the CPEC projects.

But even their enhanced, combined production will be sufficient to meet only a small fraction of the additional demand.

On top of that some producers fear that the Chinese firms involved in the CPEC projects will prefer to import steel from their country rather than buying it from the local market unless the government takes actions to ensure that imports are allowed for CPEC projects only when the local industry is not able to meet demand.

In its second quarterly report on the State of the Economy for FY2016, the State Bank of Pakistan too supported the industry’s demand for a long-term policy for the protection of larger producers using modern, efficient technology (against unfair competition).

“From a long-term policy perspective, the local industry will need to acquire economies of scale and modern, efficient technology to become competitive… But they require adequate policy support in order to smoothly run their operations,” the bank had stated.

In view of the significance of steel for other sectors of the economy, Pakistan needs a clear and consistent policy.

Such a policy should identify segments in the steel chain that need protection at the initial stage; define and enforce quality and performance standards; and ensure fair competition in the market.

This policy should also consider the level of protection available to steel manufacturers in Pakistan’s competitors, especially China and India,” the bank said.

The report underscored that Chinese imports posed a major challenge to the local producers of high quality steel. “… Pakistan, being one of its (China’s) largest importers, witnessed a sharp increase of 22 percent in steel imports from China during H1-FY16.

Local plants are unable to meet the domestic demand for high quality products particularly those that are used in the assembling of automobiles and appliances.

“Falling international prices of iron, steel and allied products over the last few years made it feasible for the domestic sector to import huge quantities; the industry would not be able to sustain this level of imports if prices revert.”

Over the last several years, the steel consumption in the country has spiked to 6-7m tons a year, mainly on the back of increasing public spending on infrastructure projects, including roads, bridges, dams, power plants, etc, and rising private construction activity. Yet local producers have not been able to take full advantage of this surge in demand as almost one-third of the domestic consumption is met by cheaper imported products.

The manufacturers agree that the steel consumption in the country will continue to surge in the coming years owing to increased public development spending and the launch of infrastructure projects under the China Pakistan economic Corridor (CPEC).

But they argue that the local industry will not be able to meet this new demand unless the government gives a clear-cut, long-term policy for protecting existing and new investments, and making the industry competitive.

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