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Exciting opportunities for steel makers

The global steel production has nearly doubled since the turn of the century. Pakistan is the 37th largest in world steel production ranking with per capita consumption of steel remaining pegged to 38-40 kgs per annum – about one-fifth of the global average of 198 kgs. The per capita consumption of steel in the US is around 394 kg, for China it is 338 kg and in India it is around 63 kg per capita. With the advent of China-Pakistan Economic Corridor (CPEC), the construction industry is booming, and with several infrastructural projects still in the pipeline, the steel industry is finding itself in a transformed market.

In Pakistan, construction, infrastructure projects and the housing sector are the key drivers for consumption of steel. Going forward, consumption of steel from these sectors is projected to increase.

Construction

The construction industry is playing an important role in economic growth of Pakistan. Recent estimates show that the industry grew 9.1% in FY17 and contributed 2.7% to the country’s gross domestic product (GDP). It has been estimated that output of the sector has a significant share of 40-60% in gross fixed capital formation. Studies show that more than 60 other associated industries form linkages with the construction and housing industry.This makes the sector pivotal to economic development as it is crucial for providing shelter, employment and infrastructure.

The signing of the China-Pakistan Economic Corridor (CPEC) agreement and improvement in the country’s security situation have been the key to giving boost to not only the construction industry, but Pakistan’s image abroad. With China having the first-mover advantage in injecting foreign investment into the country, other countries have followed suit.The sector has also been an important recipient of foreign direct investment (FDI). This can be gauged from the fact that the construction industry has started receiving significant inflows.

Locally, investment has also been boosted by government policies such as reduction in duties and taxes on building materials like steel, construction machinery and equipment and computerization of land ownership records. However, the stellar performance of the industry over the past few years has been marred by uncertain outlook on the political front, widespread corruption in the industry and a poor economic and business climate.

The construction industry is in a developing stage in Pakistan. There is an urgent need to eliminate bottlenecks such as corrupt practices in the industry, carry out extensive computerization of land ownership records for greater transparency, improve land regulation and building control, standardize and implement building laws across the board and impart latest skills to students for the future of the industry.

 

Housing Sector
  • Increasing urbanization with urban areas having lower number of people per household vis-à- vis rural areas creating additional demand for housing units.
  • Significant backlog of housing units estimated at 9 million units and announcement of various plans by the government to address this shortfall.
  • New affordable mega housing projects (Bahria Town, DHA, and LDA City).
Infrastructure
  • Infrastructure projects worth $9.8b are planned to be undertaken under China Pakistan Economic Corridor.
  • Spending for infrastructure projects as per allocations made under Public Sector Development Programs particularly for construction of dams, roads and bridges.
  • Large infrastructure projects include Gwadar Airport, Gwadar Deep Sea Port, Hydropower project of around 10,000MW capacity and Karachi-Lahore Motorway.

Going forward, strong demand outlook and high margins is expected to continue to support profitability of the sector. Any adverse developments on the CPEC front, delay in infrastructure projects (particularly hydropower projects) and significant increase in input prices may pose risk to future profitability growth of the sector.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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