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Making Pakistan Steel profitable

  1. Making Pakistan Steel profitable
  2. Tobacco industry in Pakistan
  3. Indonesia to boost its exports
  4. Reconstitution of NFC

Chinese offer seems to be a golden opportunity to convert Pakistan Steel from financial liability to a profitable enterprise

Jul 31 - Aug 06, 2000

China has made a fresh offer to Pakistan for extending technical and financial assistance to Pakistan Steel to increase its production capacity from existing 1.1 million tonnes to 3 million tonnes annually. A similar offer was made by the Metallurgical Corporation of China and other public sector corporations of that country in 1996-97. An agreement to this effect was also signed between the relevant authorities of the two countries but surprisingly, the final go ahead signal never came from the previous government.

The latest Chinese offer was reportedly made to Chairman Pakistan Steel Mill during his recent visit to China. The formal offer is now under the consideration of government of Pakistan and is most likely to be accepted with thanks to Chinese government as it seems to be a golden opportunity to convert Pakistan Steel from financial liability to a profitable enterprise. Experts estimate that profitability of Pakistan Steel cannot be ensured unless its expansion and achieving an annual production of 7 million tonnes.

Against its existing production capacity of 11 lac tonnes Pakistan Steel's average production has ranged between 7 to 8 lac tonnes. June 30th, 1999 was the second historic day in the history of Pakistan Steel when it ended its financial year with total production of 1002000 tonnes. This was certainly an achievement which was duly celebrated by the Management but it hardly offered a solution for the serious financial crisis the organisation was faced with.

One million-ton production represents capacity utilization of 91 per cent. This is 15 per cent better than the production results of 1998-99 and 8 per cent over and above the planned target for the current year. In a process industry it is difficult to achieve any improvement unless all the components turn in a minimal supporting performance. However, in this case much credit goes to the converter section of the steel making plant where the steel makers through their legendary 'jugad' (improvisation) have routinely processed nearly 700 heats before relining. Against the previous best effort of 534 heats in a campaign, twice this year a record of 734 heats was poured before relinings. This has reduced downtime and resulted in 4 to 5 per cent reduction in cost of production.

One million tons of steel should fetch around Rs. 15 billion. This money would only be sufficient to offset expenses on raw material, wage bill, production overheads, depreciation and taxes, Additional resources will be required for bank dues. Rs. 2.78 billion have already been paid on 30th June as PSM share in the interest on Rs. 7.76 billion subordinated loan) Rs. 1.5 to 2 billion for repairs and maintenance regarding which a solemn commitment was given by the Chairman to the Chief Executive and above all the cost of manpower restructuring which is sure to have its share of overruns over the planned and funded capability. However, expected tax refunds from the CBR, a one billion rupee running finance facility, improved creditability as a result of changed debt-equity ratio (thanks to financial restructuring) and better cashflow do provide the Pakistan Steel the necessary financial depth and flexibility to meet the challenges with equanimity. But for a limited period of time. Planned off-loading of 6,500 employees will save Rs. 1.2 billion but to post profit the Pakistan Steel will need another Rs. 1.5 billion or so. Real breakthrough will come only when the mill is expanded to 5 million ton per annum capacity.

It may be pointed out that the expansion programme of Pakistan Steel was conceived immediately after the present capacity was commissioned back in 1985, because, it was the opinion of the experts that the capacity of 1.1 million tonnes would make the working of the complex uneconomic and therefore the cost per unit of product would not compare favourably with similar steel mills of the region. The conclusion was all the more appropriate if judged in the context of the large number of employees in all the sections of the mills as compared to what actual number required to obtain production from the existing capacity.

Expansion programme

The latest Chinese offer as disclosed by the Chairman, Col. M. Afzal, it is hoped, would be carefully examined by the present government and would put through the long-shelved expansion project of Pak Steel as early as possible. The expansion in production capacity would undoubtedly add to the viability and economic usefulness of Pak Steel which at present is meeting the country's demand for steel products to the extent of 30 per cent. A three-fold expansion in production would make it possible for this complex to meet over 80 per cent of the country's demand for steel products and thus not only foreign exchange savings of substantially larger amounts would be realised but also near self-sufficiency in steel products would be a significant step towards economic self reliance. At the same time, optimum utilisation of the allied production facilities of the Mill after the completion of the expansion programme would enhance the plant efficiency as a whole and therefore improve price competitiveness in the market against similar imported items. The profitability in its operations would also be greatly strengthened if production is increased from the existing one million tonnes to three million tonnes.