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Making
Pakistan Steel profitable
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Chinese offer seems to be a
golden opportunity to convert Pakistan Steel from financial liability to a profitable
enterprise
From SHAMIM AHMED
RIZVI, Islamabad
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.
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