Expansion in production capacity is long overdue

June 23 - 29, 2003



Pakistan and Russia have reached almost an agreement on the expansion of Russian built Pakistan Steel Mills besides closer cooperation in other economic areas.

Recently, a large Russian delegation led by Foreign Minister Igor Ivanov had visited Pakistan to explore fresh avenues for cooperation between the two countries.

Expansion of Pakistan Steel was discussed by the visiting delegation which had come out with the observation that Moscow agrees on its participation in the expansion plan. There were a few minor problems in the final decision on the expansion request which are likely to resolve soon.

Pakistan had received several offers including from China for the expansion of the steel mill but it was preferred to work with Russia which had originally established the project. This development regarding participation of Russia in expansion plan obviously seems to be the outcome of President General Pervez Musharraf's recent visit to Moscow. Promotion of economic ties between the two countries was the priority area of the discussion between the heads of the two States.

The proposed expansion plan with Russian assistance was estimated to cost $95 million. It is interesting to note that China had also expressed willingness to participate in the expansion plan and had offered financial and technical support.

Meanwhile, a Memorandum of Understanding (MoU) between Pakistan and Russian Federation was also signed during the visit of President Musharraf to Moscow. The MoU with the Russian Federation was stated to be for a relatively limited expansion to the extent of 40 per cent of the existing capacity or increasing it from the present capacity of 1.1 million tons to about 1.40 million tons per annum.

The earlier expansion plans aimed at increasing the production capacity to 3 million tons which is said to be the idea for financial and economic viability of the project. However, the idea was dropped probably because of decline in demand for steel products in the country. Although the steel requirement in the country was three time more than the actual production of the Pakistan steel, but the remaining demand is met through other resources such as ship breaking, re-rolling mills and foundries.

Its, however, re-assuring that the demand for steel products was on the increase in recent years mainly due to growth in engineering and automobile sectors.

Currently, the management of Pakistan Steel aims for expansion which would be focused on diversified products required by value-added goods. This would improve the PSM market share for these items.

The present situation is highly supportive for expansion in the steel complex due to growing strength of the engineering sector in Pakistan.

Pakistan Steel suffered huge financial losses in the past due to excessive politicization and overstaffing on political considerations. Pakistan Steel was inherited a burden of huge loans amounting to over Rs19 billion when the present management took over in 1999. This back breaking loan was comprised of Rs11.35 billion as the principal amount with an aggravated interest of Rs7.767 billion piled up during last 20 years. In order to get out of this debt trap which eroded the economic viability of this project, the government had decided to retire the principal amount in 12 equal yearly installments along with mark-up, while the accumulated interest would be paid in seven installments after the principal amount was fully paid. Finding a breathing space as a result of this rescheduling arrangement, Pakistan Steel has succeeded to retire over Rs4.6 billion to the banks and is about to retire the second installment as well it is learnt. Certainly it is a great achievement.

The present management, however, carried out a right sizing strategy and has succeeded to bring about a turnaround both in improving profitability as well as reducing overcoming the problem of surplus and unwilling staff to a great extent. The strong discipline and financial management has however created an image of hard task master of the present management.



The profit earned during the recently concluded financial year is around Rs one billion which also played a moral boosting factor for going ahead with the expansion plans because the government has advised the Pakistan Steel to generate funds from its own resources to meet the expansion plans. The government had expressed its inability to support financially and asked the mill to arrange money for its expansion program.

In this regard, the management is active to float at least 10 per cent of its shares through Karachi Stock Exchange with a view to develop a strong financial base of the project.

According to plans, the expansion program would be implemented in phases. In the first stage, the production capacity would be increased from 1.1 million tons to 1.5 per annum. In the second stage, the capacity to be enhanced from 1.5 million tons to 3 million tons and these phases would be completed by 2006-07.