CHINESE STEEL GIANT EYING PAKISTAN STEEL SECTOR

BY SYED FAZL-E-HAIDER
Oct 22 - 28, 2007

Shanghai Baosteel Group Corporation (SBGC), China's steel giant, is eyeing investment opportunities in Pakistan's steel sector. Baosteel has shown interest in setting up 300, 000 tons cold rolled steel plant in Pakistan. The plant will be established in joint venture with a Pakistani company Sapphire Group.

The six member Chinese delegation headed by Director Strategy and Planning of Baosteel Dr. Lin Li recently met with chief executive officer of Pakistan's Engineering Development Board, who briefed the Chinese delegation about increased demand in steel sector on account of economic growth in the country. The Chinese delegation was also told about the new projects such as Al-Tuwairqi and Aaysia steel mills. The Baosteel was also invited to take part in the bidding of privatization of Pakistan Steel Mill (PSM), which is expected next year.

The visiting Chinese delegation expressed their keen interest in investing Pakistan steel sector. It is worth mentioning that the BaoSteel was among the interested 12 parties that had submitted statements of qualifications for acquiring 51-74% equity stake in PSM last year. Baosteel is already cooperating and establishing joint ventures with international steel giants.

With a registered capital of 45.8 billion Yuan, the state-owned Baosteel is China's largest steel maker. It makes steel formed as billets, tubes, pipes, bars, and plates, and iron and tin products. With an annual production of more than 20 million tons of steel, Baosteel's markets include the appliance, auto, construction, oil, and shipbuilding industries, both in China and abroad. It possesses 22 wholly owned subsidiaries including 9 overseas subsidiaries, 14 holding companies and 24 equity-sharing companies. Baosteel is one of the most profitable steel enterprises in the world enjoying international competence.

Besides PSM, there are 598 manufacturing units in Pakistan iron and steel sector. The sector plays a key role in the provision of raw material for capital formation and economic development in the country. Within manufacturers, the contribution of the PSM was 90 per cent in fiscal year 2003-04, 69 per cent in fiscal 2004-05, and 30 per cent in fiscal year 2005-06. The large iron ore and coal reserves of the south Asian country coupled with liberal investment policies provide good opportunity in the steel sector for enterprising investors.

The country's economy has shown a robust growth in recent years. The high growth of GDP has triggered astounding growth in various sectors of the economy particularly bringing a surge in steel demand. The per capita consumption of steel surpassed the level of 30 Kg per annum, thus creating a large gap between demand and supply. During the Pakistani Prime minister's China visit this year, another 40 private/ public sector projects have been added to the existing 42 joint venture projects in the five-year program for trade and cooperation between China and Pakistan in all economic sectors including steel.

Located 30km south east of the port city of Karachi, the PSM is the country's largest and only integrated steel manufacturing plant, with an annual designed production capacity of 1.1 million tones. It was incorporated as a private limited company in 1968 and commenced full-scale commercial operations in 1984. The PSM complex includes coke oven batteries, a sintering plant, last furnaces, steel converters, bloom and slab casters, billet mill, hot and cold rolling mills, galvanizing unit and 165MW of own power generation units, supported by various other ancillary units.

Last year, the privatization of Pakistan Steel came as a big scandal because it was auctioned off at throwaway price. The scandal had serious political repercussions for the present government particularly after Chief Justice of the apex court gave his judgment against this privatization deal. Pakistan Steel is currently operating at an average of 85 per cent plus capacity and earned Rs 2 billion operational profit in the previous financial year.

According to a study, the direct and indirect tax contribution made by the steel industry to the national exchequer has been quite amazing. Whereas the collection from indirect taxes increased from Rs13.6 billion in fiscal year 2003-04 to Rs18.1 billion in 2004-05 and further going up to Rs23.7 billion in 2005-06, the direct tax receipts saw wild fluctuations during this period. The collection increased from a paltry sum of Rs326 million in the fiscal year 2003-04 to Rs3.9 billion in the year 2004-05, but declined to Rs748 million in 2005-06. In fact, industry's contribution was only 0.32 per cent in total direct taxes. Out of the total direct tax receipts, the PSM alone has contributed Rs607 million or 81.1 percent of the total income tax paid by the sector, while the remaining manufacturing units contributed merely Rs141 million.

China has been showing interest in Pakistan steel sector. Last January, a delegation of Chinese Baosteel visited Pakistan to participate in the bid for purchasing Pakistan Steel. The delegation attended a forum of national and international pre-qualified bidders and visited several key departments of PSM. They had shown their keen interest to participate in the bid and to cooperate with PSM in future. Another delegation of China Metallurgical Construction Corporation (MCC) visited Pakistan in 2004 and expressed keen interest in Pakistan Steel Mill revamping and expansion project. The MCC has already carried out construction of many strategic steel production bases like Baosteel Complex of Shanghai.

The entry of the China's steel giant in Pakistan's steel sector is expected to enhance the manufacturing of high demand products in the domestic and international market. Baosteel's joint projects with Pakistani company in steel manufacturing may also include premium products such as automobile steel, oil and gas exploitation and transportation steel, stainless steel, household electric appliance steel, transportation facilities steel, silicon steel, boiler and pressure vessel steel, food and beverage packing steel, metal production steel, special material steel, high-grade construction steel. Its strategic alliance with Pakistan Steel is expected to achieve win-win result on the basis of mutual benefit.

China is committed to help Pakistan build six 300-megawatt nuclear power stations and in this regard Baosteel is to play a critical role. The high-intensity steel products are meant for the emerging needs of industries such as aerospace, nuclear power, and oil and gas prospecting. A million-kilowatt-capacity nuclear power unit requires about 2,110 tons of alloy steel, which includes high-temperature alloy, titanium alloy and special stainless steel. Baosteel started work on a US$750 million alloy steel project last July to produce special steel. The project, which is to be completed in May 2009, is expected to produce 360,000 tons of steel plates and coils each year. The special steel products, according to an estimate, will bring US$1.04 billion to Baosteel each year. The project is part of Baosteel's efforts to build itself into a world-leading research and production base for special steel.