PAKISTAN STEEL MILLS CORPORATION

S.M.ABBAS ZAIDI,
Research Analyst
, PAGE
Oct 19 - 25, 2009

Pakistan Steel is strategically located 40km south east of Karachi in close vicinity to port Muhammad Bin Qasim. Pakistan Steel is a costal site which lies on the National Highway and is linked to the railway network.

Spread over an area of 18,600 acres (29 square miles) with 10,390 acres for the main plant, 8070 acres for the township and 200 acres for the water reservoir, Pakistan Steel is Pakistan's largest industrial complex, comprising component units numbering more than 20.

Pakistan Steel specializes in the production of flat steel products including billets, slabs, hot rolled coils, cold rolled coils, galvanized sheets/coils/formed sections, and corrugated sheets.

Pakistan Steel's constant efforts in continuous improvement and quality management have resulted in its accreditation in ISO 9001, 14001, 17025, SA 8000, and OHSAS 18001.

PRODUCTION CAPACITY

Today Pakistan Steel is the country's largest industrial undertaking having a production capacity of 1.1 million tonnes of steel. The enormous dimensions of the project can be visualized from the construction inputs which involve the use of 1.29 million cubic meters of concrete, 5.70 million cubic meters of earth work (second to Tarbela Dam), 330,000 tonnes of machinery, steel structures and electrical equipment.

Unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest in Asia.

A 2.5km long sea water channel connects the sea water circulation system to the plant site with a consumption of 216 million gallons of sea water per day.

FINANCIAL CRISIS

The mills provisional financial documents for the period ended June 30, 2009 reveal that it has faced a historical loss of Rs 22.143 billion during the July-June of fiscal year 2008-09 compared to a profit of Rs 2.375 billion in the fiscal year 2007-08. The historical loss was witnessed after eight-year profitability.

During the fiscal year 2000-01, it posted Rs552 million profit, Rs 102 million in 2001-02, Rs 1.042 billion in 2002-03, Rs 4.852 billion in 2003-04, Rs 6.008 billion in 2004-05, Rs 929 million in 2005-06 and Rs 3.19 billion in 2006-07.

Despite the production and operational losses, the management of PSMC led by recently sacked Mueen Aftab Sheikh adopted inefficient policies and purchased raw material at higher rates, which raised the deficit.

The mill was in profit in the first month of last fiscal year and earned Rs 52.5 million profit in July 2008, however, it has been posting losses since August 2008 when Mueen Aftab took over. The mill registered a loss of Rs 55 million in August 2008, Rs 200 million in September 2008, Rs 660 million in October 2008 and Rs 4.1 billion in November 2008.

YEAR-WISE PROFIT/LOSS OF PSMC

YEARS PROFIT/LOSS AFTER TAX
2000-01 552 MN
2001-02 102 MN
2002-03 1.042 BN
2003-04 4.852 BN
2004-05 6.008 BN
2005-06 929 MN
2006-07 3.19 BN
2007-08 2.375 BN
2008-09 (22.14 BN)

In addition, Rs 2.5 billion losses were witnessed in December 2008, Rs 2 billion in January 2009, again Rs 2 billion in February 2009, and Rs 2.1 billion in March 2009, and the cumulative loss of the last fiscal is over Rs 22 bn.

Strangely, the PSMC made a purchase agreement of iron ore in April 2008 when the prices were at peak. Later the price of iron ore declined sharply in the world market.

The PSMC sales had also declined by 18 percent to Rs 33.154 billion in FY09 relative to Rs 40.624 billion sales in FY08.

The management adopted an ineffective marketing policy that raised the losses. Aiming to reduce inventory and enhance the sales, the management sold some products, which also raised the losses of corporation. MS billet is one of the major products of PSMC that was being sold at around Rs 30,000 per ton less than the cost to release the inventory and earn revenue for daily expenses.

It was also during the tenure of the former chairman, when steel products were sold under cost as special favors to some selected dealers. This was done despite Rs 5,000 premium per ton on the supply of billet offered by some re-rolling mills.

During FY08 with over Rs 3.543 billion profit the PSMC paid Rs 1.168 billion tax to the national exchequer, while due to massive loss later it has not paid tax. The liabilities of the corporation mounted to Rs28.129 billion in 2009, which stood at Rs 8.24 billion in FY08.

RECESSION

The country's single largest steel producer Pakistan Steel Mills Corporation (PSMC) has posted a loss for the first time in nine years due to ineffective policies, non-technical management, and global economic recession.

The Supreme Court of Pakistan has taken a suo motu action against allegations of massive corruption in Pakistan Steel Mills and asked its management to submit comments. The PSMC management is facing serious corruption allegations for the last two months. The allegations led to the removal of Mueen Aftab Sheikh on August 18 by Prime Minister Syed Yousuf Raza Gilani.

However, the other team members of Mueen Aftab Sheikh are still working at their posts, mounting billions of rupees losses to one of the prime national institutions.

CONCLUSION

With a production capacity of some 1.1 million tones, PSMC having some 20% share in domestic market is now facing a huge financial crisis due to the consecutive losses in the last fiscal year.

July-August (FY10) losses alone reached to Rs 3 billion due to massive corruption. Government must take immediate action against the accused persons. Current prices of steel in the international market have gone down and now it is the responsibility of the new management to get PSMC back on track.