BAILOUT FOR PAKISTAN STEEL

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Dec 12 - 18, 20
11

Pakistan's finance minister Dr Abdul Hafeez Shaikh recently approved Rs6 billion bailout package for Pakistan Steel Mills (PSM), the country's largest and only integrated steel manufacturing plant.

Finance Minister Shaikh approved the bailout package for the PSM while chairing a meeting of the economic coordination committee (ECC) of the federal cabinet.

The immediate financial assistance for procurement of raw material has temporarily averted the looming shutdown threat to the PSM.

The PSM management had reportedly communicated to the government that there was no option but to start the shutdown process because of shortage of raw material-coal and iron ore. Critics however said that the Rs6 billion bailout package would only delay the steelmaker imminent closure unless it is restructured and sold to a private investor.

Rs6 billion cash lifeline has been provided in a move to avert the closure of PSM, whose current 15 per cent production capacity could fall to zero in next 15 days due to shortage of raw material. The cash-strapped PSM is even unable to pay salaries to its employees, as the mill's liabilities have exceeded Rs110 billion.

The country faces acute shortage of steel products for construction activity, while PSM is not in a position to meet the current steel demand of around six million tons per year in the country. Critics said that massive corruption of PSM management and inefficiencies in its procurement and supply chain management policies actually led the state-owned entity to the downturn.

The company faces acute shortage of raw material, which has adversely affected its production. It is just producing only 400 tons, against its production capacity of 3,000 tons. The iron making plants and steel-making plants are functioning at 15 per cent of their capacity.

The mill's sales' revenue dropped to Rs2.5 billion in July this year and Rs1.3 billion in August.

Spreading over an area of 18,660 acres, Pakistan Steel is strategically located 40km southeast of Karachi near port Muhammed Bin Qasim. It produces flat steel products including billets, slabs, hot rolled coils, cold rolled coils, galvanized sheets/coils/formed sections and corrugated sheets.

It is vital to the supply of high quality and cost effective steel products to the domestic market. PSM was set up in the early 1970s with the techno-financial assistance of the defunct Soviet Union. The construction of an integrated steel mill, never experienced before in the country, was carried out by a consortium of Pakistani construction companies under the overall supervision of Soviet experts.

The expansion of PSM is not possible without repair and modernization. Russia has been showing interest in PSM expansion project since 2003. In 2004, Moscow presented budgetary proposals for expanding Pakistan Steel from 1.1 million tons to 1.5 million tons offering Islamabad $160-200 million new credit facility.

Pakistan has reportedly agreed to award Rs30 billion contract for expansion of PSM to Russian steel giant without undergoing any bidding process.

The decision has been taken after Moscow linked financing for PSM expansion project with the award of contract to state-owned firm VO Tyazhpromexport.

Under the deal, Moscow will provide a loan of $350 million for the expansion project to enhance PSM production capacity from the existing 1.1 million tons to 1.5 million tons per year.

The deal, which is believed to have been finalized in May during the president Asif Ali Zardari visit to Russia, is a violation of the rules laid by the Pakistan Procurement Regulatory Authority (PPRA).

The expansion project is expected to increase market share and substantial improvement in financial condition of PSM.

Established in 1957, VO Tyazhpromexport is one of the largest state-run engineering associations of Russia. The company exports the whole range of services rendered during construction, rehabilitation, and expansion of the projects in iron and steel and mining industries.

Main form of activity is construction on turnkey basis of metallurgical units and providing of technical assistance specialists for the existing plants. The firm throughout its long history has rendered technical assistance in construction, reconstruction, and operation of more than 90 steel projects abroad in more than 50 countries.

It was VO Tyazpromexport that signed a deal with Pakistan Steel Mills Corporation in 1969 for the preparation of a feasibility report for the establishment of a coastal-based integrated steel mill at Karachi.

In April 2004, VO Tyazhpromexport submitted the "Basic Design Solutions" on the plant expansion up to 1.5 million tons along with the make-up of equipment and budgetary cost.

Based on 100 per cent imported ore, PSM with outdated machinery is producing expansive steel.

Critics said that the country has so far failed to establish state-of-the-art mini- steel mills in areas near iron ore deposits. Pakistan is endowed with huge iron ore deposits in Punjab and Balochistan. The country has over 780 million tons of iron ore, which contains 35 percent of iron.

China has been showing interest in the development of the country's steel sector.

China Metallurgical Construction Corporation (MCC) was also interested to invest $2.2 billion for the expansion and revamping of PSM.

In 2005, the MCC produced a 500-page report on the expansion of PSM after conducting technical investigation of the PSM in 1992.

In 2009, the company gave its two-phased plan to Pakistani authorities for the PSM expansion and modernization. Under the plan, MCC proposed to set up a new plant capable of producing two million tons of steel per annum in the first phase at a cost of $1.2 billion, while it proposed to revamp and modernize the existing PSM plant in the second phase at a cost of $1 billion.

China has also shown interest in setting up a steel plant with a one million ton annual capacity. Hong Kong-based Amlong Inc, a Chinese firm, is interested in setting up a steel mill at Kalabagh in district Mianwali in Western Punjab utilizing the potential of locally available iron ore deposits.

With proven resource of around 350 million tonnes, Kalabagh possesses the country's largest iron deposits. Amlong Inc representatives were part of the delegation of 200 businesspersons who accompanied the Chinese Premier Wen Jiabao in December 2010 during his visit to Pakistan.