PAKISTAN STEEL NEARING SHUTDOWN
Feb 27 - Mar 4, 2012
Shutdown threat to the state-owned Pakistan Steel Mills (PSM) is still looming, as the government has not yet fulfilled its commitment to provide Rs6 billion cash lifeline to the country's largest and only integrated steel manufacturing plant. The PSM management in November had communicated to the government that there was no option but to start the shutdown process because of shortage of raw materials-coal and iron ore.
The Economic Coordination Committee (ECC) in December approved a bailout package of Rs6 billion as working capital for the ailing PSM to avoid its imminent shutdown. Even after lapse of two months, the government could not bail out the PSM, which is incurring a loss of Rs1 billion per month due to acute shortage of raw materials.
Local analysts argue that even the cash injection of Rs6 billon would only delay the entity's imminent demise, unless it is restructured and sold to a private investor.
Critics say that the PSM has been turned into a loss-making entity from a profit-making company under the four years of present government led by Prime Minister Yousuf Raza Gilani and President Asif Ali Zardari, as it showed profits for consecutive seven-year right from 2000 to 2007 under former government of President Pervez Musharraf. The mill's production dipped from 82 percent in 2007-08 to 15 percent in 2011.
'It seems the government is not taking any interest in running the PSM,' a private TV channel reported Fazlullah Qureshi, Chairman PSM Board of Directors (BoD) as saying. The mill has not yet got announced bailout package. The BoD of the PSM consists of 12 members and presently it has nine members. Though the federal cabinet had directed in December to fill the three vacant posts of BOD, yet BOD is still with nine members showing non-serious attitude of the government toward revival of PSM. It is presently a sinking ship, to say the least.
The country faces acute shortage of steel products for construction activity, while cash-strapped PSM is not in a position to meet the current steel demand of around six million tons per year in the country. It produces up to 1.1 million tons of steel products per annum, meeting 16 per cent of the total steel demand of the country. The remaining 84 per cent is met through imports. Private companies import more than four million tons of raw materials.
Critics say 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.
Last year, Federal Investigation Agency (FIA) unearthed a PSM scam that caused a revenue loss of Rs50 billion to the national exchequer and Rs100 billion to the cash-strapped mill.
The scam involved more than a dozen companies, which were permitted to import duty-free raw materials. These companies imported an estimated five million tons of raw material during three years from 2007 to 2010, causing as billions of rupees in revenue losses in customs duty exemption, while trillions of rupees worth of foreign exchange flew out of the country.
FIA also found that the companies made fake transportation documents to declare they had installed manufacturing units in different parts of the country, but they sold the raw materials to local companies that considerably decreased sales of PSM causing a loss of around Rs100 billion from 2007 to 2010.
Spreading over an area of 18,660 acres, Pakistan Steel is strategically located 40km south east 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.
The PSM's liabilities have exceeded Rs110 billion, while its production has declined to 15 per cent of its capacity due to shortage of raw materials and financial crisis. It is ironical that the value of hugely indebted PSM assets is presently less than its liabilities.
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.
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 existing1.1 million tons to 1.5 million tons per year. The deal, which is believed to have been finalized in May 2011 during the president Zardari visit to Russia, is a violation of the rules laid by the Pakistan Procurement Regulatory Authority (PPRA).
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.
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.
Based on 100 per cent imported ore, PSM with outdated machinery is producing expansive steel. Critics say 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.