ANOTHER ATTEMPT TO KEEP THE AILING PAKISTAN STEEL ON ITS FEET
Aug 6 - 12, 2012
The state-owned Pakistan Steel Mills (PSM) got the second cash lifeline of Rs8.6 billion after receiving Rs6 billion in one year. Last month, Finance Minister Dr Abdul Hafeez Shaikh in a meeting of Economic Coordination Committee (ECC) of the Cabinet, the top economic-decision making body, approved another bailout package for PSM to avert its complete collapse. The delay in release of funds caused losses of Rs21.4 billion to the PSM in the fiscal year 2011-12, ended on June 30. The production capacity of PSM has presently dropped to an all-time low of 15%. Prime Minister Raja Pervez Ashraf is hopeful that the PSM would stand on its feet after structural reforms brought about by the Cabinet Committee on Structural reforms. The bailout funds will be used to import iron ore and coal to increase its production and also meet the carry-forward liabilities of PSM.
The PSM turned into a loss-making entity under the Pakistan People's Party (PPP)-led government, as it incurred the accumulative losses of Rs71.4 billion during the last four years. The analysts argue that even the cash injection of Rs8.6 billion 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 white elephant from a profit-making company under the four years of present government, as it showed profits for consecutive seven-year right from 2000 to 2007 under former government of President Pervez Musharraf.
Under the bailout package, the repayment schedule of 5 billion and 120 million rupees debts of the PSM would be rescheduled while the interest on the debts would be paid by the federal government. The government has also raised the credit ceiling for the PSM to three billion rupees
The non-availability of funds for purchase of raw material actually reduced the entity's production capacity to a new record low. The finance ministry could not timely release Rs11 billion funds approved by the ECC last year, as envisaged in the PSM Business Plan.
In April, General (retd) Muhammad Javed, who remained PSM chairman from September 2006 to May 2008, took over as the new chief executive officer (CEO) of the state-owned PSM. Javed was unable to meet the immediate challenge to enhance the production capacity of the mill due to shortage of funds. Under his almost two-year tenure as chairman, the PSM witnessed increased production and earned Rs5 billion profit and paid off debts worth Rs2 billion. The PSM was operating at 90% capacity during the tenure of Javed as its former chairman (2006-2008).
Under a recent barter trade deal with Iran, Pakistan would purchase iron ore from Iran for the PSM, which 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. The complex spreads over an area of 18,660 acres. It is vital to the supply of high quality and cost effective steel products to the domestic market.
Last September, the rolling mills of the PSM were closed and iron making plants (IMPs) and steel-making plants (SMPs) were functioning at 18% of their capacity. The company which has a capacity to produce about 3,000 tons of various products was producing only 450-500 tons. Its sales' revenue which had been hovering around Rs5 billion a month in 2007-8 dropped to Rs2.5 billion in Rs750 million in September 2011, mainly because of shortage of raw material which includes iron ore and coal.
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 6 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.
PSM is based on 100% imported ore. It has outdated machinery, which produces expensive 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 2 million tonnes 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 businessmen who accompanied the Chinese Premier Wen Jiabao in December 2010 during his visit to Pakistan.
In 2007, Shanghai Baosteel Group Corporation (SBGC), China's steel giant, showed interest in setting up 300, 000 tons cold rolled steel plant in Pakistan. Local analysts urge the government to import plants and machinery from China for the exploration and upgradation of iron ore. The machinery and plants manufactured by China can work in Pakistan, as China iron ore also contains 35 percent iron.