Long steel: glass half full or glass half empty? – BR Research


One of the statistics most often cited in the context of steel consumption in Pakistan is that the country consumes significantly fewer kilograms of steel per capita (around 48) compared to the global consumption of 228 kg / capita. This number is slightly exceeded but may be sufficient for comparison purposes. This means, according to the National Steel Advisory Council, an additional consumption of 10 kg / capita of steel would require an additional supply of 2 million tonnes of steel. But if that statistic shows potential, here’s a more nuanced statistic for the background: Pakistani cement makers sold 13 times more cement in the domestic market last year (on a monthly average) than the amount produced by cement makers. ‘steel. As a rule of thumb, this ratio should be about 4-5 times (that is, for every ton of steel, 4-5 tons of cement is used). In the construction of dams where steel is used much more, the share is even lower: 1 ton of steel for 1 to 2 tons of cement. Why are Pakistani steelmakers not producing enough?

Let’s start by eliminating the definitions. Long steel products (billets, rebars) are mainly used in construction and infrastructure industries, while flat steel products such as sheets, coils are used in consumer durables, white goods such as household appliances and automobiles. For the purposes of this part, we are interested in long steel.

Clearly, the gap in steel production (what we should be making and what is actually produced) is filled by imports – in fact, about half of current demand is met with imported steel. . As with many other industries, domestic steel manufacturers have strong pricing power in the local market. After making a compelling case to Pakistan’s National Tariff Commission, steelmakers succeeded in securing anti-dumping duties on billets and rebar on Chinese and Iranian steel until October 22 . This is in addition to tariffs and regulatory obligations (which have no sign of retreating, although by definition regulatory obligations are temporary in nature). Essentially, billets and rebar enjoy 50 to 60 percent tariff protection against imported steel while not producing enough to cover the entire domestic market. When domestic production cannot meet the needs of consumers, they have no choice but to turn to imports and pay a higher rate for a product that is simply not made locally.

On the other hand, flat steel products (sheets, coils, etc.) have lower protection – 23-35% compared to long steel products. This corresponds to the respective importance of the two in a growing economy like Pakistan. Long steel products have a major share in total steel production – most growing economies have a higher demand for long than flat steel, the former being used in the construction and construction of the country’s infrastructure. while the latter is used in electronics, automotive and other industries. In fact, much of the steel required in the automotive industry comes from very few factories around the world due to the high quality requirement.

But whether it is long steel or flat steel, both segments are protected from imports while being heavily dependent on imported inputs. Long steel manufacturers import iron and steel scrap to produce billets and rebar at home. Since scrap constitutes about 60 to 65 percent of the total cost of steel production, it is a heavy import bill for the country. In FY19, 4.5 million tonnes of scrap were imported at a cost of about $ 1.5 billion (the country spent roughly the same in FY20 with a lower number of tonnes imported). In fact, Pakistan is the fifth largest importer of scrap in the world. Let us remember this a little.

The problem is that every time scrap prices go up – which has been the case for many months – domestic prices go up too, which ultimately increases the cost of construction for end users. Although steelmakers – as economic agents of the free market – have every right to set their prices, given the protection of the industry, there is no winner for end consumers. This is what happened – due to covid-ranked supply shortages and port congestion, scrap prices since December 20 have risen 25% (rebar prices have risen 28%). Domestic steel prices – as a result – have also increased. Since rebar prices almost always parallel scrap prices, international rebar prices have also experienced a massive recovery (see chart). Importers of finished steel have to pay for this with an additional protection fee.

Here is the glass half full. In a recent webinar hosted by AKD Securities, major long steelmakers believe the grass is really green on this side of the fence. They believe in the huge growth potential of the industry, even without considering the explosion in demand that could come from Naya Pakistan’s housing program and the Prime Minister’s amnesty for construction. It’s also true. By simply adding construction demand from Diamer-Bhasa and other on-going hydropower projects, the country could see steel demand increase by 6 million tonnes in addition to the organic increase in steel demand at as government development spending grows and the economy grows. Current demand is around 5 million tonnes. But it also means that steelmakers will have to dramatically increase their capacity to respond to them. By emphasizing branding and marketing, graded steel players can easily outperform the fragmented and low-quality ungraded steel products in the market.

But the half-empty glass is this. Steel manufacturers import expensive scrap to make steel products that are not sufficient for domestic consumers who then have to rely on imported steel, which is also expensive due to protective duties. What would be really fascinating would be for domestic steelmakers to start exploring options for using local iron ore (which is in abundance) to make steel products (which would also be of superior quality) in s. ‘relying less on imported scrap (which is usually not the best for making steel products) and producing competitive products that would also benefit consumers. They could explore a wide variety and nuances of steel products that could be made locally, taking advantage of technology (current production technology leaves a lot to be desired) and local resources.

Note that there is nothing wrong with imported raw materials, but if domestic production does not bring great added value in terms of quality or price to the consumer, a radical person might ask: why are we producing- us anything? The grass is greener on the other side after all.


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