Pakistan Steel: groping in the dark

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Inconsistent policies and apathetic attitude of the government towards the affairs of the ailing Pakistan Steel Mills are adding to PSM’s financial and operational problems, as production is practically at a standstill. And while the government is not clear whether to privatise the Mills or to restructure it, and has frequently changed its mind, the gap between domestic demand and supply of steel continues to widen, leading to huge imports.

Owing to robust demand for construction and civil engineering, automotive and mechanical engineering and energy projects, growth in steel demand is projected at 8pc per annum. From 6.84 million tonnes per year in 2004-05, the demand is likely to increase to about 10MTPY in 2015.

The current annual installed capacity of steel products is about 4.9MTPY, and the supply-demand gap is bridged through imports. In 2011, imports of iron and steel amounted to 3.2 million tonnes, costing $2 billion. With the virtual closure of PSM, reliance on imports has increased, and this trend is likely to continue.

Intially, the government wanted to bring about administrative and financial revival of the country’s largest industrial complex, but later started favouring divestment of 100pc shares to the private sector on a fast-track basis.

In January 2014, it announced that financial advisors would be appointed by end-March 2014 to make recommendations for its survival, based on which the government would decide about its privatisation and seek strategic private sector participation. The deadline to sell it was this December, but there has been no progress in this direction.

At one stage, the government also had plans to divest 51pc shares of PSM in the capital market, but nothing happened on that front either.

The ECC, however, decided in February not to inject fresh equity, but to transfer management of this strategic industrial unit to the private sector with the sale of a 26pc stake. Now, there are reports that the planned privatisation has been delayed for about a year, and it has been decided to revitalise the mills’ operations first.

Meanwhile, the government has asked the Asian Development Bank to extend $20 million technical assistance to restructure selected state-owned enterprises. And this is expected to be available only during the next financial year.

For more than two decades, PSM had plans to undertake major BMR and to gradually expand its production capacity to 3MTPY. A number of technical and commercial exercises were done since 1993, and the PC-1 was finally approved in 1998.

During the last 10 years or so, Russia, China and Western countries made comprehensive BMRE proposals to the government to transform PSM into a modern and efficient entity that employed latest steelmaking technology, and even offered equity participation.

But, alas, subsequent governments could not act to achieve any tangible physical progress. Russia offered again, in August 2013, $1 billion to revive the Mills, but there has been no response from the government.

The government has failed to act as a catalyst or as an investor in PSM — which has created a strong technical base for the engineering industry — or as a regulator of the steel sector, which is termed the backbone of infrastructure of any country.

PSM has been marred with poor corporate governance, weak and corrupt management, over-employment and political interference in its operational matters. These issues weakened its institutional, technical and operational capabilities. Its chief executive and chief financial officer are both on ‘acting’ charge and not whole time functionaries.

The heavy engineering sector, including steel, is considered vitally important for achieving the most cherished goal of rapid industrialisation and self-reliance. The sector is not only complex, but is also exposed to severe international competition from multinational industrial giants, and is prone to cyclical market fluctuations due to a variety of factors.

Owing to its importance, the steel sector has earned maximum patronage and support of various governments in many countries, but, unfortunately, not in Pakistan.

The steelmaking facility badly needs funds to improve its operational performance, as its average capacity utilisation declined from nearly one million tonnes per year (MTPY) in 2007 to 0.022MTPY in 2013, and dipped to zero in October 2013.

More than 15,000 employees have not been paid since December 2013. Further, it needs billions of rupees to pay its creditors and to procure raw materials to restore its operations. The management asked the government a number of times for bailout packages — the last time in November 2013, for Rs28 billion.

The Economic Coordination Committee (ECC) of the cabinet recently decided that the government would provide Rs960 million for salaries of PSM employees, but its release is still awaited.

Meanwhile, PSM suffered a fresh loss of Rs21 billion during the last nine months of the government, whereas its accumulated losses over the past five years stand at Rs110 billion. With its liabilities currently at Rs125 billion, PSM has a negative equity, and is unable to repay existing loans or secure additional working capital.

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