Pakistans steel industry - the way forward

Towfiq Habib Chinoy, Managing Director& CEO, International Industries Limited, is presently serving as the non-executive Chairman of New Jubilee Insurance Company, Pakistan Cables Ltd. and Packages Ltd. Hes also a Director at BOC Pakistan, IGI Investment Bank., Pak Chemicals, Pakistan Business Council and HBL Asset Management Ltd.
He is also Governor of Indus Valley School of Art and Architecture and Trustee of Mohatta Palace Gallery Trust, has served on the boards of various public bodies, and has held various appointments at the Aga Khan Economic Planning Board as well.
Pakistans steel industry - the way forward The steel industry in Pakistan is passing through tough times because of non-availability of raw materials locally, higher input costs, and above all, non-existent developmental projects.
"Raw material costs are 80-85 percent of the total product cost and international metals, like other commodity prices, remain volatile. It is not always possible to buy at the right time and at the right price. Three years ago, when prices fell from peak in three weeks, we had to write off over Rs0.5 billion worth of our inventory....and it was the same the world over," says Towfiq Chinoy, CEO of the countrys top steel processor, International Industries Limited (IIL).
Power cost-saving and other cost mitigation strategies account for only 15 percent of the cost. So even if the entity buys the best possible equipment and generates power cheaply, it will just affect 13-15 percent of the costs. The only cost effective long-term cost mitigation strategy is to move towards value-addition," says Chinoy.
International Industries Limited, currently has the highest production capacity of steel pipes in Pakistan with over 300,000 tons and is the only local private sector company to have a Cold Rolling Mill.
Currently IIL is producing 200,000 tons of steel pipes of which 150,000 tons are sold in the domestic market and 50,000 tons are exported to Afghanistan, Sri Lanka, UAE, Iraq, Yemen, Bahrain, Kuwait, Germany, Italy, UK, USA, Puerto Rico and West Indies. The company has been persistently winning the FPCCI export trophy for engineering goods for the past ten years.
Pakistan Cables is also a part of the group, which is a prominent manufacturer of electrical cables in Pakistan. When asked about the future of steel exports from Pakistan, Chinoy was very optimistic and said his firm is currently expanding its value-added equipment to cater to potential new export markets as well as the value-added segment of the domestic market
IIL has also put up a steel processing plant. "We will be the first one in the country to produce cold rolled and galvanised coils to such a scale," says Chinoy.
The project was thought out with an objective to meet local demand of raw materials for auto, steel processing, packaging, home appliances and other value added sectors. Currently raw materials for these industries are being imported from China, Europe, Australia and other countries which is a huge drain on our foreign exchange reserves.
ISL, which was incorporated in 2007, was hived-off from its parent company last year, after IIL transferred all asset and liabilities of the cold-rolled and galvanised-sheet project and power plant to International Steels Limited (ISL).
ISLs manufacturing facilities include capacity to produce 150,000 tons of galvanised and 100,000 tons of cold-rolled steel sheet as well as a 18-MW gas-fired co-generation power plant and a 100 cubic meter reverse osmosis water treatment plant.
This 250,000 tons per annum steel complex will initially produce cold rolled and metal-coated steel sheets conforming to international standards (ASTM, JIS, etc.) from imported hot rolled coils. "IIL has used its contacts established over the last 45 years in the international steel industry to procure state-of-the-art equipment at highly competitive prices from reputable international manufacturers," says Chinoy.
Pickling the hot band will be the first process step to remove the oxide layer from the surface prior to cold reduction in a reversing mill where the thickness will be reduced to the desired range of 0.25-1.6 mm. 100,000 tons of cold-rolled products will be offered to the industrial, engineering and manufacturing industry as a premium raw material for transformation into any number of value-added products for the domestic and export markets. The balance 150,000 tons will be hot-dip galvanised for similar industries, roofing sheets and for other applications that require excellent corrosion resistance and for exposed outdoor applications. Both products will be offered as coils or sheets as per the customers needs.
Each product category will provide a range of strength levels from drawing to structural and surface finishes and also from bright to matt to satisfy a spectrum of customer specification. With the planned expansion, the annual production capacity can be increased to 400,000 tons.
Downstream integration will provide additional products which will catalyse the countrys industrial production for export and domestic consumption. The initial production capacity will substitute Pakistans steel imports, thus conserving valuable foreign exchange for the country.
This large investment in the value-added, flat-rolled, and coated steel industry in Pakistan, has unlocked the dormant potential for developing the countrys engineering and hi-tech manufacturing industries. This bold investment will create thousands of jobs, both as direct employment by ISL and related job opportunities in associated support industries.
The total investment on the project is Rs8.7 billion. Chinoy said "IIL has invested around Rs4.35 billion in the form of equity in ISL, making ISL its wholly-owned subsidiary, but is now seeking to offload nearly 45 percent of ISLs shares. Sumitomo and IFC have each already agreed to purchase 10 percent of ISLs shares.
This will leave 25 percent equity, which is roughly around Rs1 billion, for offering to various investors. Of this amount, nearly Rs 400 million is to be raised from offshore private placement and Rs350 million through the book-building process, leaving Rs 250 million for direct offer to the public. The book building is expected soon.
"As there was no EPC (engineering, procurement and construction) contractor involved, we saved substantial costs in installing the project. Given the lean cost structure of ISLs manufacturing facilities laid out over 32 acres of land, we are hoping to get a reasonable premium for ISL shares," said Chinoy.
To a question on how he looks at the future of the industry, Towfiq Chinoy said that he hoped that "2011 would be the levelling year."
Concluding the interview, Chinoy said, "I am confident the country has great potential and we all can contribute in our own capacities for building a better world for our future generations".