Steel will soon become a hot commodity again. According to Bloomberg, domestic manufacturer Agha Steel is all set to raise up to Rs5 billion in an initial public offering (IPO) of its shares. The company hopes to triple its capacity to produce steel rebars. Reinforcing bars like other long steel products are used primarily in infrastructure and construction industry to hoist up structure and ultimately build homes, bridges, and dams. That this should be the time to launch this IPO makes considerable sense despite steel’s performance in the economy over the past two years.
According to the Pakistan Bureau of Statistics (PBS) Large Scale Manufacturing (LSM) numbers: long steel production (rebars, billets, ingots etc.) fell 18 percent while flat steel manufacturing (sheets, plates, coils etc.) contracted nearly 17 percent during FY20 against the corresponding period last year. The latter steel is typically used in electronic appliances and automobiles—predominantly sectors where demand has been critically missing over the past year as consumers’ buying powers have reduced and over all inflationary pressures have forced prospective buyers to delay consumption.
But long steel has performed even worse—in fact, FY19 saw long steel manufacturing decline by 25 percent year on year. Sister-industry, cement performed better—production was down only 3 percent during this time—but it was saved by exports. In fact, alternative data from All Pakistan Cement Manufacturers Association (APCMA) shows domestic cement sales fell 2 percent against an increase of 38 percent in exports during FY19—and by 0.9 percent against an increase of 20 percent in exports during FY20 year on year. Exports share in total has grown from 10 percent in FY18 to 16 percent in FY20. If domestic cement manufacturers were only supplying locally, they would be returning negative double-digit numbers in production as well watching capacity utilization deplete.
But it seems, fortunes are about to turn on their heads. The PTI government has clutched onto the low-hanging fruit that is construction like a last hail mary to drive up the economy (and employment). It is clever because the industry feeds into 40 or more allied manufacturing and services industries and does not necessarily require long term reforms from the government to boost demand (and productivity) in domestic and exporting markets. Traditional construction is pretty straight forward. In fact, more than reforms, the industry required sweetener incentives from the government and a little bit of turning back on its words (given how vehemently against the PTI government has been on amnesty schemes).
To recall: there is a construction amnesty package that has a no-questions-asked policy on investment where information on source of income would not be sought by the government. In addition, there are tax reductions as well as the changing of the tax regime to a fixed tax system. On top of this, the earlier announced Naya Pakistan Housing Program would go hand in hand—which is all set to ground break 100,000 houses for now (against the promised 1 million houses per year).
Builders will get 90 percent tax waivers on investment in NPHP while consumers will get a cash subsidy (totalling Rs30 billion with a cap of Rs300,000 per house for the initial 100,000 houses) and an interest subsidy (to be announced and funded later) which would bring down mortgage rates to 5 and 7 percent. A collective “wow” is in order if this materializes.
Then there is construction and infrastructure development that is happening elsewhere—dams, CPEC power plants and so on. As cited by Bloomberg, the upcomer Agha Steel has already supplied materials for CPEC based coal-fired power plants and the company has also bid for five upcoming dam projects. Other long steel manufacturers like Amreli steel are already well-positioned to meet this demand having expanding capacity over the past several years. Just last week, International Industries mainly involved in flat steel production announced the formation of a subsidiary which would provide structural engineering and steel fabrication solutions for the construction industry.
Construction is all the rage. And it seems, save for bureaucratic delays and unforeseen calamities (like the second coming of the coronavirus); the tide is lifting and the steel industry seems pretty prepared to ride it.