“Our new technology will revolutionize steel production”
Over the past week, the buzz around Agha steel is palpable as the steel manufacturer announced its long-awaited entry into the stock market, hoping to raise up to Rs5 billion in equity through a public offering of 120 million shares. This will be Pakistan’s biggest steel IPO in five years which will finance a major expansion of the company’s long steel manufacturing plants.
BR Research sat down with Hussain Agha, the young CEO of Agha Steel to talk numbers and prospects. Why is steel important, what market position does Agha steel want to capture amid budding competitors, and what does the future hold for steel in Pakistan — the passionate 34-year-old Hussain, who took the reins of the family-owned business right after he completed his Master’s degree from Boston, answers these questions and more in a candid discussion. Here are edited excerpts from our sit-in:
BR Research: Why is this the right time for an IPO?
Hussain Agha: We are doing an IPO right now when the market is highly conducive but that is not the critical factor here for the IPO to go forward. For that, you will have to understand the timeline and vision of Agha Steel and where we hope to be. In fact, we decided on this IPO long before the recent bull run, so while the investors are certainly getting great valuation and we are proud of that; as a company, we have a long-term view and it is this: we hope to be one of the most technologically advanced steel makers in the region. Our topline today is touching Rs16 billion and with the new technology, we could potentially be selling worth Rs70 billion over the next few years but we are not in pursuit of being the largest, and that is also not what we are communicating to our investors. Our real pursuit is to manufacture high quality, diversified steel products - most efficiently - and to leverage our unique technology to grow sustainably into different segments which will ultimately lead to high retention and high margins.
BRR: What is the current manufacturing process (in Pakistan and within Agha Steel) and what new technology are you bringing that would lead you to sustainable growth?
HA: There are three ways of making steel. One, through the blast furnace by using virgin iron ore. This is the purest form of steel making which Pakistan Steel Mills was also using. But for the blast furnace to be competitive and viable, the minimum productivity should be at least 3 million tons per annum. Two, through the electric arc furnace which Agha Steel is using. This is a steel recycling furnace and the most accredited method of manufacturing worldwide as well as the fastest growing technology that companies are adopting today in the private sector. It is very energy efficient. The third is through the induction furnace which is what most steel manufacturers are using in Pakistan.
The sector is highly fragmented — with many manufacturers operating with furnaces ranging from 5-tons to 20 tons. In order to be regionally competitive, the minimum capacity should be north of 400,000 to 0.5 million tons per annum. Agha Steel is on the way to do that by adding capacity to its existing 250,000 tons and taking it to 650,000 tons annually. Though our primary focus is not just capacity expansion. This new capacity will be added by investing in a new re-rolling mill, an endless steel technology called Micro Mill Danieli or Mi.Da with (DRB) direct rolling and bundling technology. What that means is, it shall revolutionize the entire production process.
Traditionally, the process of steel-making is straightforward. We use steel scrap which is melted in a furnace (either electric or induction) which is then converted to billets by going through the process of casting. Billets are semi-finished goods which are cooled down, graded, re-heated and then rolled. This process could potentially take days. Danieli, a leading Italian steel technology manufacturer, has come up with a disruptive technology that will use an endless casting and rolling procedure. We won’t have to make billets at all unless we have to. This will bring down the entire production cycle — scrap to rebar — to just 2 hours! This is a game changer for us.
BRR: In cost and monetary terms, what does this technology bring to the table?
HA: Let’s look at it from the yield perspective. Pakistan’s standard conversion (or yield) from billet to rebar is 90-92 percent. The global standard today of top mills is around 96-96.5 percent, which a few mills have done in Pakistan and we must appreciate their efforts. However, this is where Mi.Da technology comes in which guarantees a yield of 99.2 percent. This is separate from the energy and time savings we can accomplish through the new re-rolling process. Today, if our sale revenues are about Rs20 billion — and let’s assume the yield benefit is around 5 percent — just by adopting this technology, our bottom-line could grow by Rs1 billion. This is why I call it a game changer.
Let’s come to energy. Pakistan steel industry’s standard rolling mill uses 130-150 kwh per ton of electricity — ours is around in the 100-range depending on the rolling size. Mi.Da guarantees 60 kwh per ton — which is 40 percent more efficient than our peers. The higher yield and lower energy usage leads to substantial savings. Plus, we are eliminating the process of making billets — unless, of course we want to in order to resell to the market.
BRR: The most oft-quoted statistic related to steel in Pakistan is the low steel consumption in the country at 43kg/per capita against the global average of up to 5 times that much. What are you banking your growth on?
HA: Yes, it is very pertinent to mention that number and compare it to the world. Today, Pakistan stands at 0.28 percent of the world steel production. Unfortunately, it pains to say that Pakistan is like a rounding error when it comes to steel making. We are not just infant per WTO standards; we are far below, at a nascent stage. At the same time, you have China that is making 51 percent of the world’s steel. What China makes in 24 hours, Pakistan does not even make in one year, all manufacturers combined.
Pakistan has now started to grow and the industry will be making 5 million tons per annum. As a company, our compounded annual growth rate for the last six years has been 25 percent. Benchmarking ourselves against the steel industry which has predominantly grown in double-digits, we are very optimistic about demand. Due to a low base effect of current year with reference to demand, it is forecasted by research analysts that steel demand could bounce back and we could witness growth by 82 percent next year and then record 10-12 percent growth in successive years.
This is on the back of public sector projects including dam constructions which are in the works (we have been shortlisted for a few), in addition to the announced construction package which will yield dramatic demand from the private sector. A lot of undocumented money will come into construction that will hopefully steamroll demand over the next few years.
BRR: What is your USP amid key competitors?
HA: Even today, no other steel maker is utilizing a 100 percent refined steel route via electric arc furnace technology, so we have set ourselves apart from our competitors from the outset with respect to technology. Our focus has always been to have international compatible infrastructure and vision.
I will come back to how we leverage our technology and our focus on R&D which allows us to explore different avenues. Let me illustrate that. There is a product called wire rod which feeds into several downstream and cottage industries. Low carbon SAE 1008 billets are the primary raw materials in its production which are typically sourced internationally. Recently, a company located in Port Qasim Industrial park set up a new plant for feeding international standard wire rods into our downstream industry. That’s a great investment, although there are also many other players in the segment too. At this stage, a large segment, which is ever growing, of our sales constitute of billet — which is pure import substitution.
There is also tremendous potential for R&D in further downstream segments such as high carbon billets for 0.60 percent+ carbon wire rods which could be a boost for more import substitution. In the end, its Pakistan that wins and it shall serve to benefit from localization, in line with the vision to ‘Make in Pakistan.’
BRR: There are a lot of saturated rolling mills making inferior quality steel in Pakistan, which are probably not meant to be used in construction. Do you think with new capacities coming into the formal sector — with Agha being a prominent contributor — it will change the structure and dynamics of the industry?
HA: A major advantage of expansions in the formal sector is the growth in the graded sector where steel producers follow quality and safety standards. Over the last 2-3 years, the shipbreaking industry — which made up a large chunk in total steel production — has been diminishing, which historically used to contribute 1 to 1.2 million tons per annum. Last year, this fell below approximately 200,000 tons, give or take. The graded sector is overcoming the ungraded sector as awareness among consumers is changing. As the industry expands capacities and brings in more advanced technologies along with economies of scale, the graded sector will be able to compete with the ungraded sector on the value proposition. For the end-user, that means reliable and quality steel at a more affordable price.