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ISLAMABAD: The government has totally ignored the documented steel sector in the recent budget (2021-22) by removing Federal Excise Duty (FED) on the industries operating in erstwhile tribal areas, say industry sources.

They say the Steel industry informed the Ministry of Finance here on Wednesday that in the recent budget, the steel sector was hoping that the government will remove duties and taxes on the primary raw material of the local steel sector. By doing so, the government would have supported its ambitious housing initiative of the Naya Pakistan Housing in a big way. However, sadly, the government opted to totally ignore the steel sector, which is the backbone of economy of the country.

Steel industry says that in the budget, instead of providing any relief to the steel sector, that would have helped the PM’s housing initiative in a big way, the government opted to drop a bombshell on the steel sector of the country by removing the FED on the industry operating in erstwhile Fata/Pata. The local steel industry considers this move of the government as a step towards deindustrialisation of the country.

The Pakistan Association of Large Steel Producers (PALSP) has time and again informed the government that removal of the FED on erstwhile Fata, Pata will be massively misused because the government has no strong mechanism to control leakages.

The large steel sector went grappled with two most difficult years (FY 2018-19; 2019-20), when some of the major players declared huge losses, and some smaller steel units got closed.

The year FY 2020-21 has shown some silver lining as the demand has picked up.

Still, the net profit margins of the steel sector hover around three to five percent as being witnessed in the results of listed companies against FY 2020-21. With these poor profit margins, no industry could continue and there will be no future investments. This has been happening as the governments in the past, as well as, the current chose to ignore the steel sector.

The net profit margins of the construction industry on average are 13 to 15 percent and that in the steel sector is a meagre three-five percent.

Drastically increasing steel prices is an international phenomenon being witnessed across the globe because of Covid-19. The fourth wave and its variant are playing havoc with the supply chain and collection of scrap. Scrap constitutes 75 percent of the cost of manufacturing rebar and power is 15 percent, where both are on the rising trend and completely beyond the control of manufacturers. With scrap at US $550, a devaluation of every one rupee will result in increase in sales price by Rs900 per ton just to cover the resultant increase in costs.

During recent months or so, the prices of raw material (scrap) have increased from US $300 to 550 US$. @ PKR/dollar parity of 160, and by including duties and taxes this translates to PKR 52,000.

During the last five months or so, the cost of electricity increased from PKR 13 per unit to PKR 20 per unit and this translates into an additional cost burden of PKR 6,000/PMT.

Most recently, the PKR devalued further and the rupee-dollar parity has increased from PKR 156 to PKR 164.

This factor adds another PKR 4,500/ PMT to the cost as the key raw material is imported with dollars. As far as the industry is concerned, it has not passed on all of these cost increases to the end consumer. So far, the industry has absorbed a substantial portion of it by lowering its gross profit margins and passed on limited impact to the end consumer.

However, given very low net profit margins, the industry has to pass on the impact slowly and gradually to the end consumer to meet its financial obligations and remain in business.

By calculating the impact of increase in all kind of inputs, the prices of rebars in Pakistan should have been around PKR 200,000 PMT by now for the manufacturers to make a net margin of seven to eight percent.

However, the local industry has been absorbing major chunk of the impact, which is very much evident from its low profit margins from sale of rebars.

The prices of rebars in Pakistan are at par or in some cases less than the prices of rebars internationally.

On every ton of steel that is produced and sold in Pakistan, the Government of Pakistan gets PKR 32,000 to PKR 33,000 in the shape of different duties/taxes, leaving aside income tax and workers welfare fund and workers profit participation funds.

The biggest beneficiary of frequent increase in the cost of steel is the Government of Pakistan. The steel producers earn a paltry amount from these bloated figures, after running from pillar to post to run this industry in the country.

The low-cost housing initiative of the government is a great initiative. The steel sector appeals to the government to remove taxes and duties on this scheme. This can be done by the government very easily by reducing duties and taxes.

In this regard, the government is in touch with the PALSP to find out any workable solution.

Copyright Business Recorder, 2021

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