ISLAMABAD: An unprecedented increase in the cost of steel scrap, record freight charges, devaluation of Pakistani rupee, increased cost of gas/electricity, and fuel are going to further hike the prices of steel products in the domestic market.

According to the analysis of the Pakistan Association of Large Steel Producers (PALSP), the latest decision of the State Bank of Pakistan (SBP) of increasing discount rate to 8.75 percent, one of the highest in the region, has proved to be the last straw on the back of struggling industry.

After facing deep crisis for two years (FY 2018-2019 and 2019-2020), the fragile steel industry was looking to rebound robustly but could not achieve any real growth due to supply chain disruptions and government’s inflationary pressures.

In terms of real production, the steel industry has shockingly consolidated and contracted by a record 30 percent. Increasing interest rates at such a fragile moment would further dent any opportunity of growth within the sector.

It stated that as per provisional figures compiled by the Pakistan Bureau of Statistics (PBS), in terms of quantity iron and steel scrap imports, a major raw material ingredient used by steelmakers in Pakistan for manufacturing quality graded rebars, stood at 347,888 tons in October 2021 declining 15.40 percent year-on-year.

Import volumes have consistently declined over recent months. In terms of quantity import of iron and steel scrap into Pakistan has plunged to 1.227 million tons from 1.824m tons in the same period last year.

A major blockade for scrap importers have been the rising costs of steel scrap in global markets, the situation has been further exacerbated by the steep decline in the rupee-dollar parity, with the Pakistani currency having declined to historical lows this year.

The industry has been plagued by continuous devaluation of PKR by five percent in the last 30 days, as the USD to rupee parity was at 169 on November 7 and now hovering at a record low of 177 with no support in sight.

The devaluation of rupee adds to landed import cost of all imported raw materials, directly leading to imported inflationary pressures domestically.

The PALSP notes that due to the record devaluation in the local currency, it would directly result in an increase of over Rs9,000/ton to their input costs.

The energy cost in Pakistan, a vital cost component for steelmaking, is double to that of the regional peers. Industrial unit effective price in Pakistan ranges between 12.28¢/kwh-16.14¢/kwh, whereas in Vietnam (7.3¢/kwh), India (6.1¢/kwh and 6.8¢/kwh in Maharashtra and Punjab, respectively) and at 6.1¢/kwh in Xinjiang, China.

However, the National Electric Power Regulatory Authority (NEPRA) on November 30, 2021 has further firmed up-charging an additional Rs4.74 per unit fuel cost to consumers for the electricity consumed in October.

The PALSP strongly objects such inflationary pressures as the decision to have a record energy tariff hike would directly burden consumers by at least another Rs4,000/ton.

In the wake of continuous upward commodity boom of scrap metals in the international market, the scrap prices remain on a bullish trend owing to a pickup in demand after economies began to operate in full swing and governments push to stimulate their respective construction industries across the globe, such as United States Build Back Better program valued at a record $1.75trillion are driving up the prices of scrap steel in global market.

Appreciatively, due to the massive technological investments made within the steel industry of Pakistan prior to Covid-19pandemic, domestic manufacturers have been able to control theirs costs of rebar for time being, however surmounting inflationary forces are going to further create upward pressure on pricing.

It is important to note that SBP increased the Current Reserve Ratio (CRR) of banks by 20 percent from five to six percent.

This will further reduce money supply to industries as banks look to capitalize in government securities lucrative pricing, whereas, the genuine requirement from steelmakers would be crowded out, leading to further supply shocks and disinvestments in the industry.

The SBP raised its key policy rate by 150 bps to 8.75 percent on November 19th of 2021 that will jack up the cost of doing business.

The PALSP strongly objects as this measure is against business and industry, which will only lead to further cost-push inflationary pressures into the economy. Also this sharp increase will discourage investors to develop their respective industries for import substitution, only to further rely on imports which our national exchequer cannot afford.

The PALSP notes that due to increasing inflationary pressures passed on by the government, cost push inflation would lead to drastic increases in domestic prices if no immediate relief is granted.

The SBP policy rate has increased by 20 percent in its last decision, the PKR has devalued by a whopping five percent in 30 days, the NEPRA has increased energy tariffs by a record 23 percent, whereas, supply chain tightness is being further irritated due to the new Covid-19 variant, Omicron, threatening to exacerbate the compounding inflationary pressures at play, the industry added.

Copyright Business Recorder, 2021

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