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Much like its cousin industry cement that heavily feeds into the construction sector, steel is also having a tough year, though it is no stranger to it. Pakistan's large scale manufacturing is in recession, and steel is a prominent participant in the slowdown. Steel used in construction- what is more commonly known as long steel has been in red for several quarters now as reduced construction demand hit manufacturers of rebars and billets. Flat steel makers on the other hand had been able to avoid a pronounced decline-  until now.

Flat steel manufacturing (particularly Cold Rolled Coils-CRC and Galvanized Iron- GI) has contracted by 1 percent while long steel has declined by 29 percent in the period Jul-Nov 19 year on year. The former is likely to come down further as flat steel makers are now raising prices given cost-push inflation. It’s the usual suspects. The depreciation of rupee raised cost of production—since Hot Rolled Coils (HRC) used in the manufacturing of CRC and steel scrap (used in the manufacturing of steel bars and billets) is imported. High financing costs due to the tightened monetary policy is another factor. Demand has also not been on the side of either flat or long steel makers. Public sector projects had been in doldrums for the past several months while commercial and housing construction had also been lethargic.

In its quarterly report, the SBP argued that the producer’s pricing power remained constrained through the first half of the fiscal year which affected profitability margins. Though prices were increased subsequent to this report, it is very unlikely to positively affect margins. Light engineering, automotives and transport sectors where flat steel is used as an input are all experiencing a profound decline in demand.

Another way to check demand is through imports. Pakistan typically imports about 30-40 percent of its long steel consumption from abroad. In the Jul-Dec period, volumetric import of steel scrap has reduced by 20 percent while steel products declined by 31 percent.

Private sector steel players have all been embarking on capacity expansions and much like cement players will now have to grapple with reduced capacity utilization. Is there a silver lining? Maybe. The most recent development that could bring in demand for steel is the Naya Pakistan Housing Program (NPHP) which will soon be running a pilot project in Punjab. If the construction takes off over the next few months, some demand recovery is expected for long steel players. The successful take-off of the pilot may generate interest in real estate all together which would further boost demand. But until some ground breaking is actually done, any forecasted growth in demand is merely conjecture.