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PKR Devaluation, Inflation, Raw Material Shortage Take Heavy Toll on Steel Industry

The country is facing a severe shortage of steel rebars as a result of the State Bank of Pakistan’s (SBP) inability to open Letters of Credit (LCs) for industry raw materials. The recent confirmation of energy price increases and a hike in the General Sales Tax (GST) as part of the International Monetary Fund (IMF) conditions aggravates the situation.

The Pakistan Association of Large Steel Producers (PALSP) has expressed grave concern about the current state of affairs in the steel industry, which is dealing with a rapidly deteriorating situation.

According to PALSP’s Secretary General, Wajid Bukhari, “The steel sector is in the midst of an unprecedented turmoil, with massive currency depreciation, shortage of raw materials, high inflation, and increased energy prices. The situation is extremely difficult and unviable for the steel industry to survive”.

The government has approved a revised circular debt management plan (CDMP) under various headings including quarterly tariff adjustments, deferred fuel price adjustment, and imposition of a surcharge of Rs. 1 per unit on big power consumers, where the tariff would be hiked around Rs. 7-8 per unit until August 2023.

This will have a direct inflationary impact of 7,000 Rs/ton, while increasing GST from 17 to 18 percent will have an additional impact of Rs. 3,000/tonne.

Deformed rebar prices are currently around Rs. 305,000/tonne, with inflationary pressures warranting further price increases. According to Bukhari, the steel sector has been hard hit due to difficulties in opening LCs and rapidly depleting foreign exchange reserves, resulting in a shortage of raw materials. “The manufacturers are forced to operate on very low capacities or to close their units, which has raised the cost of production and made it unviable to operate. Steel prices have risen as a result of massive rupee depreciation and demurrage detention charges on containers stuck at ports,” he said.

The PKR’s 24 percent depreciation over the last two quarters, combined with a 16 percent increase in inflation from 23.8 percent to the highest ever 27.6 percent, and finance charges raised by 13 percent from 15 percent to 17 percent, have thrown the industry into a tailspin.

“The sudden depreciation of the rupee has caused billions of rupees in losses to the industry, and stakeholders fear an unprecedented change in prices of imported finished and raw materials if landed costs continue to rise,” Bukhari added. The removal of the dollar cap by the government to meet the International Monetary Fund’s demand has resulted in the Pakistani rupee falling to a historic low, and the steel industry is on the verge of collapse”.

Steel prices have begun to rise due to the massive depreciation of the PKR against the US dollar and the rise in petroleum prices. Due to the depreciation of the local currency, uncertain economic conditions, and high inflation, industries are forced to raise prices. The industry fears that this is just the beginning, and that consumers will face even more shocking price increases when the port releases the stuck imported containers that have been subjected to heavy demurrage and detentions.

The shortage of raw materials is caused by issues with the non-opening of LCs as a result of rapidly depleting foreign exchange reserves and a weakening rupee. Due to the scarcity, many steel manufacturers have been forced to operate at 30-40% capacity, using low-quality local scrap. The cash-strapped industry is on the verge of collapse as the cost of doing business rises due to the rupee’s massive depreciation.

PALSP is calling for immediate action to address the situation, and Bukhari emphasised, “The steel industry is a crucial contributor to the economy as one of the highest tax-paying industries in Pakistan, and we need immediate intervention from the government to resolve this crisis to have our LC’s open effective immediately. High interest rates, a devalued rupee, and a scarcity of raw materials are putting undue strain on steelmakers, and we urge the government to address these issues and assist the struggling steel sector.

 

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