Pakistan Association for Large Steel Producers (PALSP)Decry Cost Push Inflation Measures To Damage Industry
By: SteelBis Research
The Pakistan Association for Large Steel Producers (PALSP), in a press release issued on December 6, 2021, has decried that the cost-push inflation measures taken by the government will further damage the country’s steel industry.
Stressing upon the severity of the situation the association states, “In terms of real production, the steel industry has shockingly consolidated and contracted by a record 30%, which has not been seen in the history of our Nation. Increasing interest rates at such a fragile moment would further dent any opportunity of growth within the sector”.
According to the press release, “An unprecedented increase in the cost of steel scrap globally as well as in the record freight charges, coupled with the massive devaluation of PKR, drastically increasing cost of gas, electricity and fuel are going to further lead to price increases in the domestic market”.
Commenting on the latest decision by the State Bank of Pakistan to increase the discount rate to 8.75%, one of the highest in the regions, the PALSP deemed the move as a “last straw on the back of struggling industry”, adding, “The State Bank of Pakistan raised its key policy rate by 150 bps to 8.75% on November 19th of 2021, that will jack up the cost of doing business. PALSP strongly objects as the measure is against the 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.”
According to the association, after facing a deep crisis for the previous two years fiscal 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 local government inflationary pressures.
Appreciatively, due to the massive technological investments made within the steel industry of Pakistan prior to the Covid-19 pandemic, 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.
Provisional figures compiled by the Pakistan Bureau of Statistics, 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% year on year. Import volumes have consistently declined over recent months, in terms of quantity imported of iron and steel scrap into Pakistan have plunged by -32.73% in 4MFY22 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 currency having declined to historical lows this year.
In the wake of the 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 the United States Build Back Better program valued at a record $1.75 trillion are driving up the prices of scrap steel in the global market. Stressing upon further issues faced by the industry, the PALSP stated, “The continuous devaluation of PKR by 5% in the last 30 days has plagued the industry at large, as the USD to PKR parity was at 169 on November 7 and now hovering at a record low of 177 with no support insight. The devaluation of rupee adds to landed import cost of all imported raw materials, directly leading to imported inflationary pressures domestically”.
Pakistan Association of Large Steel Producers (PALSP) notes that the record devaluation in the local currency would directly result in an increase of over 9,000rps/ton to their input costs.
The energy cost in Pakistan, a vital cost component for steelmaking, is double 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, in a new record, 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 electricity consumed in October. PALSP strongly objects to such inflationary pressures as the decision to have a record energy tariff hike would directly burden consumers by at least another 4,000 rupees/ton.
It is important to note that SBP increased the Current Reserve Ratio (CRR) of banks by 20% from 5 to 6 percent. This will further reduce the 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.
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% in its last decision, the PKR has devalued by a whopping 5% in 30 days, NEPRA has increased energy tariffs by a record 23%, 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.