Need for a national steel policy

Steel is an integral part of our daily life, from the steel bars that hold our houses together to the steel utensils that we use to cook. As such, the steel industry is known as the mother of all industries because it supplies intermediate and finished goods that are used in numerous other industries to make products that are a part of every day life. Therefore, a country’s steel industry is often a matter of national and strategic interest.

With Pakistan’s demand for steel set to grow tremendously over the next decade, a National Steel Policy is required to protect the local steel industry from unethical international trade practices, enable the industry to cater for future growth and provide quality products at competitive prices.

When analysing the demand side of the equation there are two critical factors to consider: GDP and population growth. Studies have shown very strong correlation of steel demand and GDP growth, where steel demand spikes at a multiple of GDP growth during an economic expansion. With positive indicators such as LSM expansion, KSE reaching record levels, and low interest rate, Pakistan is set to witness a constant GDP growth rate. Moreover, learning from economic success stories of China, Brazil and India it is very evident that the developing countries’ growth path is linked to a heavy investment model. With heavy investment driving growth, steel demand is sure to come. According to the World Bank, Pakistan has a shortfall of over 10 million housing units, which will generate an additional demand of 50 million tons of steel over the next 5 years. As our population continues to grow the housing shortfall is only expected to increase. World development agencies have also identified Pakistan as having an acute infrastructure gap that should also generate an additional demand of millions of tons of steel. Major infrastructure projects already under way such as hydropower dams, public transport metro/inter-city highways, coal power plants and port terminals are already demanding over 1.2 million tons of steel every year. Moreover, the China-Pakistan Economic Corridor and the recent MoUs signed during the visit of the Chinese President will require steel in very large quantities.

This is a golden opportunity for the government to make correct policy decisions in order to create the business environment for the local steel industry to expand and become a driver for LSM growth in Pakistan. Let’s take recent examples from two economic superpowers – China and India. In the late 1990s China was in a similar position to Pakistan where it saw a large off-take in investment, infrastructure spending and GDP growth. Between 2000 and 2007, China pumped in USD 27 billion worth of energy subsidies to steel manufacturers, creating the right incentives for companies to invest in large factories that gave advantages of scale and become globally competitive. Today, China is the largest manufacturer of steel in the world and has become an exporting powerhouse. India took a different approach early on by protecting its industries through tariff and non-tariff barriers. The high tariff barriers of up to 55% gave the steel industry the time to reduce costs by developing local raw materials, supply chains and expand to large factories with latest technologies. Even today, regulatory agencies make it extremely tough for foreign manufacturers to export steel to India – using quality or licensing issues as ammunition. Therefore, India is currently one of the largest steel manufacturers. It is important to note here that policymakers of both countries support local steel manufacturers to ensure the industry is ready to compete globally.

Pakistan’s steel industry is also currently young – only manufacturing 0.06% of the world’s total steel output. The industry is of a fragmented nature and there are only a few large-scale factories. With Pakistan’s energy prices now one of the highest in the region, the industry needs energy reforms to be aggressively implemented.

Policymakers in GoP need to take a similar approach to our steel industry as India and China did during the adolescent years of their steel industry. Due to massive oversupply in the international steel market, continuing subsidies by steel exporting countries, misdeclarations at port, and trade concessions – international steel products are being marketed aggressively and are a barrier to the growth of Pakistan’s steel industry. Although subsidies may not be a viable option in our situation, high tariff and non-tariff barriers will certainly incentivize local manufacturers to invest in high capacity and latest technology facilities to meet the burgeoning demand for steel. It will also give the local industry time to build integrations along the supply chain and develop local resources. If policymakers do not take a stand against imported steel products that are dumped onto Pakistan’s ports by taking advantage of un-fair trade practices such as heavy subsidisation, export rebates, or concessionary treaties – foreign manufacturers will get a larger market share of Pakistan’s steel demand at the expense of the local steel industry. By increasing the regulatory duty on steel products, the government can incentivize investment – the hallmark of any growing economy, and take advantage of the multiplier effect that such investment brings for decades to come.

Many countries have taken this approach to ensure their domestic steel industry gets a fair competitive environment. Turkey has raised tariffs to 30 – 40%, Thailand 5% – 98%, Mexico USD500/ton, Vietnam 37.29%, and Brazil USD743/ton. It is a matter of national and strategic interest to have a strong domestic steel industry in the long run due to a number of reasons. In times of global expansion as experienced between 2003-07, imported steel can become very expensive and short in supply. In such cases, not having robust steel manufacturing capacity can hamper growth. Moreover, each country has its own quality standards. For example, since Pakistan lies in a high-risk earthquake zone, the standards of steel required are designed according to local conditions. Exporting manufacturers may or may not comply with such standards. Moreover, imported steel orders are placed in bulk and have a long lead-time. This can cut out many segments of the market, create price distortions and affect construction activities.

Pakistan’s steel industry today has a capacity of approximately 5 million tons of primary steel making. The industry provides over 100,000 jobs directly and many more indirectly. Cumulatively, the industry contributes in a big way to the national exchequer and provides quality raw material in the local market. Pakistani entrepreneurs have invested over 250 billion PKR in the steel industry, often tough times of political instability and law and order problems.

With so much at stake, the government should get serious about creating a National Steel Policy that will shield the local industry from un-fair trade practices, create incentives for entrepreneurs to invest in large scale manufacturing plants, and help companies become globally competitive by developing local resources.