Pakistan Steel – An Academic Analysis (MBA Report)

Pakistan Steel – An Academic Analysis (MBA Report)

EXECUTIVE SUMMARY

The iron and steel industry holds the key to the sustained growth of the engineering sector and hence, to the development of the economy as a whole. As such the steel industry can be termed as the ‘mother industry’ to all modern industries, being the basic source of metal for them. In this perspective the importance of national assets such as Pakistan Steel, which is determined on their strength and ability to sustain the national growth rate, need not be emphasized.

 

What we actually see is an organization constrained in the confines of corruption, serious mismanagement, wrong policy decisions and lack of government support. The organization is now trying to get back on its feet and has adopted the process of complete restructuring and overhauling of facilities, finances and personnel to set the pace for growth and development.

 

In the report we have tried to analyze and evaluate the PSM and its performance. The report has been planned in a manner to accentuate the problems that hinder progress and advancement in this industry and contains opportunities available to rectify the discouraging situation at present. It contains a detailed discussion of the present status of the PSM and also the reasons for its deteriorating condition.

 

TABLE OF CONTENTS

BACKGROUND AND HISTORY………………………………………….4

PSM AT A GLANCE…………………………………………………………………… 8

PROCESS AND PRODUCTS…………………………………………………….. 10

– USES OF STEEL PRODUCTS

INTERNATIONAL SCENARIO…………………………………………………. 14

• PRODUCTION
• CONSUMPTION

PERFROMANCE REVIEW……………………………………………….21

• PRODUCTION
• SALES
• PROFIT/LOSS
• DEMAND
• SUPPLIERS
• CONSUMERS
• CONTRIBUTION TO NATIONAL EXCHEQUER
• IMPACT ON ECONOMY

 

FINANCIAL ANALYSIS……………………………………….29

• NET EQUITY
• DEBT SITAUTION
• SLAES / COST OF SALES
• FINANCIAL CHARGES
• PERSONNEL COST
• SELLING AND ADMINISTRATIVE COSTS
• BAD DEBTS AND DUES
• RESCHEDULING OF LOANS
• WORKING CAPITAL REQUIREMNTS
• FINANCIAL SUMMARY

 

COMPETITIOR ANALYSIS……………………………………41

• POHANG STELL WORKS
• TATA IRON AND STELL WORKS
• PROFIATABILITY COMPARISON

PROBLEMS AT PSM ………………………………………..50

 

 

MISSION STATEMENT OF PSM

 

To effect import substitution to the maximum possible extent whereby saving valuable foreign exchange worth million of dollars every year and to boost the indigenous engineering and construction industries by making the essential inputs (steel) available at competitive prices.

 

In this way it will help the economy achieve the planned rate of growth in the industrial output. In addition to meeting the demand of conventional users of steel, PSM has to endeavor to encourage setting up for technology intensive industries in the private sector for production of value-added products having export potential and /or import substitution effect.

 

As a corollary it has to play a significant role in promoting advancement in the know-how, opening of new vistas of technical and economic cooperation and giving a flip to the research and development activities in the field of metallurgy.

 

 

BACKGROUND AND HISTORY

 

The foundation stone of the Pak. Steel Mills was laid on 30^th, December 1973. The engineering goods industry is recognized the world over as most critical for the development of a self- reliant and vibrant economy.  This industry however depends heavily on basic metals industry, specially the iron and steel industry for the supply of resource inputs. The development of the economy as a whole depends on the iron and steel industry which in turn helps the growth of the engineering sector in the economy.

 

For rapid industrialization the necessities are an abundant supply of steel, sufficient power and adequate transport system. In the early 70’s the lack of an advanced engineering and metal sector was beginning to show its adverse effects on the overall industrial sector in the economy. The country faced various setbacks with regards to the import of steel and iron. At one point a stage had been reached where the import bill for these inputs could not be met with the financial resources available in the economy and the country began to give serious thought to this issue. The time had come for Pakistan to have its own iron and steel making plant to reduce its reliance on the import of these very essential inputs for the industrialization of the whole economy.

 

The issue was on the papers when the First 5-Year Plan was documented but was facing extreme controversy and was not given its due importance. For nearly 2 decades questions with regard to the raw material requirement, product range, plant site, machinery purchase, ore needs, ownership patterns and most of all foreign financing, were raised and remained unanswered.

 

In 1968 the PSM Corp. was set up the private sector with the sole purpose of developing a steel manufacturing industry at Karachi and other parts of the country. In January 1969 the PS concluded an agreement with V/O Tiajpromexport of the then USSR, for preparation of a feasibility report for the establishment of such an industry at Karachi. In 1971 the USSR agreed to provide techno-financial assistance for the construction of a coastal – based integrated steel mill at Karachi.

 

Under the overall supervision of Russian experts, a consortium of local construction companies carried out the construction. The plan included the development of not only the main manufacturing units but also associated infrastructure facilities.

 

There were overall 20 component units of the PSM and the first unit to start production was the Coke oven and By- product plant and the Galvanizing unit the last. The commissioning of the Blast Furnace unit in August 1981 marked Pakistan’s entry into the club of iron and steel producing nations.

 

 

PSM AT A GLANCE

 

PSM the only integrated iron and steel works of the country had been established as a base for the engineering industry, a purpose that it has served well. PSM that was inaugurated in 1985 has designed capacity of 1.1 million, tons per year. A rapid growth of the engineering industry is evident from the multiplying demand of steel in the country which PSM is not in a position to meet because of its limited capacity and as such is looking forward for expansion in its capacity.

 

Located at a distance of 40 km South East of Karachi at Bin Qasim in close vicinity of Port Muhammad Bin Qasim, is a coastal site which lies on the National Highway is linked to the railway network. PSM is spread over an area of 18,600 acres (about 29 square miles) including 10,390 acres for the main plant. Its unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest concrete reservoir in Asia. A 2.5 kilometers long seawater channel connects the plant site to feed the sea water circulation system with 216 million gallons per day.

 

The most widely used and proven route for iron and steel making i.e. advanced blast furnace technology for iron making and Basic Oxygen Furnace/Linz-Do-nawitz Converters for steel, making with modern continuous casting facilities has been adopted for PSM. Integrated with the main plant is the Coke Oven and By Product Plant where Coking coal is converted into coke. Modern techniques such as dry quenching of coke, use of natural gas injection, oxygen enrichment of the blast, high top pressure and high blast temperature in the blast furnace have been provided. PSM’s product-mix comprises rolled billets, cast billets, hot-rolled sheets, cold rolled sheets, galvanized sheets and formed sections. Besides, pig iron and metallurgical grade coke are also produced but are largely meant for internal consumption. The excess quantities of these products are, however, sold in the local market. In addition granulated boulder slags, coal tar and ammonium sulphate are, also obtained as byproducts.

 

 

PROCESS AND PRODUCTS

 

Steel is a metal composed of iron plus varying amounts of carbon as well as other elements such as chromium, nickel, molybdenum, zirconium, vanadium, tungsten, and soon. Different types of steel – that is, steel with different properties and characteristics – are produced by adjusting the chemical composition and adapting any of the different stages of the steelmaking process, such as rolling, finishing and heat treatment. As each of these factors can be modified, there is potentially virtually no limit to the number of different steels that can be made. Currently there are over 3,000 catalogued grades available (chemical compositions) of steel, not counting those created to meet custom demand, ranging from basic grades (such as for railway tracks) to sophisticated high-alloy and stainless grades for specialized applications.

 

Products and Applications:

Steel slabs billets and blooms are known as semi-finished products. Finished products include hot- or cold-rolled flat products (such as plates, coils or sheets) and hot-rolled long products (such as wire, bars, rails or beams).

Steel is used in a vast array of products. The largest markets for steel are construction (buildings, transport infrastructure, etc.), automotive and packaging. Electronic components, industrial equipment and medical applications are also important markets, particularly for special steels and stainless steels.

 

Common Uses of Steel:

Look around you and you’ll find examples of steel uses everywhere: in road, rail and bridge structures, food and beverage cans, cars, construction elements such as reinforced concrete walls and pillars, bicycles, airplanes, and in a vast array of other products. You’ll find steel in furnishings (desks, filing cabinets, handles, hinges, locks and keys, light fittings, curtain rails, chair and table legs, etc.), office items (computers, paperclips, staples, diskettes…), or in motors, mobile phones, industrial machinery, flagpoles, lawnmowers…. It is impossible to imagine a world without steel.

 

Many of the items you use every day are made of stainless steel, which is both hard wearing and beautiful. It’s used in personal accessories (glasses frames, watches, buttons, clasps, zippers, keyrings…) and household items (cutlery, sinks, saucepans and utensils, appliances), and it is prized by interior designers for use in modern furniture, lights and decorative elements. Stainless steel is also invaluable in highly specialized applications: it’s highly resistant and easy to clean surface make stainless steel extremely hygienic. It is therefore used extensively in hospital and sterile environments, food processing plants, restaurants, and so on.

Uses of Steel Products:

PSM products are used as process materials by the engineering industry in producing a variety of finished steel products. The following are some of these uses:

COKE:

• Melting iron scrap
• Carbonization in sugar mills
• Producing calcium carbide and other chemicals

PIG IRON:

• Iron and steel castings
• Equipment components
• Ductile iron pipes and pipe fittings

BILLETS:

• Steel rails and reinforcement bars
• Twisted and ribbed bars
• Rods and wire rods
• Seamless pipes and gas cylinders

 

HOT ROLLED COILS/SHEETS:

• Storage tanks
• Seam welded pipes for gas, water and oil
• Ships and launches
• Fabricated structures and welded beams
• Wheel rims

COLD ROLLED COILS/SHEETS:

• Steel pipes
• Tin plates
• Steel furniture
• Oil and gas appliances

GALVANIZED COILS/SHEETS:

• Roofing, shuttering, paneling
• Buckets and tubs
• Air conditioners and water heaters
• Fresh water tanks, ducting and home appliances

 

PSM meets its raw material requirements both from indigenous and foreign sources. Locally available materials include:

• Limestone dolomite
• Fireclay
• Bauxite
• Magnetite
• Chromite
• Fluorite

The basic minerals such as iron ore and coking coal are imported doe to their non-availability in appropriate chemistry, quantity and quality locally.

Major raw material requirement at full production level is given below:

 

IMPORTED ITEMS	AT 1.1 MTPY( in 000 tons)
Coking coal	1050
Iron ore	1910
Manganese ore	28
Ferro manganese	6
Ferro silicon	3
Aluminium	2
Fluorite	5
Zinc	3
LOCAL ITEMS	AT 1.1 MTPY( in 000 tons)
Limestone	390
Dolomite(sinter grade)	185
Dolomite(refractory grade)	46
Refractory clay	28
Silica sand	19

 

 

Production Process at PSM:

The most widely used and proven route for iron and steel making i.e. advanced blast furnace technology for iron making and Basic Oxygen Furnace/Linz-Donawitz Converters for steel making with modern continuous casting facilities has been adopted for PSM. Integrated with the main plant are the Coke Oven and the By-Product plant where coking coal is converted into coke. Modern techniques such as dry quenching of coke, use of natural gas injection, oxygen enrichment of the blast, high top pressure and high blast temperature in the blast furnace have been provided.

Full facilities have been provided for the handling of the following:

• Bulk raw materials
• Blending
• Preparation of calcined lime
• Alloy additions
• Sintering
• Iron making
• Steel making
• Rolling mills

 

Bulk raw materials (iron ore, coking coal and manganese ore) are being imported by 40000-45000 DWT vessels during the monsoon season and by 50000DWT vessels in the other months. Since the middle of 1980 these material are unloaded on the ore and coal jetty at Port Qasim by means of 2 mechanized unloaders. These have a capacity of 1000 tons per hour each and can transfer directly to the plant site through two berth conveyors and two mill-feed conveyors 4.5 km in length. These conveyors have a width of 1200 mm and a capacity of transporting 1200 tons of iron ore and coal per hour. At the plant site iron ore and coal are stored in different stockyards which have a storage capacity for sufficient material s to last for 90 and 45 days respectively.

 

Its unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest concrete reservoir in Asia.  The use of obsolete equipment reduces the productive efficiency of PSM. The organization has not maintained the equipment and processes as per the standards set by the producers of this plant. Instead of the basic oxygen furnace technology used by 70% of the steel manufacturing process other methods such as direct oxidization and induction methods should be adopted to assist in capacity expansion and increased plant utilization.

 

INTERNATIONAL SCENARIO

 

Ø Production

The steel industry worldwide produces over 750 million tons of crude steel each year (based on average annual production in the past decade). The largest steel producing countries are China, Japan and the United States, which each produce around 100 million tons of the above total. Russia, Germany and Korea each produce around 40-50 million tons. Stainless steel production has climbed rapidly in the past decade: over 16 million tonnes of finished stainless steel were produced in 1997, compared to 13 million tons in 1988 – an increase of more than 23 percent. Production has increased by more than 50 percent in Europe and Asia in that period. The largest stainless steel-producing countries are Japan (nearly 4 million tons), the United States (2 million tons), and Germany, Korea, Italy and France, each of which produced over 1 million tons of finished stainless steel in 1997.

 

Production(million metric tonnes)	1988	% of Total
EU (15)	150.0	19.2%
Other Europe	75.7	9.7%
Former USSR	163.0	20.9%
NAFTA	113.3	14.5%
China	59.4	7.6%
Japan	105.7	13.5%
Other Asia	54.4	7.0%
Others	58.6	7.5%
Africa	13.4	1.7%
Middle East	3.3	0.4%
Central and South America	34.9	4.5%
Australia and New Zealand	6.9	0.9%
World	780.1	100.0%

 

 

 

Production(million metric tonnes)	1998	% of Total
EU (15)	159.9	20.6%
Other Europe	47.5	6.1%
Former USSR	74.4	9.6%
NAFTA	127.8	16.5%
China	114.3	14.7%
Japan	93.5	12.1%
Other Asia	90.4	11.7%
Others	68.0	8.8%
Africa	12.0	1.5%
Middle East	9.1	1.2%
Central and South America	37.4	4.8%
Australia and New Zealand	9.6	1.2%
World	775.9	100.0%

World Total: 780 million metric tons in 1988, which was 775.9 million metric tons in 1998.

Ø Consumption

Steel use in any country is closely linked to its economy, with the largest consumption in the wealthiest countries of the world. Steel consumption of finished steel products ranges from approximately 20 kilograms per person per year in Africa to around 340 kg in Europe, 420 kg in the North America and 635 kg in Japan. However, the largest consumers are in Asia: Singapore (1,200 kg/capita), Taiwan (over 970 kg) and Korea (830 kg). Per capita consumption is climbing rapidly in Asia due to investments in industry, transport, infrastructure, construction and overall improved standards of living. For example, in the past decade, per capita consumption has risen by nearly 470 % in Malaysia, 240 % in Korea, and nearly 80 % in China.

 

 

Consumption	1988	% of Total
EU (15)	129.6	16.6%
Other Europe	66.4	8.5%
Former USSR	164.7	21.1%
NAFTA	132.8	17.0%
China	69.6	8.9%
Japan	86.9	11.1%
Other Asia	71.9	9.2%
Others	58.8	7.5%
Africa	15.3	2.0%
Middle East	11.4	1.5%
Central and South America	25.1	3.2%
Australia and New Zealand	7.1	0.9%
World	780.7	100.0%

 

 

 

Consumption	1998	% of Total
EU (15)	136.1	19.7%
Other Europe	35.2	5.1%
Former USSR	29.6	4.3%
NAFTA	144.3	20.9%
PR China	113.9	16.5%
Japan	70.3	10.2%
Other Asia	101.6	14.7%
Others	61.0	8.8%
Africa	15.2	2.2%
Middle East	11.4	1.6%
Central and South America	27.9	4.0%
Australia and New Zealand	6.5	0.9%
World	692.0	100.0%

 

Ø Employment

Steel production in the world has risen by approximately 30 percent in the past 25 years. In the same period, estimated employment in the major steel-producing countries (excluding China) has fallen from around 2.5 million to 1.3 million people. This enormous reduction has been the result of major investments by the world’s steel makers in modern steelmaking processes and technologies. The new technologies not only improve productivity but also increase yield efficiency while reducing resource consumption and the environmental impact of the steel-making process.

 

Ø Process and materials

It is sometimes argued that it is “better” to make steel via a particular process route, whether the traditional “integrated” route (using coal, iron ore and scrap) or the “electric arc furnace” route, which uses scrap as its basic raw material. In reality, both routes are valid, depending on local circumstances, including such factors as availability of scrap and other raw materials; local energy costs; scrap prices, local workforce skills, and so on. Production also differs according to the types of steel required, from the basic grades for heavy construction uses to the most specialized custom steels. While the manufacturing materials available to man changed little for hundreds of years, the latter half of the 20^th century has seen a tremendous influx of new and exciting materials. The world of steel is no exception.
Steel is not a single material, but a vast range of different materials constantly evolving as steel applications evolve. For example, more than 80 percent of the steels used in automobile production today did not exist ten years ago. In automotive as in other applications, steel makers are continually working in collaboration with their customers, improving and modifying their products, and creating innovative new steels.

 

Ø Environmental Issues

Is a required and essential component of new steel, making steel a naturally environmentally responsible material? In basic oxygen steelmaking, scrap represents up to 30 percent of the raw materials charged into the furnace. It represents between 90 and 100 percent of the charge in EAF (electric arc furnace) production, which is also the principal route for stainless steel production.
Steel is 100 percent recyclable: moreover, it can be used over and over again with no downgrading to a lower quality product. Steel’s magnetic properties make it simple to extract from other materials for recycling. Approximately 350 million tonnes of steel scrap is recycled each year. Stainless steel is a very valuable commodity and is therefore almost entirely recycled.

 

There is no one factor to explain the many environmental improvements achieved by the steel industry in recent years. One trend has become clear however: the steel industry has shifted its focus from end-of-pipe collection of emissions to considering improvements at every single stage of the steelmaking process. Steelmakers have therefore achieved even further emissions reductions by investing in overall cleaner production, better maintenance and improved practices. New technologies, operating practices, employee education and management attention have all been important.

 

Many of the improvements have resulted from very heavy investment programs. It is estimated that at least 10 percent of all steel industry capital expenditures have been specifically on environment improvement – or more than US$ 20 billion in the last ten years alone. This is almost certainly an underestimate, since it does not include investment in new steelmaking processes – such as continuous casting, thin slab casting or coal injection – which enable much cleaner technology to be introduced.

 

 

 

PERFORMANCE REVIEW

The project was completed at a capital cost of Rs.24700 million and was formally inaugurated in 1985. PSM today is the country’s largest industrial undertaking, having a production capacity of 1.1 million tons of steel. The construction inputs involved 1.29 million cubic metres of concrete, 5.7 million cubic metres of earthwork, 330000 tons of machinery, steel structures and electrical equipment. Its unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest concrete reservoir in Asia.

Product mix ( qty. in 000 tonnes at 1.1 mn.tons /year)

MAIN PRODUCTSOUTPUTSALABLEBillets(rolled)260260Billets(cast)175175Total long products435HR coils/sheets/plates615355CR coils/sheets200100Galvanized sheets/coils100100Formed sections1010Total Flat Products565Total long/flat products1000Coke970215Pig iron/hot metal1230135Raw steel/intermediary products:Cast billets175175Blooms275-Slabs650-Total raw steel1100175

PSM has followed a checkered pattern of perform since during the 15years of its operation. It passed through difficult period from 1985-1991 when production and sales were low and cost of production was high. As a consequence thereof, PSM suffered losses. Production, sales, profitability, and liquidity position improve during the years 1992-95. PSM however suffered heavily under the previous management in the year 1996 due to mismanagement particularly in the procurement and marketing sectors. It resulted in a liquidity crunch, substantial increase in outstanding liabilities, pile-up of inventory and heavy losses. Briefly the performance of PSM since 1993-94 has been as under: –

Production

The year-wise raw steel production against rated capacity of 1.1 mtpy is given below: –

YearProduction in Million TonsCapacity Utilization1993 – 941.04495%1994 – 950.92284%1995 – 960.89882 %1996 – 970.96388 %1997-980.84477%1998-990.98990%

The production has shown downward trend during 1997-98 due to:

Non-availability of  raw material

Large carry-over inventories of finished goods

Low sales turn-over during the period

Overdue capital repair which could not be carried out due to cash-flow problems.

The production target for the year 2000 is 1 million tonnes, i.e. nearly 91% capacity utilization. On attaining the full cycle of production the quantities of the products that can be manufactured are as follows:

MAIN PRODUCTSQTY. IN 000 TONNES/YEARCoke215Pig iron135Billets(rolled)260Billets(cast)400Hot rolled sheets/coils445Cold rolled sheets90Galvanized sheets/coils100Formed sections120

Sales

Average daily sales are approximately Rs. 40 million. The sales target for 2000 is Rs.12 billion of which Rs. 9.1 billion has already been earned.

YEARBUDGETED SALES   RS in million

ACTUAL SALES          RS in million

EXCESS(SHORTFAL) RS in million

1993-94115461421726711994-95138241506112371995-961530914024(1285)1996-971857513067(5508)1997-981822915337(2892)1998-99139701999 – 200012000          9100  (to-date)

The sales showed a marked decline since 1995-96, which is attributable, to unfavorable tariff and import policy as described below: –

Fixation of low Import trade price ITP for imported secondary steel products on quarterly basis not only damaging PSM as it had to lower its prices to remaining the market but having adverse impact on the revenue collection and balance of trade of the country.

Reduction in import duty on shredded bundled waste/scrap other waste & scrap and vessels & other floating structures for breaking-up.

Allowing import of “re-rollable scrap” by excluding it from the “negative list”.

Smuggling of iron & steel products are taking place unabated through northern borders at dumping prices hurting established steel industry in the organized sector.

Inspite of above-mentioned problems PSM was able to achieve the highest ever sales of Rs.15.4 billion during 1997-98.

Market Demand

The demand of steel products is constantly increasing.  M/s. W.S. Atkins International, U.K. who were engaged by Ministry of Production under the sponsorship of the World Bank to carry out a study on “The Steel Sector in Pakistan” in their final report of 1987 have indicated the demand of iron & steel products in the country at 3.70 million tonnes for1995-96. Extrapolating the projections at Atkins growth rate assumed at 7% per annum, the total demand size of iron & steel products works out to 4.86 million tonnes by the year 1999-2000 and 7.35 million tonnes by the year 2005 – 2006.

PSM is presently meeting the domestic demand of about 25% demand of long products and 60% of flat Products.

Customers

The main customers of PSM include traders and industrialists.  A dealer network for sales is present which aids in the distribution and marketing of the organization’s products. Industrialists include large pipe makers, storage tank and pipeline sheets manufacturers.

Small consumers buy from the dealers whereas large buy directly from PSM. The latter do so since their orders are large and must be in accordance with specific standards and specifications. They require specific grades (prime, secondary A etc.)

In 1998-99 the sales to traders were around Rs.8699 million and those to final consumers were Rs. 5189 million. Sales value of traders is higher even if tonnage levels are low since their purchases are of higher quality.

Suppliers

The main suppliers of raw materials are Australia, India, Mauritania. Coal is imported from Australia and Canada in the ratio 80% and 20% respectively. Magnese ore is mainly imported from India. Pakistan imports around 1.6 million tonnes of iron ore each year. Around Rs.100-150 crore is spent annually just on the imports of spares and alloys. The existence of an import lobby has led to an increase in bank charges from 0.5% to 5% which adds to the cost burden for PSM.

The process of purchase involves long-term contractual relationships between mining companies and PSM. Most of these contracts are for a 5-year period.

Profit & Loss Position

The position of profit and loss is given as follows-

 

YEARPROFIT/(LOSS)1993-948791994-95.961995 – 967311996 – 97(2477)1997 – 98(1571)1998 – 99(1482)(Rs. In Million)

Accumulated losses sustained during 1997-98 have decreased by Rs.906 million as compared to the previous year. There is no operational loss during 1997-98. The loss of Rs.1571 million is on account, of PTC’s and other debts/loans of the past. A detailed discussion regarding the financial status of PSM has been done in the sections ahead in the report.

Contribution to National Exchequer:

PSM has been making contribution to the national exchequer in the form of duties and taxes as is visible from the figures from the last four years: –

YEARAMOUNT1994-9544571995-9645201996-9739821997-98280O      1998-99       3188 Jul – Sept 99         957(Rs. In Million)

PSM has since its inception contributed to the national exchequer to the extent of Rs.28500 million, which is more than the capital cost of Rs.24700 million at which the project was completed. Moreover, foreign exchange saving for the value of products so far produced amount to about US$ 3.0 billion.

PSM has been contributing to the national exchequer in a big way. Duties & Taxes paid during the year 1997-98 amounted to Rs: 2710 million and in 1998-99 to Rs.3188 million. An amount of Rs.957 million has been paid in the form of duties and taxes to the Government during July-September, 1999. The total sum paid under this head to the Government so far is over Rs.30 billion (to date RS 32 billion have been paid) which exceeds the cost of Rs.25 billion incurred on the installation of the project. Agreements between WTO and the GOP have led to a change in the tariff structure from 65% to 35%. 3 years ago there were 0 duties. Now there exist not only 10% import duties but an additional 15% in the form of GST is also levied.

Employment:

PSM provides employment to more than 21000 employees on a regular basis whereas about 3000 daily wageworkers and retainers are engaged on a piece-job basis including capital repairs and emergency works etc.

With the establishment of downstream projects about 25000 persons were provided jobs while an equal amount of workers obtained employment indirectly.

Impact on the Economy:

Being the country’s largest public sector enterprise PSM is a national asset. It has been instrumental in creating new job opportunities, enlargement of range and variety of production and technical expertise and has added to the research and development in the field of metallurgy.

If the said expansion plans were implemented the benefits that would accrue to the economy are:

Increase in PSM’s market share from 32% to 71%

Substantial foreign exchange savings

Contribution to the GDP and GNP through value-added production

Providing industrial stimuli for downstream industries

Development of natural resources for industrial utilization

FINANCIAL ANALYSIS

PSM is confronted with a deep financial crisis inherited from previous years’ backlog of accumulated liabilities. The mill since its inception was running in losses. During 1988-89 the corporation earned profit for the first time. But started sustaining losses again from the next year 1989-90 owing to under utilization of production capacity at 62%. The reasons for initial losses were attributed to

Heavy capital investment.

Excessive manpower of over 23,000 employees instead of actual requirements of 12,000 to 15,000 workforce.

Law and order problems.

Poor equity ratios because of expensive debt of Rs 8 billion.

This change improved the efficiency and profitability of the mill considerably. The corporation has been able to pay off its running finances and immediate current liabilities of Rs.2.27 billion during 1992-93.While excessive manpower was planned to be absorbed with completion of expansion of the existing plants.

Income stat. Items1999(RS.000)1998(RS.000)1997(RS.000)Financial charges202834919800521856768Net profit(loss)(1482159)(1434561)(2476780)

NET EQUITY

The Corporation’s net equity has been eroding over the past several years. The main reason for this unfavorable trend is the size of financial charges incurred each year. In fact for the year ended June ’99 financial charges (Rs. 2,028.349 million) are even higher than the gross profit earned (Rs. 1,816.875) on net sales.

An analysis of key financial figures of the Corporation for the past six years shows that PSM is a highly geared (a relationship between debt and equity) organization and because of the high gearing and low capitalization, financial charges alone each year practically offset the Corporation’s profit.

 

DEBT SITUATION

PSM owes Rs.13.717 billion as principal amount in respect of Participation Term Certificates (PTC’s) and Medium term Loan (MTL’s) and Rs.7.767 billion being interest and penal interest in respect of PTC’s to the banks as at June 30, 1999. PS has not paid 2nd, 3rd & 4th installments of the PTC’s of Rs.700 million each due on July 30 ’98, ’97 & ’96 respectively. The Economic Coordination Committee (ECC) formed for PSM’s financial restructuring is handling this issue.

DEBT HEADAMOUNT DUE(Rs. Billion)Principal amount of PTC’s/medium term loans                    13.717 Interest and penal interest due7.767   Annual Payments0.7        Slab and pig iron imports 1.5        Sundry creditors0.5        Port Qasim 0.7

The major financial liabilities of PSM apart from the above are Rs 1.5 billion due on account of slab and pig iron imports. Port Qasim claims on PSM amount to Rs.70 crore and other accumulated liabilities to sundry creditors have piled up to Rs.50 crore. The PSM therefore has financial liabilities of over Rs.21 billion.

 

 

Liabilities1999(RS.000)1998(RS.000)1997(RS.000)Long-term liabilities379579941169704051335Current liabilities1224713796346579081498

As shown by the following graph the ratio of the current and expensive liabilities is increasing in the total liabilities. This sounds a double alarm for the PSM mill as these short term loans are not only expensive but they also have to be returned in the near future thus posing a severe cash crunch on the already cash strapped organization.

 

FINANCIAL COST

Financial Charges would come to in the vicinity of Rs.2.5 billion roughly. The Corporation has incurred substantial losses in gross margins due to frequent stoppages of production at various plants and also due to goods being produced that are not of specifications that are in demand. The increase in gross sales in 1997-98 was due to the incentives given to customers as free credit facility, discounting of LCs and commission paid to every customer throughout the year. Plus the Government imposed restrictions on imports. The only increase in net sales is for 1996 and this is because no discounts were allowed that year. The discount shown is against delivery orders issued last year. For the other years the fluctuation was mainly due to government policies and poor capacity utilization due to lack of plant maintenance.

Income stat. Items1999(RS.000)1998(RS.000)1997(RS.000)Financial charges202834919800521856768

HIGH PERSONNEL COST

Currently PSM is facing severe financial crunch caused by rising cost and falling sales price due to unfair competition from commercial imports and 5000 excess staff burden. The imbalance has resulted in higher unit cost, which makes PSM unviable. The personnel related cost is around 25% of unit cost against world average of 15% because of the 5,000 excess workforce. The decrease in Administrative costs in 1998 & 1997 were due to the different economic measures taken by PS in terms of layoffs and reduced overtime and bonus. The 12.47mn increase in 1999 is due to the increase in contract labour plus medical and provision for gratuity made this year.

The following table shows how increase in capacity via the concept of economies of scale will help in reducing the overall manpower cost. Thus, in order to stay competitive and attractive in the eyes of the investor capacity expansion is a must.

Prod.CapacityVariable cost(%)Fixed cost(%)Manpower cost(%)0.89 mtpy50.3349.6724.601.1 mtpy55.3146.6922.051.3 mtpy57.5842.4219.241.5 mtpy56.4443.5616.341.8 mtpy51.9048.1013.292.2 mtpy48.4851.5210.042.6 mtpy51.8348.179.083.0 mtpy52.9747.038.74

SELLING & ADMINSTRATIVE COST

The same reasons apply to Selling Expenses for the 8% increase in ’99 and decrease in ’97 of 23%. The legal expenses are due to expenses in International Arbitration case. In other income the major increase was due to the encashment of FIB’s and write-back of provision created for shortages in stocks. A provision of Rs.12.693 million was given again. The key problem is that PSM infrastructure was designed to handle an output of 3 million tons a year while the plant has a capacity of 1.1 million tonnes per year. The present production capacity of PSM can cater to all the needs of Pakistan but due to flexible import of secondary material including scraps as well as import of primary products under the cover of secondary metal plus low import duty tariff and management irregularities huge losses are being incurred. The present management believes that the organization can become profitable overnight if its capacity is expanded to 3 million tons.

DECLINING SALES

The decrease in Gross Sales in 1999 was due to decrease in customs duty of finished goods and increase in raw material which lead to a decrease in prices of imported products and as a result competition for PSM increased resulting in low sales. Plus the deteriorating state of the plant was also a major factor.

Income stat. Items1999(RS.000)1998(RS.000)1997(RS.000)Sales139701531530930612678210Cost of sales121532781342027511779361Gross profit18168751889031898849

This trend has other reasons as well since there is now no need of a license requirement to import steel and other related goods any body can import steel. A second illegal source of substitute products is the porous afghan border as the steel lying in the warehouses of former soviet states is finding its way into the market.

MAJOR FINANCIAL DISPUTES AND BAD DEBTS

For long-term loans and advances 0.337mn loan is receivable from a chairman since 1996 and an advance was paid to Messrs. Banbhore Industries for supply of goods without a purchase order (increase of 2.35%).  In short term finances the major increase in 1997 is due to 1,121.5mn outstanding against Finance against documentary bill. For Deposits and other receivables an amount of Rs.22.7 mn is receivable from Arabian Sea Country Club (land rent). The delay in the capitalization of capital work in progress is due to the unadjusted bills of the contractors. PS has investment in 9 companies at accost of Rs.27.9 million. In debtors an amount of Rs.49.89 million is receivable from People’s Steel Mills on which there is a dispute.  The corporation’s problems are aggravated by a perennial liquidity crunch. As the Corporation is cash strapped it has neither been able to carry out major mandatory repairs nor improve the production efficiency of the existing facilities. In the present state of financial health of the corporation, substantial modernization or expansion of the production capacity to bring it to an optimum economic level cannot be achieved.

The financial restructuring of PSM is long overdue. Before several proposals were developed by PSM but they could not be implemented for want of the Government approval.

RESCHEDULING OF BANK LOANS

Under an agreement with syndicate banks an amount of Rs.11050 million was converted into PTC’s. The PTC’s holders are entitled to participate in the profit of PSM at the minimum rate of 11% per annum. It also provides that in case of loss or in-sufficiency of profits in any financial year, the Government of Pakistan is required to make good the whole or so much of the shortfall as there ‘is against the 11 % interest.

An amount of Rs.5752 million has fallen due on PSM on account of loan installments/ return on PTC’s (interest payments) as on 30.6.1998. The above dues could not be paid by PSM to the banks due to losses sustained. The Government of Pakistan has also not paid the’ dues as guarantor and nor has it made provision in the budget as per agreement. This is despite the fact that huge losses were incurred in 1996 as a result of which PSM during Mr.Usman Farooqi’s tenure was unable to pay installments following due or service the interest due’s. Three letters written by him and his Director (Finance) were addressed to Finance Ministry. This is evidence enough that he was not making profits as claimed by him in the press. Accordingly, as a last resort it has been agreed between PSM and the Banks to reschedule the PTC’s by granting seven years moratorium w.e.f. 1.7.1996 on the terms and conditions indicated by the commercial banks.

The PSM has now worked out an arrangement with the banks to pay off its accumulated debts and medium term loans. Under the said arrangement the PTC’s of over Rs.14 billion and Rs.3.4 billion will be converted into government guaranteed bonds with 15 years’ maturity period effective from July 1998 with a moratorium period.

WORKING CAPITAL REQUIREMENT

The capital repairs and maintenance of the plant remained a neglected area and is being currently operated at the risk of a sudden breakdown.   PSM immediately needs about Rs.3.0billion for necessary repairs/maintenance. PSM maybe assisted in arranging a loan of Rs.3.0 billion from NCB’s in order to under-take essential BMR/ repairs & maintenance’ works.

FINANCIAL SUMMARY

Balance sheet items1999(RS.000)1998(RS.000)1997(RS.000)Issued capital172064971720649750000Accumulated losses818544567032865268725Long-term liabilities379579941169704051335Current liabilities1224713796346579081498Operating assets171247341766014618599512Long-term investments278023180233802Current assets135548141264516913060476

Income stat. Items1999(RS.000)1998(RS.000)1997(RS.000)Sales139701531530930612678210Cost of sales121532781342027511779361Gross profit18168751889031898849Operating profit552349758593(287489)Financial charges202834919800521856768Net profit(loss)(1482159)(1434561)(2476780)

COMPETITOR ANALYSIS

Although Pakistan is no major player in the world steel market as it produces only about 0.26 % of the world total production of Steel.

Production  per capita in kgs World average150India25Pakistan  ( PSM+others )7+7

Pakistan has no other integrated steel mills .we for the competitive analysis have selected two steel mills

POHANG STEEL WORKS – SOUTH KOREA:

Same capacity of 1.1 million tons, similar time of inception, 1975 as to PSM

TATA IRON AND STEEL WORKS  – INDIA:

Geographic proximity to PSM

Pohang Iron & Steel Co., Ltd.

Was established in 1968 and is now the largest iron and steel producer in South Korea and the second largest in the world. It produces cold-rolled steel for steel pipes, ships and containers, hot-rolled steel for automobiles, refrigerators and washing machines and stainless steel and wire rods as well surface-treated sheets and electrical sheets. Hot-rolled steel sheet products accounted for 49% of 1998 unconsolidated revenues; cold-rolled steel sheet products, 36%; stainless steel sheets, 14% and other, 1%. Unconsolidated revenues accounted for 81.8% of 1998 consolidated revenues. Exports accounted for 45.9% of unconsolidated revenues. The company has 29 consolidated subsidiaries, twelve in South Korea and seventeen worldwide.

The company currently operates two works, one each in Pohang and Kwangyang, South Korea. Korea Development Bank is the major shareholder with 21.07% of issued stock.

POSCO started in 1968 when the nation’s steel industry was suffering from serious lack of capital, technology and experience. The self-sufficiency rate progressed slowly. From the 1st phase of the construction of Pohang Works in 1970 to the completion of Kwangyang Works 4th phase, all executives and employees of POSCO toiled day and night towards the ultimate goal of supporting the nation economy through the growth of the steel industry.

The results of the incessant hard work were astonishing. After 30 years, POSCO has emerged as one of the world’s leading steel producers with an annual production capacity of 28 million tons. But POSCO’s sights are not confined to this achievement. With an annual investment of more than one trillion won for product development, plus the rationalization and modernization of its production facilities, POSCO is now reputed to be the most competitive steel producer in the world. Another corporate aspect emphasized by POSCO since its inception is financial stability. With its balance sheet in the black throughout its corporate history, POSCO now boasts of a 50% capital adequacy ratio, the highest among its rival companies in the steel industry. Thanks to such an impressive business performance, POSCO successfully went public in 1988 through the Korean Stock Exchange. POSCO later listed its shares on the New York and London Stock Exchanges in 1994 and 1995, respectively. POSCO maintains a one-company-two-steel-works system to maximize its efficiency and productivity. Pohang Works, which produces a wide array of products in small volumes to fit individual needs, and Kwangyang Works, which focuses on production of a limited number of items in large volumes, definitely make for a winning combination.

Profitability Analysis:

On the $9.94 billion in sales reported by the company in 1998, the cost of goods sold totaled $7.12 billion, or 71.7% of sales (i.e., the gross profit was 28.3% of sales). This gross profit margin is lower than the company achieved in 1997, when cost of goods sold totalled 68.1% of sales.

Pohang Iron & Steel Co., Ltd.- ADR’s 1998 gross profit margin of 28.3% was lower than all three comparable companies (which had gross profits in 1998 between 37.2% and 49.0% of sales).

The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $2.27 billion, or 22.8% of sales. This EBITDA margin is worse than the company achieved in 1997, when the EBITDA margin was equal to 26.2% of sales.

In 1998, earnings before extraordinary items at Pohang Iron & Steel Co., Ltd.- ADR were $695.64 million, or 7.0% of sales. This profit margin is an improvement over the level the company achieved in 1997, when the profit margin was 6.3% of sales.

The company’s return on equity in 1998 was 18.6%. This was significantly better than the 9.9% return the company achieved in 1997. (Extraordinary items have been excluded).

CompaniesEmployeesCapacity (mn.tonnes)Sales / employeePSM21,9501.113,000$POHANG19,15028525,000$TATA59,235

4.518,000$

TATA Iron and Steel Works-India

The Tata Iron and Steel Company Limited manufactures and markets steel, welded steel tubes, cold rolled strips, bearings, cement and other related products. Steel accounted for 73% of fiscal 1999 gross revenues; steel tubes, 7%; cement, 5%; trading products, 3%; bearings, 2% and others 10%.

Profitability Analysis:

On the 51.07 billion Indian Rupees in sales reported by the company in 1999, the cost of goods sold totaled 37.52 billion Indian Rupees, or 73.5% of sales (i.e., the gross profit was 26.5% of sales). This gross profit margin is slightly lower than the company achieved in 1998, when cost of goods sold totaled 73.3% of sales. There was a wide variation in the gross profit margins at the three comparable companies, from 6.5% of sales to 26.8% of sales.

The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were 10.54 billion Indian Rupees, or 20.6% of sales. This EBITDA to sales ratio is roughly on par with what the company achieved in 1998, when the EBITDA ratio was 21.3% of sales.

In 1999, earnings before extraordinary items at Tata Iron And Steel Company Limited  were 2.82 billion Indian Rupees, or 5.5% of sales. This profit margin is lower than the level the company achieved in 1998, when the profit margin was 6.2% of sales.

The company’s return on equity in 1999 was 6.9%. This was a decline in performance from the 8.1% return that the company achieved in 1998. (Extraordinary items have been excluded).

Profitability Comparison

PRIVATECompanyYearGross
Profit
MarginEBITD
MarginNet incomeTata Iron And Steel Company Limited 199926.5%20.6%5.5%Tata Iron And Steel Company Limited 199826.7%21.3%6.2%Pohang Iron & Steel Co., Ltd.- ADR

199828.3%22.8%7.0%Pakistan Steel Mills 199812%7.7%-9.3%Pakistan Steel Mills199913%5.6%-11%

PROBLEMS AT PSM

The present management has been making vigorous efforts, to accelerate production and sales with strict control on expenditures so that the losses are minimized and funds are generated for undertaking BMR/Capital Repairs of essential production units. However, the measures taken by the present management alone cannot pull back PSM from the current crisis situation. Immediate support is, therefore, required by PSM in the following problem areas. The problems have been categorized into fiscal and non-fiscal problems.

Financial problems have been discussed at great length in the previous section on Financial Analysis. Stated with the problems are the required steps that need to be implemented to reduce the burden on the organization. Proposals for rejuvenation of the organization are explained in detail under the categories mentioned above.

A combination of factors, including the misplaced priorities of the government is said to lead to the deteriorating state of PSM

Suffering losses of over Rs.5 billion in the last 3 years the PSM now has total liabilities worth Rs.17 billion

Increasing financial costs adds to the cost and renders the prices incompetitive.

Increased dumping and competition from S. Africa and C. Asian states has forced PSM to reduce its prices

The existence of traders importing superior quality steel but showing them as inferior products helps them reduce the duties paid and thus charge lower, more competitive prices

Lack of implementation of the expansion plans (worth $1.9 billion) hinders PSM from improving productivity and achieving economies of scale

The frequent change in management (6 chairmen came and went in 1990 alone) led to corruption and mismanagement of funds

Capacity stagnation at 11 lac tonnes per year

Overstaffing

FISCAL ISSUES

Import duty exemptions:

In order to restore market equilibrium and retain market share, following is needed: –

The exemptions allowing import of the following Negative List items be withdrawn from the Trade Policy 1998-99.

Secondary Quality Steel Scrap

Re-rollable Steel Scrap

The following proposals are made for the fixation of Import duty:

PTC HeadingDescriptionImport Duty Agreed7204.4100&7204.4900Shredded & bundled waste/Scrap15%8908.0Vessels & other floating structures for breaking up35%

The SRO’s allowing imports on concessionary rate of duty are withdrawn.

Only re-rolling mills should be allowed to undertake import of re-rollable steel items.

Till, such time as the installation of weighbridges is completed at the Customs posts, imports through land-routes be stopped completely and borders be sealed to prevent smuggling and under invoicing.

The import duty on the primary raw-materials and spare parts (not manufactured locally) of PSM be fixed @ Zero% and 10% ad valorem respectively as PSM is entirely dependent on imported raw materials for its production. However, in order to save foreign exchange in these difficult times,’ Pakistan’s own reserves of iron ore should be explored and exploited for which there is a Chinese offer of $2.2 million (grant).

Charging of Presumptive Tax under Section 80-C:

The tax authorities classified PSM as a “supplier” and charged presumptive tax at.2.5% of Sales under Section SO-C of Income Tax Act instead of treating it as a manufacturer and charging 0.5% under Section80-D. This tax has been levied retroactively from 1991 which amounts to Rs.1billion out of which Rs.256 million has already been recovered from PSM. This is an obviously perverse decision and need to be corrected.

PSM should he restored the status of a manufacturer and it should be charged under Section 80-D, refunding the excess amount so collected by CBR on this account.

Refund of Excise Duty on Slabs-Case Won by PSM in Sindh High Court:

CBR had levied excise duty amounting to Rs.628.8 million on Slabs which was contested by PSM and High Court of Sindh had decided the case in favour of PSM. The decision of the High Court needs to be implemented and the amount so collected should be refunded PSM or be adjusted against future tax demands.

Sales Tax on Blooms:

The sales tax department had raised a huge demand of Rs.1.63 billion (including additional tax) on blooms from 1990-91 to 1994-95. Bloom is an intermediary product used in the manufacturing of billets.   Exemption of sales tax on blooms may therefore, be granted retroactively- from the date of its application, as PSM cannot bear this huge liability.

Sales Tax on Mark-Up:

The Sales Tax Department in February 1996 raised demand of Rs.33 million as sales tax on mark-up received from customers from July 1993 to September 1995. Knowing the above fact, PSM has started charging the sales tax on mark-up from its customers w.e.f. 1st March 1996 and the same is deposited in the Government treasury regularly. As regards past liability, the same cannot be recovered from the customers at this belated stage and therefore, should be condoned.

Import Duty on Imported Bulk Raw Materials:

The import duty leviable on imported bulk raw materials i.e. Coal, Iron Ore, Manganese Ore etc. is 10% and the incidence of import duty on the cost of production is significant. In order to reduce losses, import duty on Coal, Iron Ore etc. must be withdrawn.

Import duty on Plant and Machinery:

In order to reduce the ‘cost of production of Steel Products, PSM should be exempted from the payment of customs duty on import of Plant and Machinery for its BMR and Expansion Schemes. Alternatively, the rate of customs duty on such Plant & Machinery should not exceed 10%.

NON-FISCAL ISSUES

BMR/CapitaI Repairs:

The normal life of Steel Mill is taken to be around 50 years. In such a long period, it is essential that substantial investments be made regularly for modernization/up-gradation/ optimization of the plant and equipment. The practice of up-gradation/modernization of steel plants’ is being followed world over. For example M/s. Rautaruuki of Finland spend about $ 127 million every year for modernization and up-gradation of their plant. Through these efforts they have not only been able to operate the plant efficiently but have also enhanced their capability (from 1.1 mtpy to 2.0 mtpy). Similarly, British Steel makes an average annual capital investment of about pound sterling 200 million in this regard.

M/s. W.S. Atkins International of U.K. carried out a Technical Audit and Basic Engineering study of PSM in 1991. In their report they observed that PSM should have been spending something in the order of pounds sterling 20 million (Rs.1.5 billion) each year on BMR and Capital Repairs to maintain and improve the works. However, during the 15 years operation history of PSM, no appreciable investment was made for catch-up maintenance and balancing/ up-gradation of the plant and equipment. The Russian supplied plants with weak instrumentation and control systems have therefore been deteriorating and immediate action for catch-up maintenance and replacement of outdated components became a burning necessity.

PSM, therefore, for the first time ever initiated a BMR Scheme in1993 for up-gradation of number of units on self-financing basis. A total expenditure of Rs.1284 million has so far been incurred on the BMR Scheme. Further progress on this Rs.5.0 billion scheme has received a serious set back due to adverse financial position. PSM intends to take-up the remaining BMR works during the fiscal years 1998-99 and 1999-2000 subject to arrangement of required funds.

Payment of Demurrage:

One of the major issues faced by PSM is import of unwanted Pig Iron and Slab.

Out of the total quantity ordered by the previous management in 1996, 98425 tons of Pig Iron and 90874 tons of Steel Slabs at a total cost of about Rs.2.5 billion has been received. Most of these imports are awaiting clearance at the port. PSM does not have the necessary funds for their release. Besides, the mill cannot use these Slabs without first cutting them. It stands to lose a significant amount of money on this account but there seems to be no way out. PSM, may at least be exempted/condoned from the demurrage and storage charges levied by the Port Authorities which at the moment amounting to above Rs.100 million.

MEASURES TO ELIMINATE PROBLEMS

TASK FORCE ON PAKISTAN STEEL

The Government of Pakistan constituted a Task Force under the Chairmanship of Mr. Zafar Iqbal, Chairman, NDFC in August, 1997 to address the fundamental question if it is appropriate to continue operating Steel Mills and if so, then develop an action plan for rehabilitating and making it a viable entity.

The Task Force after an in-depth study has concluded that psm should not only continue to operate but it must be strengthened/expanded. In order to rehabilitate the Steel Mills and make it a viable entity, the Task Force has recommended a number of immediate/ short term and long term measures. The measures recommended by the Task Force have by and large been referred above.

A meeting was held in the Ministry of Finance on 27th December 1997 under the Chairmanship of the Finance Minister to consider the report of Task Force on PAKISTAN STEEL. Mr. Zafar Iqbal, Chairman of the Task- Force made a presentation which was attended by Deputy Chairman, Planning Commission, Secretary (Finance), representatives from Ministries of Commerce and Industries & Production, CBR etc.

The recommendations of the Task Force were discussed in detail. The Committee endorsed almost all the recommendations of the Task Force.

PRIME MINISTER’S COMMITIEE FOR EXPANSION & REHABILITATION OF PAKISTAN STEEL

The Prime Minister while visiting PAKISTAN STEEL on 24th February 1998 constituted a Committee under the Chairmanship of Secretary, Ministry of Industries & Production to give recommendations for expansion and rehabilitation of PSM. The Committee has submitted its report to the Prime Minister oil 16th March 1998. The Committee interalia recommended the following: –

ECC’s decisions taken on 3rd March 1998 regarding PSM should be implemented immediately.

1. ii) The import of secondary quality steel products should be banned or alternatively the 1TP of secondary quality steel products should not be fixed at less than 80% of the ITP prime products.

iii) Government may encourage the banks for re-scheduling of the redemption of PTC’s by giving 5 years moratorium from 1.7.1996. Penal interest may not be charged.

1. iv) PSM should prepare a revised PC-1 or BMR/Expansion to 1.3 mtpy and obtain all necessary administrative approvals.
2. v) The Committee agreed in principle for expansion of PSM to 3.0 mtpy and beyond. It recommends that the expansion should be carried out in phases subject to the technical, physical and financial viability of each phase, for example, 1.3 mtpy, 1.5 mtpy about 2.0 mtpy, 3.0 mtpy and beyond.

The early implementation of ECC decisions on Task Force recommendation as well as Prime Minister’s Committee recommendation will certainly ensure rehabilitation/ revival of PSM and make it a viable and profitable entity.

PRE-FABRICATED STEEL STRUCTURES/BUILDINGS

PAKISTAN STEEL has developed the capability of designing, fabrication and erection/installation- of various pre-fabricated steel structures/buildings like overhead bridges, overhead car parking, residential houses/buildings etc. PSM has offered to the KDA to erect pre-fabricated steel bridges and multi-storied car parking cum-shopping centers to be set-up in different areas of Karachi City on a turnkey basis. The structures erected and installed by using this technology would have a life span of around 100 years and therefore shall be cost effective as well. PSM would use indigenous material instead of importing the same from foreign countries and thus contribute to foreign exchange saving. A committee formed by the Provincial Ministry is presently evaluating the feasibility of the offered proposal.

This action will not only enhance revenues for PSM but will also allow the development of the construction and engineering sector in the economy. The country will be able expand employment opportunities and use local resources to achieve growth without any loss of foreign exchange in importing expertise and materials for these projects.

INSTALLATION OF A CRANE

The Engineers of PAKISTAN STEEL succeeded in installing a crane/ weighing 350 tonnes, at a height of 26 meters/ through a self devised technique and thus saved an amount of around Rs.40 million which PAKISTAN STEEL would have to spend otherwise in the process. To ensure smoother and faster production activity at Converter Shop and Billet Caster of Steel Making Plant, the crane which has the capacity of lifting 180 tonnes of Steel, vertically and horizontally, was imported from China, at a cost of US $ 1.02 million. However, according to its installation plan, which was to be carried out by the Chinese experts, a big portion of the Steel Making Plant needed to be dismantled. The installation plan of the Chinese experts also required to stop the operation of an existing 30 tonne crane/ for a period of one month, which, including new constructions might have cost a huge amount estimated to be around Rs.40 million.

To over come this difficulty the engineers of the Central Maintenance Department devised a new technique that made it possible to install the crane without any dismantling, suspension on going operations or fabricating the new civil works. The new technique that was based .on the theory of mechanical advantages was never used by the Chinese before and as such the job without their help was completed in the minimum record period of 3 weeks. Another innovation resulted in making the lifting of a 27.8-meter long bridge of the crane possible, in the space of 27 meters available between the two columns.

ACCOUNTABILITY

The present management has taken measures to reduce the losses and liabilities with the cooperation of the workforce of the organization. They have exhibited appreciable support to the management and made sacrifices in this regard, apart from hard work and a spirit of dedication in maintaining the production at the possible optimum level.

While plugging the holes of any possible ‘irregularities’ PAKISTAN STEEL management has also been making persistent efforts to bring corrupt elements to book and to recover the misappropriate embezzled amount from them. In this regard so far:

• 9 draft charge sheets to be served on various officials of previous management in 1996 have been sent to the Ministry of Industries and Production for necessary
• Copies of the investigation reports have also been sent to the Ministry of Industries and Production for sending the same to Ehtesab Cell for initiating necessary action for recovery of embezzled/misappropriated amount.
• Charge Sheets have also been served upon 28 other officers for their alleged involvement in corruption cases and necessary inquiries have been instituted against them.

PSM management is providing all possible support to the investigating Government Organizations and seven cases have already been registered by F.I.A. in this connection. It may also be mentioned that the services of 16 officers that had been terminated during previous management in 1996 have already been restored.

QUALITY IMPROVEMENT

Pakistan Steel is working with an effective Quality Control System. Quality is being monitored and controlled at every stage of production. Effectiveness of Quality System is shown by the decline in Quality Complaints. To minimize the complaints of the Customers, Pakistan Steel has also established an additional Cell in Quality System, which ensures correct deliveries to the Customers at the time of dispatch of material. Special attention is given to the complaints of thickness verifications which have now declined from 0.006%  (for 1992-93) to 0.003% (in 1997-98) and .no valid complaint was received in 1998-99. On the other hand overall decline in valid Quality Complaints now ranges from 0.062% of (1992-1993) to 0.03% (in 1998-99).

To further improve the Quality of its products, Pakistan Steel is on line for ISO-certification, and its Process Laboratories have already received certification of ISO-9002 whereas other production units are in the process of certification.

COST  CONTROL

With a view to avoid wasteful expenditures and minimize production & overhead costs, strict cost control and economy measures have been adopted. The measures have resulted in substantial cost savings. The material that is a significant factor of cost of production has been kept in control.

Although devaluation of Pak. Rupee against US$ has taken place several times ranging from 9% to 17% during the last five years. The prices of Coal and Iron Ore, which are two important raw materials of Pakistan Steel, were brought down by 6% & 9% respectively, in year 97-98 as compared to last year. By adopting various economy measures, labor cost was decreasedbyRs.34million and Rs.172 million during 96-97 and 97-98 respectively compared to previous years. Cost on Stores & Spares has also decreased by 30% and 20% during 97-98 and 98-99 respectively as compared to previous years.

OPPORTUNITIES FOR PSM

PROMOTION OF DOWNSTREAM INDUSTRIES

Right from the very beginning Pakistan steel planned for a steady growth of the down stream industries based on the utilization of its products. Committed to set up a pace of rapid industrialization in the country as one of its prime objectives Pakistan steel started making promotional efforts for establishment of down stream industries in the private sector.

Pakistan steel encouraged entrepreneurs in the private sector to establish these industrial projects by providing needed information about its own products and projects that could be profitable and feasible. PS even created a fully developed industrial estate of 1420 acres with its periphery for the benefit of the entrepreneurs who wished to locate their industries in close vicinity of the iron and steel works so as to be near the source of raw material and o avail other benefits. However there was no binding and projects could be set up anywhere in Pakistan by prospective investors. The interested parties and organizations could carry on their own techno-economic feasibility studies on these projects. These efforts of Pak steel bore fruit.

Out of the 54 which were identified as many as 32 downstream units have so far come up in different pats of the country and are in production. Another three are in the stage of completion while 8 projects are in various stages of planning and implementation. Most of these down stream projects have been set up in the vicinity of PSM.

These industry are presently producing value added engineering goods such as:

Steel pipes

Seamless pipes

Wire rods

 

PROFIATABILITY COMPARISON

PROBLEMS AT PSM ………………visited China in January 1998 and a draft Framework Agreement on Principles for expansion of PAKISTAN STEEL at an estimated cost of US $ 1887.55 million was initialed by the two sides. However M/s. MCC have now brought down the cost to US $ 1532 million after deleting some of the plants/facilities. They have also offered to arrange loan to the extent of US $ 850 million and have also agreed to participate in equity up to US$ 100 million. Their proposal is presently under examination by the Ministry of Finance.

In addition, M/s. Tiajpromexport of Russia who are the original suppliers of plant & machinery to PSM have also shown interest in the expansion program of PSM up to 3.0 mtpy. An Inter-Governmental Agreement between the Governments of Pakistan and the then USSR was signed in November, 1989 extending the Russian State Credit of US $ 95 million for the Expansion Scheme of PSM. This credit could not be utilized due to disintegration of USSR. The agreement now needs to be ratified between the two Governments.   M/s. Tiajpromexport have also recently offered commercial credit of US $ 100 million for the up gradation of the existing facilities of PSM. The proposal is presently under examination by EAD.

The scheme should be successful as such was the case in India where capacity expansion led to the increase in production from 60 lac tonnes per year to 2 crore 20 lac tonnes per annum. Other steel producing countries such as Iran and Saudi Arabia have also increased production capacity.

 

SWOT ANALYSIS OF PSM

STRENGHTS

Monopoly:

Steel mill is the only integrated steel mills in the country whereas India has six government owned steel mills plus the gigantic TATA steel and iron works. These seven contribute as much as 16.1 million tons per year of the 28 million tons. The competition in Pakistan is limited to only small Re-rolling mills and foundries such as the infamous:

– Ittefaq Foundries

– Peoples steel mills

These mills are scattered all across the country and they contribute an almost equal amount of steel products in the country as of steel mills which is equal to 1 miilion tons per year.

Trained Human Resource:

Over the years steel mill has been the hub of activity in the metallurgical sector of the country. More than 10,000 technical personnel have been trained at the Steel mills so much so that some people in the management have acquired a loss-making mill in the Central Asia republic and have turned it into a profit making enterprise. These persons and those who are now performing their jobs at the mills at the PSM is now a highly trained pool of workers whose services can be utilized at the improvement of the engineering sector of the country.

Available Infrastructure:

The plant layout was designed according to the plans that with in the next five years it will be upgraded to 1.3 then to 1.5 million tons production per annum. Everything including the plant powerhouse the blast furnaces were designed to accommodate the third blast furnace of 1750 tons per day capacity. These units were never installed although a whole design bureau is functioning in the PSM. The human resource has also been trained and the Metallurgical training department is also working in order to fulfill the human resource requirement.

Proximity to the Port:

Located at a distance of 40 km South East of Karachi at Bin Qasim in close vicinity of Port Muhammad Bin Qasim is a coastal site, which lies on the National Highway, is linked to the railway network. PSM is spread over an area of 18,600 acres (about 29 square miles) including 10,390 acres for the main plant. Its unloading and conveyor system at Port Qasim is the third largest in the world and its industrial water reservoir with a capacity of 110 million gallons per day is the largest concrete reservoir in Asia. A 2.5 kilometers long seawater channel connects the plant site to feed the sea water circulation system with 216 million gallons per day.

The location gives a high advantage as to the bulk of raw material is shipped right into the stores of the PSM through a conveyor belt from the ships which anchor on  Port Qasim.

Distribution Network:

Pakistan steel has a well-established buyer network, which reduces the sales effort on the part of the organization as a whole. The network consists of dealers who resell directly to the market after purchasing from PSM. This does not require PSM to maintain direct contact with its smaller buyers. Larger industrialists and traders are dealt with directly since orders are of more value and are in accordance with standard specifications and quality requirements.

WEAKNESSES:

Imported Raw Material:

The duties levied on imports are variable. The GOP used to impose the requirement of an NOC approved by the PSM before imports were allowed to enter the country but such is not the case anymore. In addition to this PSM has to rely on imports due to the non- availability of major inputs such as coal and iron ore. The GOP has though improved the situation by reducing the tariff rate from 65% to 35% that has considerably affected the manufacturing cost.

Overstaffing:

The number of workers at present poses a problem since they are not in lieu with the capacity utilization of the plant. Overstaffing means that a large number of personnel are part of the workforce even when there is no need of them. Instead of cutting down on the plant workers the idea should be to reduce the administrative staff which is in the form of lots of secretaries and assistants for the higher officials. 78 secretaries make up the workforce in just 9 directorates. Also the idea being studied at present is to outsource security to cut personnel cost here. Getting rid of the trained shop floor workers, engineers and technicians is not a viable option.

Bureaucratic management:

PSM is probably the only plant in the world where none of the CEO’s has ever been an engineer or even an employee promoted from within. Most of the CEO’s had been appointed by the Ministry of Production and hence their only motive was either to satisfy those in the high ranks.

 

 

 

On the other hand the level of government support as far as raw material imports are concerned is not substantial. Also the GOP takes no solid actions to eliminate the problem of dumping as has been done in Iran and India.

Plant Life:

PSM is based upon one of the most widely used steel making technologies in the world. The blast furnace, which is the heart of an integrated steel plant, has an operational life of 30 years. This and other related equipment at PSM is in dire need of replacement and BMR in the near future. PSM does not have the finances needed to conduct the required amount of capital repairs, which are long overdue. The estimated cost of these repairs is around Rs. 2 billion. PSM is at present expecting a loss worth 75% of the estimated cost and the required capital repairs will have to be financed through external means which will add to the debt burden.

OPPORTUNITIES:

Short supply of steel

PSM is working in an environment where the demand for steel is growing at a rate of 7% per annum and is projected to be around 7-8 million tonnes by 2005. The national requirements of steel presently are around 4 million tonnes. Local manufacturers including PSM and others are able to fulfil only 50-60% of this demand. The rest of the demand is catered to via the smuggling channels rampant in this industry.

Pakistan imports steel worth Rs.2 billion and the rest is smuggled through the Afghan tranmsit trade and the porous Iranian border.

Downstream Industries:

In the long run the establishment of downstream projects in real earnest will have a truly boosting effect on Pakistan agriculture as well as industrial economy. It will result in the development of high value added high tech industries and met the growing needs of engineering goods. This in its wake would bring about in the rapid increase in the consumption of steel. For PSM this means an expected increase in existing capacity and entry into sophisticated machine making stage and improved quality, efficiency and productivity. 32 of such industries are already in operation whereas another 8-10 are in the process of completion.

Expansion:

The implementation of the expansion plan will lead to the utilization of the excess workforce and help PSM reduce operating costs due to economies of scale. Expansion up to 3 mtpy will also help PSM capture a larger market share and thus improve its revenue status as well. A detailed discussion of this plan has been done in the previous section on the opportunities available to PSM.

 

FUTURE PLANS

SELF-RELIANCE/INDIGINIZATION

Nokkundi Iron Ore Project:

Nokkundi Iron Ore Project was set up by Pakistan Industrial Development Corporation (PIDC) in 1974 to carry out exploration and geological investigation of iron ore in Baluchistan. The project was subsequently transferred by the ministry of production to Pakistan Steel 2nd may 1985. Since then Pakistan Steel has been endeavoring to develop these deposits and to make use of this indigenous ore in the best national interest.

In the past various exploration and survey studies to locate the iron ore deposits of commercial grade were conducted by provincial and federal government agencies. As a result of these studies 50 million tonnes of iron ore with about 48% FE content were indicated at Nokkundi, Baluchistan. These require further survey and investigation for proving iron ore reserves to the extent of at least 100 million tonnes as well as finding of suitable reserves at shallow levels, which can be easily mined by open cast mining methods. Efforts are to be made to prove at least 40-50% of iron ore at shallow depth and 50-60% at greater depth so that overall mining cost is reduced.

Since transfer of this project from PIDC, Pakistan Steel arranged “Pre-investment Evaluation Study” of the project by M/s. USX Engineers and Consultants Inc. USA under the aegis of Asian Development Bank. They were engaged for conducting the evaluation study in 2 phases. In Phase 1 the consultants prepared a “Pre-investment Evaluation Study”, to assess the viability of utilizing Nokkundi iron ore in various forms in Pakistan Steel or in alternate technical processes. Phase1 study has already been completed and now the Phase2 study i.e. Comprehensive Engineering Study remains to be carried out.

The economic viability of the project is effected due to the fact that about 80% of the deposits are underground therefore, it was considered necessary to prove additional iron ore reserves at shallow depths involving less extraction cost.

With this end in view, Pakistan Steel got this scheme approved and recently M/s. China Metallurgical Corporation, China on request of Pakistan Steel, have submitted a detailed proposal for undertaking of geological survey and investigation of Nokkundi iron ore to be financed under Chinese grant-in-aid scheme. The proposal is presently under examination by EAD.

Dilband Iron Ore Deposits:

The Geological Survey of Pakistan (GSP) has recently, discovered approximately 200 million tonnes of iron ore deposits in Dilband area of Mastung District, Kalat Division, Balochistan. The area is easily accessible, mining conditions of the deposits are favourable and amenable to open cast mining. Chemically the iron ore contains 35 to 45% Fe, which compares favourably with similar iron ore deposits of the world, which are being commercially exploited on large scale.

In order to minimize dependence upon foreign items and self-reliance in the field of iron and steel industry, efforts were made at Research Laboratory of PAKISTAN STEEL to explore the possibility of using local iron ore.

Therefore experiments on Dilband Iron Ore were carried out using a blend of fine iron ore having 10% of Dilband in combination with Australian, Indian and Maritanian iron. This type of iron ore blend in conjunction with adequate quantity of flux materials did not disturb the quality of the product. Engineers and Lab. Personnel’s of Research Laboratory of PSM put tremendous efforts and eventually succeeded to optimize such blend which will prove its worth at plant level as well.

By using Dilband ore dependence upon foreign sources will be minimized and saving in terms of foreign exchange will be achieved. Efforts are being made at the Research Laboratories to further increase the share of Dilband iron ore. With technological changes share of Dilband iron ore will be increased from 15% to 20% by weight. However, detailed investigations are yet to be carried out to know exactly about the quantity and quality of these reserves.

Exploitation of Dilband Iron Ore deposits will provide job opportunities to the people of Baluchistan directly and will contribute to uplift of the province. This step will go long way to self-reliance of our nation.

RECOMMENDATIONS

To gain in the long run PSM must quickly implement its expansion plans to come at par with its competitors as far as costs and prices are concerned. This increase in capacity will help the PSM widen its customer base from the existing 300 large-scale manufacturing concerns to more. The reduction in operating costs will make available finances to pay off the accumulated debts of the organization.

PSM must turn to the capital markets and float its shares on the stock exchange to increase financing through equity rather than debt. This action will lead to the elimination of financial costs, which are a major burden on the organization.

Pakistan Steel must revert to its existing objective of providing a sound base for the development of the engineering sector, instead of making profit as its ultimate goal.

Privatization is not the solution for PSM’s problems. It will not only lead to a loss of tax revenue for the state but also threaten the employment of a lot of people.

Downsizing needs to be carefully evaluated before any decision is taken. Compulsory retirement of 5000 employees will cost the PSM Rs.6 billion. On the other hand, the salary bill will be reduced by only Rs.600 million per year (Rs.50 million per month).

 

 

Quality Reports on Pakistan’s Economy and Business Sectors for Students

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• Pakistani Automobile Industry – In-depth Analysis

• Sugar Industry of Pakistan – An Academic Report

• Pharmaceutical Industry of Pakistan: Financial Analysis

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