Financial advisers suggest steps for PSM turnaround

Published September 2, 2015
PSM can generate and put together funds required for expanding its production capacity to three million tons.—AFP/File
PSM can generate and put together funds required for expanding its production capacity to three million tons.—AFP/File

ISLAMABAD: An initial investment of $289 million (about Rs29 billion), uninterrupted power supply and a new management, the Pakistan Steel Mills (PSM) with its ideal location, market and facilities has the potential of becoming a profitable enterprise.

Not only this, the country’s largest industrial complex can generate and put together funds required for expanding its production capacity to three million tons.

These are the findings of Pak China Investment Bank, the financial advisers appointed by the government on the transaction structure for PSM sale, in its 165-page report.

Also read: Chinese group shows interest in PSM

It has proposed a three-phased development and expansion plan with a capital investment of $288.77m in the first phase, $300.4m in the second and $296.62m in the third phase (total $885.8m — approximately Rs100bn).

“The way for PSM to achieve three-phased transformation and revitalisation is through privatisation, form­ation of a new management team and overall optimisation of the supply chain,” said the advisers. They str­o­n­g­ly recommended handing over of the management control to the new buyer.

The PSM’s “current management team is not suitable to the three-stage transformation and to participate in the market competition the buyers shall set up new management and technical team to take full control of the operation and management of PSM”, they said, adding that as its equity partner the government of Pakistan should continue to make tax policy and other support through recovery and development and strengthen the product standards and quality.

The advisers have concluded, on the basis of field surveys, extensive data and in-depth discussions, that PSM “is steel enterprise which has a high starting point, complete process chain and has the advantages of resource acquisition and regional market”.

They said that being near the largest city with over 20 million population and close to the 50,000-ton bulk cargo wharf relying on raw material and fuels import, PSM owned rare logistic cost advantages. With the expansion of production capacity in future, its harbour can also be used to ship products to the rest of the market.

With a large population and per capita GDP of over $1,000 in the upgrading of consumption structure by local residents, the starting point of the rapid development of national economy, the future of steel consumption has considerable growth potential because the country depends on 40 per cent imports.

Also, the quality of steel produced by a large number of small domestic electric furnace steel mills and independent steel rolling plants was poor and has no match with that of PSM and, therefore, its further expansion to the scale of 3m tons of potential market exists.

On top of that PSM being the only combined process large-scale iron and steel manufacturer, all the care and support provided by the government and Pakistan tariff barriers on steel imports on the higher side, it is also conducive to protect local steel enterprise from the impact of cheap foreign steel.

The advisers said that PSM’s main equipment were out of repair, advanced equipment lagging behind and control system completely paralysed, sinter machine, blast furnace, continuous casting had been close to or exceeded the designed life and, technically speaking, unbearable for reuse.

The complex has been suffering losses since 2008-9, rising to Rs135bn or 87pc of its total assets, and total assets and liabilities beyond 100pc of assets or negative equity. Yet its 79pc assets are in the shape of land.

It said the main reason for PSM’s trouble was its management ideas falling behind the development of market change and the loss of competitiveness in technology and market. The advisers did not agree with the management’s claim that it was facing losses because of dumping of cheap foreign products and said the “root failure is that operation idea, management and technology of PSM is not with timely development”.

Moreover, main process equipment, low efficiency, high consumption, low product quality, high workforce put together lead to the plan uncompetitive, production loss and business failure.

The PSM has not carried out any market research during the past 10 years and, therefore, it knows nothing about the country’s steel demand, imports, consumption and structure. It is also not clear about the price of steel in the domestic market and knows nothing about progress in the international market, its competitors and the technical efficiency level of China.

The PSM has too many employees, especially managers, and even if its output meets the designed capacity, its per capita steel production can only reach half the Chinese state-owned companies and one-fourth private companies.

The organisation has been suffering losses but the number of its employees and wages have not been reduced.

The advisers said the first $288.77m transformation phase should resume production, increasing it to one million tons, followed by two million tons in the second $300.4m improvement stage based on the existing iron and steel main equipment and by three million tons in the third $296 million expansion plan to create a new set of blast furnace system, iron and steel.

Published in Dawn, September 2nd, 2015

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