Even before the entire spectrum of infrastructure and power projects under the China-Pakistan Economic Corridor was unveiled, cement producers and investors in listed cement companies visualised a massive escalation in demand. And they did benefit.

Yet, the huge expansion in capacity and unprecedented increase in the price of imported coal has poured cold water over their enthusiasm.

Steel thus stepped in and now sits on the throne as the unchallenged king. On the heels of Mughal Iron and Steel Industries, Amreli Steels Limited (ASTL) floated its Initial Public Offering (IPO). This was the eighth new offering at the Pakistan Stock Exchange last year.

With more than 110 steelmakers operating in the country, the company has to ride out the challenges of competition. Yet the steel industry is still in the nascent stage.

Amreli Steels Limited had set out to mobilise funds from the equity market to finance the company’s expansion of its re-bar and billet manufacturing capacity at a total cost of Rs3.4bn.

The new re-rolling plant is being set up at Dhabeji with an estimated annual capacity of 300,000 tonnes. It will add to the existing Sindh Industrial Trading Estate, Karachi re-rolling plant’s operational capacity of 180,000 tonnes per year, thus cementing the company’s position as the country’s largest producer of steel re-bars and billets.

However, the slow progress on civil work has resulted in delays in the start of the new plant’s commercial operations; the date of the launch has now been pushed forward to Sept 2017, after scrapping the earlier two deadlines of May 2017 and August 2017.

The company has not notified if the delay would result in cost over-runs. On the contrary, Research Analyst Waqar Uddin Salim at Summit Capital affirms that since the expansion is 100pc equity financed, the company would be eligible to tax credit for the next five years. He also posited that ASTL was continuously deleveraging its balance sheet and that by FY19, it was expected to be debt-free.

Total assets of ASTL at the close of FY15 stood at Rs12.2bn. The company recorded a profit after tax for FY15 at Rs1.01bn, translating into earning per share at Rs3.40. The board skipped a dividend.

The strike price for the public auction of 25pc shares in ASTL last year worked out at Rs51 per share after the book building process. The price of the company stock at the close of trading last Wednesday was Rs74.61 with 52-week high and low prices at Rs76.92 and Rs44.21, respectively. Market capitalisation of ASTL amounts to Rs23bn.

Analyst Abdul Azeem at Spectrum Securities said the management of ASTL held an analysts briefing on Friday, Nov 4, to discuss the company’s first quarter 2017 (1QFY17) results.

The company recently unveiled its 1QFY17 results posting net profits at Rs226m for the quarter, down 32pc over the previous year’s corresponding quarter (YoY). Sales declined 6.2pc YoY to Rs3.2bn. As the company also sold imported re-bars — which happen to be a lower margin product — the gross margins shrank by 4.61pc YoY to 14.45pc in 1QFY17.

One of the risks faced by the steel industry is the hike in international steel scrap prices as it dents the firms’ margins; scrap being one of the main raw materials in manufacturing steel.

Some analysts cautioned that the tragedy at the Gadani ship-breaking site could impact raw material supply as scrap prices had altered by 18pc to $260 per tonne in the couple of weeks following the incident.

Yet, in line with the rise in international steel prices, the company expected an increase in re-bar prices in local markets by Rs1,000 per tonne, which would help keep the gross margins of the company intact.

In order to protect the domestic market, the government has recently imposed a 30pc Regulatory Duty on imported re-bars, which seems to provide a lifeline to local steel mills.

“The anti dumping duty will help local companies expand their market share and increase profitability. Chinese imported billets will become considerably more expensive”, say market observers.

The management of ASTL also hoped that the imposition of the above mentioned duty on the import of re-bars would provide a further boost to profitability.

As the corporate regulators have placed more responsibilities on research analysts, most add a caveat. “The following risks may potentially impede the achievement of the target price of the security: market risk, interest risk and exchange risk’.

With more than 110 steelmakers operating in the country, ASTL has to ride out the challenges of competition. Yet the steel industry is still in the nascent stage.

As the main focus of the government is on infrastructure with the Public Sector Development Project (PSDP) budget allocation at Rs1.67tr this year, representing a 20pc increase against the revised estimates, the cement industry is increasing its capacity by approximately 21m tonnes in the next few years to meet the expected growth in demand.

In concert, steel producers are also working on expansions so as not to be left behind.

Published in Dawn, Business & Finance weekly, December 5th, 2016