Crumbling steel

April 29, 2019


IN a factory where corrugated iron sheets are held up by truss poles, giving an appearance of an oversized kennel, workers labour in the scalding heat of the furnace to melt steel scrap. They wear no hardhats, work books, or protective jackets while handling ladles filled with molten iron.

This is one of the mini mills straddling the Lahore and Gujranwala region in Punjab. Ferrous scrap is recycled here to produce steel billets, an intermediary product of steel. This scrap is almost always imported.

Billets are used as raw material for producing reinforcement bars or rebars, called sarya. Rebars provide reinforcement to concrete structures and are used for construction of houses, bridges and buildings.

Recently, the steel production has fallen in the country. From 4.9m tonnes in 2017, total crude steel production fell to 4.7 million tonnes in 2018. The dip came in the last three months of the year and continued on in 2019.

Many business owners ascribe the decrease to increase in ferrous scrap prices in the international market. This, coupled with ham-fisted currency depreciation, has made the import of scrap very expensive.

The economy’s slowdown, especially in the construction sector, and slashing of the Public Sector Development Program has affected steel production. Some mills have cut down operations while others are shutting down.

A fair system of taxation and regulations that protect workers and the environment, without driving the mills out of business, is required for a robust steel sector

‘It is not profitable to remain in the business anymore. I’m scaling back to metal work again,’ said the proprietor of a melting mill.

Revenue collection has fallen down by around 40 per cent. Businesses are scaling down despite the industry being a highly protected one. Apart from the customs duty, there is a high regulatory duty as well as anti-dumping duty on Chinese billets and rebars

Steel manufacturing is an electricity-intensive process. Most of the installed furnaces are inductive, using high frequency currents that heat up iron into a liquid state, which is then cast into billets or ingots.

This process produces hazardous industrial smoke because of which mills were closed down last year by the Punjab Environmental Protection Department. Factory owners had to install furnace fume extraction systems to resume production.

‘This has added to the already skyrocketing cost of production,’ said the proprietor, pointing towards a newly installed pollution control system.

At 17pc ad valorem tax, steel melters and re-rollers are a big source of indirect tax revenue for the Federal Board of Revenue. However, due to high electricity usage they are allowed to pay sales tax through electricity bills under a fixed regime based on number of units of electricity used. The current rate is Rs13 per unit. They can adjust their sales tax liability by subtracting credit on tax already paid on import of scrap.

Though the melters and rerollers are given a choice to stay in the ad valorem regime, the tax office prefers the fixed regime as it is easier to get timely revenue. Otherwise, under-declaration of sales continues and the authorities have to initiate audits, stock taking, and in extreme cases, conduct raids.

‘Those getting assessed in the normal regime are distorting the market. They are not paying as much sales tax as we are and hence are able to sell below market price’, argued the proprietor. This is an oft-repeated argument that there should be a unified tax regime for the sector. Whenever there is an alternative, it creates losers and winners.

Some owners also complain of unregistered plants being set up in the garb of manufacturing something else. These unregistered mills are producing billets and rebars without paying sales tax.

This is unlikely as furnaces require a larger industrial B3 connection and that is monitored by electricity supplying companies. It is possible that some very small furnaces with below one tonne capacity are using B2 connections to produce billets. Such mills are an exception rather than the norm.

The method employed in Pakistan for steel production is highly inefficient. Elsewhere, electric arc furnaces are used which are twice as efficient in terms of energy consumption and controlling environmental pollution. Here, smaller units stick to induction furnaces that are a drag on a country already facing an energy crisis. However recently, they were penalised for pollution.

Steel consumption is a good indicator of economic development of any country. Rebars are a major portion of steel produced and are an essential part of construction. As the focus of the government is to provide affordable housing for its citizens through Naya Pakistan Housing scheme, rebars would have to be made at affordable rates and at par with globally available prices.

Pakistan lags behind per capital steel consumption as compared to India, Asia, and the world average. We need a robust steel industry. This requires a fair taxation system and regulation that protects workers and the environment, without driving the mills out of business.

The writer is a civil servant

Published in Dawn, The Business and Finance Weekly, April 29th, 2019