The steel demand has picked up sharply since June following the resumption of business activities after the decline in the Covid-19 infections in Pakistan. The unaudited accounts of some of the major companies listed on the Pakistan Stock Exchange (PSX) for the first quarter of the ongoing financial year to September confirm that the industry is on the path of quicker recovery from the severe pressures of the International Monetary Fund mandated economic stabilisation policies exacerbated by the negative impact of the coronavirus pandemic in the last quarter of the previous fiscal year.

The accounts show that the companies have recorded better top-line growth this year so far when compared with their performance during the corresponding period last year. The bottom lines of the steel manufacturers, who had suffered significant losses last year, are also turning green from red. The rebound in the fortunes of the steel firms is ascribed mainly to the pent-up demand unleashed by the Covid-19 economic stimulus package implemented by the State Bank of Pakistan (SBP), including the reduction of 6.25 percentage points in the policy interest rate to seven per cent, to fight off the effects.

“The impact of the construction and housing package announced by the government is yet to come on the steel industry,” Meher Kashif, the managing director of Model Steel, one of the largest steel companies with a manufacturing capacity of 600,000 ton, asserted during an interview with this correspondent. “The demand in the construction sector, which feeds into 35-40 allied manufacturing industries and services, remains subdued so far. The reasons are as clear as day: the public sector development spending has been slashed substantially; no new industrial project is being undertaken, and no large commercial project is coming up,” he elaborated.

‘The measures announced favour the large corporate companies, which do not see much demand for housing in the market at this moment. The smaller contractors, who work with a capital of up to Rs100 million, do not find the package attractive enough because of requirements of documentation’

Speaking about Prime Minister Imran Khan’s generous housing initiative, Kashif explained that the measures announced favoured the large corporate companies, which do not see much demand for housing in the market at this moment. The smaller contractors, who work with a capital of up to Rs100 million, do not find the package attractive enough because of requirements of documentation, he added.

“The developers and investors have used the construction package to purchase land but nobody has until now announced any major scheme. That’s why you see the land prices falling again. The government needs to find a solution to support the undocumented small builders who operate in the informal economy to construct one or two houses a year and inspire confidence and bridge the trust gap or the success of its housing initiative.”

The raft of lucrative policy, fiscal, and monetary measures announced to push-start construction and housing include no-question-asked-on-source-of-income-amnesty-scheme on the investments made in the construction industry before the end of 2020, and tax cuts and exemptions for real-estate developers and builders. These incentives were topped up later with cash support of Rs300,000 each on the first 100,000 housing units in the price range of under Rs2.5m (this does not include the cost of land) and subsidised mortgage finance for 10 years on the construction of 5-marla and 10-marla housing units.

Following up on the government policy, the State Bank of Pakistan has announced a mandatory mortgage finance target for the banks equal to 5pc of their private sector credit by the end of 2021 for the housing and construction of buildings segments. The initiative has twin objectives: a) help lift the all-pervasive economic gloom, and b) start delivering on the ruling PTI’s election promise of building five million affordable houses under its flagship Naya Pakistan Housing Programme launched in April 2019. Many believe the incentives announced will create a large housing demand in the next several months, pushing demand for construction materials like cement, steel and glass.

Historically, the steel demand in Pakistan has remained negligible compared to other regional countries like China, India, Korea, Malaysia, and so on. But the increased infrastructure development spending by the federal and provincial governments in the last decade and a half, and the large power, transport and other infrastructure schemes undertaken under the China Pakistan Economic Corridor (CPEC) initiative are estimated to have pushed both domestic steel demand and production.

With a big part of the fragmented industry operating in the informal sector, it is almost impossible to estimate the exact domestic demand and supply ratio. But the industry estimates that the per capita steel consumption, according to the Pakistan Credit Rating Agency, has increased to over 43kgs (from less than 25kgs a decade back). Yet the per capita consumption remains one of the lowest in the world against the world average of over 240kgs.

The increase in demand and favourable policies protecting the local industry from foreign competition has led to investments in new large-scale, graded capacity and modern cost-effective, environment-friendly technology in recent years. Still, almost half of the demand is met through imports, mostly from China. Pakistan had imported more than $2.6 billion worth of semi-finished and finished steel products the last fiscal year with total imports in the last five years reaching $15.5bn.

“Besides new projects, many companies have expanded their capacity and upgraded their technology. We also have increased our melting capacity to 175,000 tonnes and rolling capacity to 475,000 tonnes recently in expectation of more business. Now the challenge for us is to utilise the new capacity in a low-demand environment,” said Kashif.

Although unlike some of his competitors Kashif does not find the current business environment ideal despite the incentive package for the real estate and construction industry, yet he remains quite optimistic about the future. “With such low per capita steel consumption and massive infrastructure supply gap exists in our cities, we can but only go up as far as domestic steel production is concerned. There is immense growth potential in this industry.” He says the present conditions are depressing but this situation is not going to last forever. “The country has to industrialise, build infrastructure and construct homes. Once this starts happening, the construction-related industries will pick up momentum,” he said, adding he wasn’t certain as to when would this actually happen.

“The government can, however, make it happen sooner by increasing spending on large infrastructure schemes, making its housing and construction package a bit more lucrative for smaller players and pursuing policies that would incentivise investment in the industry within or without the ambit of the CPEC.”

Published in Dawn, The Business and Finance Weekly, November 9th, 2020