KARACHI, March 20: Pakistan imported 3.2 million tons of iron and steel in FY11 amounting about $2 billion, which was 5 per cent of the annual import bill.

This was disclosed in the SBP’s 2nd quarterly report for 2011-12 which discussed in detail the pathetic condition of Pakistan Steel and demand of iron and steel in the country.

The finished steel imports are price competitive despite high import duties (from 10 to 35 per cent), 16 per cent sales tax, and 3 per cent withholding tax, the report said.

“This is distressing given Pakistan’s 1.4 billion tons unexploited proven iron ore reserves as well as sufficient domestic capacity (roughly 4.5 million tons). With full capacity utilisation, imports of finished goods can drop to as low as 0.1 million tons a year,” the report said.

In dollar terms, the net saving could exceed $1 billion per year. A number of factors are responsible for the present state of affairs including the ailing Pakistan Steel Mills, insufficient investment and loopholes in the tax system, the report noted.

Over 96 per cent of growth in world steel production during the last decade was contributed by Asia, with China and India virtually explaining the entire expansion.

In sharp contrast, Pakistan’s crude steel production declined from 1.1 million tons in FY01 to 0.4 million tons in FY11.

As domestic consumption continues to grow, the demand supply gap is widening. A conservative estimate puts demand for finished iron and steel products as over 6 million tons/annum.

Pakistan Steel Mills is the sole processor of iron ore in Pakistan and constitutes a little less than 20 per cent of the country’s capacity for finished steel.

In better times, the mills supplied raw material (billets and HR sheets) to the private sector as well.

“Since FY09 (when PSM reported a huge loss), crude steel production has been going downhill, dropping from 80 per cent of installed capacity in FY08 to only 23.8 per cent in Jul-Nov FY12,” said the report.

PSM has since been strapped for liquidity, unable to consistently fund raw material imports. Low crude production has affected production of finished steel by the PSM and the numerous downstream private mills relying on PSM, which now have to import raw material.

“To date, PSM has been unable to emerge out of the low funds-low capacity cycle,” the report noted.

But more importantly, the current local iron ore supply is sufficient to produce only 0.2 million tons steel a year. This means that at full capacity, PSM must import at least 1.5 million tons of iron ore, which amounts to import burden of approximately $0.2 billion annually (at FY11 price).

The PSM also imports coal for coking. Coking needs superior quality coal and is therefore this component is not substitutable locally. At full capacity, the PSM requires 0.85 million tons of coal per year ($ 0.1 billion at FY11 prices).

“In short, in order to break even, PSM must have sufficient funds to be able to run at efficient capacity. Otherwise, producing at low capacity will only lead to snowballing losses,” said the report.