Steel industry is progressing amid overcapacity and challenges from outside
‘The prospects of the Bangladeshi steel industry are very bright,’ says Abdur Rahman, Managing Director of Appollo Ispat Ltd. ‘People are using steel sheets for various purposes rather than building low-cost houses. The industry, too, is becoming technically sound everyday which is increasing the efficiency and lowering the production cost.’
But, the entrepreneur regrets, ‘the huge potential is facing setback due to shortage of power and electricity supply’. He suggests some government policies need to be changed in order to make this industry more supportive of the economy.’
Abdur Rahman is, however, one of the individuals who says that the glass is always half full. Despite frequent power outage and disruption in gas supply, steel production goes on, of course not in full swing, at over 400 steel, re-rolling and auto-rolling mills in the country.
Unfortunately, another official said, a good number of re-rolling mills have already been shut down due to interrupted gas supply, lower demand of their products in the market and unfriendly tax regime.
Rahman said, ‘We buy billets from the steel millers and roll them for manufacturing Mild Steel (MS) rods and other construction-related steel products.’ Except some big steel and re-rolling units, most of the mills were in trouble now, and some have auctioned their factories for selling them to other parties, he added.
Mizanur Rahman, senior vice president of Bangladesh Re-Rolling Mills Association (BRMA), said small and medium-size mills were under real threat, as they were neither getting support from banks nor could their operations continue due to declining market demand. He insisted that the government should devise some policy to support the locally developed and self-sufficient steel industry at this critical time. ‘If the industry is not given support, the steel producing business will face further operational hazards, and the country may become dependent on imports to meet demands for mild steel, steel and other high technology-based products for construction works in the near future,’ he observed. ‘Once upon a time, we had problems with raw materials, but they are available now from scraps in the ship-breaking yards.’
Md. Abul Kalam, vice president of BRMA, said every mill owner was counting losses as they could not sell their products. He said even the big mills were also facing trouble as their products were being stockpiled at their compounds.
Production Capacity of Steel Industry in Bangladesh
Currently, the demand of steel is around 4 million tonnes a year whereas the combined capacity of the industry is around 8 million tonnes. Although the installed capacity of 4 million tonnes is not being utilised at present, this overcapacity may prove to be tricky as demand fall coupled with the high production capacity may cause drastic fall in profit margins.
Players of the Steel Industry
As an emerging country that has attained an average growth of 6% or so over the last few years, Bangladesh has seen sizeable investment in the steel sector. Big business conglomerates such as PHP and Abul Khair Group have stepped into the industry to take advantage of growing market demand. Kabir Steel & Re-rolling Mills (KSRM) has set up a 300,000-tonne mild steel rod plant in Chittagong. The plant has been designed by famous European steel plant designer Pomini, is fully automated and has the capacity to produce from prime quality billets. The KSRM announcement came just a month after the country’s largest conglomerate, Abul Khair Group, formally entered the sector, unveiling a Tk. 7000 crore investment for an 800,000 tonne plant.
Bashundhara Group, the realtor-turned-tissue to paper giant, has also decided to join the steel manufacturing industry. At present, the group’s subsidiary Bashundhara Steel Complex Limited (BSCL) has two Steel Melting Units and two Steel Re-rolling Units with a capacity of 100,000 tonnes a year; one MS and GI Pipe manufacturing units with the capacity of 20,000 tonnes a year; one LPG Cylinder manufacturing unit with the capacity of 300,000 cylinders a year and one Ferro-Alloy Plant with the capacity 7000 tonnes a year which is at the commissioning stage. Yet another Re-Rolling Mill with TMT technology is under trial run, whose production capacity is expected to be 60,000 tonnes a year.
Another Chittagong-based mill, Ratanpur Steels and Re-rolling Mills (RSRM) – has started marketing 75-grade mild steel rod since late 2011 from its state-of-the-art steel factory worth Tk. 2000 crore. On the other hand, Sarker Steel has automated its factory with sophisticated technology in an effort to increase the quality of its product offering. Currently, the company has a monthly capacity of 5,000 tonnes. Baizid Steel also produces high quality 75,000 psi deformed bar and has an annual capacity of 180,000 tonnes. Its sister concern CSS Corporation (BD) Ltd has a similar annual capacity of 170,000 tonnes billet.
But the biggest player of them all, Bangladesh Steel Re-rolling Mills (BSRM), has not remained idle in the face of such broad scale mobilisation in recent times. In turn, it has aggressively engaged in capacity building. BSRM (producer of high-grade steel) caters to more than 25% of the total domestic steel demand. BSRM had a production capacity of 375,000 tonnes per year in FY 2012 and it is now conducting a trial production of its newly installed Tk. 3,500 crore plant that is expected to have an output level of 300,000 tonne annually. The steel giant has also unveiled plans to invest another Tk. 5,000 crore to raise its capacity to around 1 million tonnes within the next five years.
Challenges of steel industry in Bangladesh
After a decade of steady growth, local steel-makers are now facing tough times due to a surge in production costs and a slowdown in consumption by both the government and the private sector. In addition, a low pressure of gas, depreciation of the local currency (Taka against US dollars), rising costs of raw materials, electricity and bank borrowing, and a tight liquidity situation have hurt the Tk. 30,000-crore steel industry.
- Competitive market – Newly invested companies have started operations, with even more in the pipeline while existing companies are looking to expand on existing capacity.
- Economic crunch – At present, consumption has slowed down significantly due to a slowdown in development works. Financing issues regarding the Padma Bridge and disrupted credit flow from the World Bank and other donors like JICA, ADB and IFC also resulted in an adverse impact on the steel industry particularly, and the construction sector as a whole. Moreover, the stock market crash of 2011 negatively affected the real estate sector badly which led to the slowdown in the demand for steel rod.
- High borrowing costs and exchange rate risks – The cost of producing a tonne of 60-grade rod has increased by Tk 18,000 between January 2011 and January 2012, mainly because of the depreciation of taka against dollar. Steel-makers import at least 70% of their raw materials, thus fluctuations in exchange rate tend to affect them badly.
- Energy Crisis: The energy crisis in Bangladesh is worsening day by day. Steel making requires exhaustive power consumption, in the form of uninterrupted power supply and gas in production. However, the lack of realisation of these basic utility services has posed, and is posing a serious hindrance to growth in the Bangladeshi steel industry.
- Technology Risk: Many steel factories in the country still use manual production methods, despite new efficiency-enhancing, cost-reducing technology being readily available in the market. An example could be the conditions of the factories in the Shyampur area of Dhaka. Most of the mills there are on the verge of extinction, as they cannot compete with automated factories in terms of cost, efficiency and production volume.
What next?
Steel plays a vital role in infrastructure and overall economic development of a country. Thus, the growth of steel industry is often thought to be a parameter of economic progress. This sector has seen increased activity in terms of new investments during the last few years. To be more cost effective, companies are also upgrading their technology and manufacturing processes. To reduce the dependency on billet import, local companies are now investing heavily in setting up their own billet plants. Most of the mid-level and large scale steel mills have installed fume-extraction systems and effluent treatment plants (ETP) to protect the environment by controlling the harmful fumes discharged from the plant. However, excess capacity is very much a reality in the steel industry.
The industry insiders say that government support towards facilitation of exporting the excess steel will not only stabilise the domestic market, but also provide the millers with an extra source of income. In fact, steel manufacturers have been lobbying for the Bangladesh government to approach India in order to remove the non-tariff barriers for steel exports to the north-east states of the neighbouring country, as Bangladeshi millers believe that the particular region to be a good potential market.
‘As an industry, we have a long way to go to match Western efficiency level’ – Alihussain Akberali, Chairman of BSRM
‘The steel industry in Bangladesh has a good future because we have grown steadily in the last 15 years,’ says Alihussain Akberali FCA, Chairman of Bangladesh Steel Re-Rolling Mills (BSRM). ‘The steel industry’s growth is highly correlated with that of the economy, and therefore when the economy does well, the industry will also do well.’ For the industry to grow, the steel magnate says, the government needs to ensure basic infrastructure, power, gas and an educated workforce — without which, industrial growth will sputter.
In the industry, ‘mild steel’ rebar (known as ‘MS rod’) is central, providing the bones inside the concrete muscle that holds buildings together. Alihussain says its quality is often not up to snuff: ‘Only some companies make rebar conforming to international standards, and a significant percentage of materials produced in the country follows no international or BSTI standards.’
‘Lack of implementation and enforcement of standards is extremely dangerous for a country like ours, which is in an earthquake zone,’ he says. Steel production in the country is fairly efficient but, he explains, that this is not enough. ‘As an industry, we have a long way to go to match Western efficiency levels.’
‘We are efficient, not in operations, but in costs. Our cost of labour, power and gas is among the lowest in the world, which gives us a competitive advantage. However, due to our port restrictions, all raw materials that we import cost us more in freight compared to our neighbouring countries, and this makes us not as cost-efficient for exports, which overrides the benefits of low-cost utilities,’ he says. Alihussain notes that steel making requires a lot of energy, good infrastructure and qualified human resources. ‘As a nation, we are lacking in all these.’
‘Regardless of the odds, we are growing; and one can only imagine how much growth we will have if we solve the basic problems in the country.’ He says Bangladesh is adopting new technologies but still has long way to go to improve as an industry. ‘As our economy keeps growing and size of the industry grows, more and more companies will be able to afford newer technologies.’
Although state intervention is infrequent, whenever the government does intervene, it distorts the market, Alihussain says, for example, the caretaker government saw global and local steel prices were very high in 2008, so it forced steel makers to keep lower prices.
That hurt investment in the industry, as well as the bottom line, he says: ‘That intervention cost the industry many crore of taka in losses, and the industry is still suffering. To this day, those losses have not been recovered.’
Alihussain favours only subsidies that level the playing field for industry: ‘We have proposed a subsidy on furnace oil, such that the cost of power generated from furnace oil and gas is the same, and the government can have one fixed price for the purchase of power from producers whether it is based on gas or furnace oil.
‘This will automatically bring many more entrepreneurs to invest in the power sector, which currently is not happening fast enough due to the faulty policies.’
He says there are so many steel manufacturers that it is impossible for them to raise market prices with a syndicate, hoarding etc. ‘The steel market operates in the most competitive environment at all times. There is no need for the government to intervene at any point in time and create disequilibrium.’
The future of local steel, Alihussain says, is to become greener as well as automated. ‘We are also focusing on the environment, and have installed fume-extraction systems that work efficiently to protect our environment by controlling the air discharged from the plant.’
