Rising steel prices pushes up cost of construction
Karachi can be termed a city of its own kind. It has an estimated population of 20 million people living in all sorts of dwellings, from huts to condominiums. Despite hardly any support from the federal or provincial governments, housing units are being constructed but still remains an acute shortage of housing units, be it for the richest or the poorest. Despite fully cognizant of the fact that over three dozen industries gets impetus from construction industry, little is being done. In the absence of adequate housing finance facility it has become almost impossible for a person of middle class to even think about owning a house, with its own land and open sky.
As the distance from Keamari to Gulshan-e-Hadeed touches nearly 50 kilometers there has been a major change in the thinking of people. Since highly depleted public transport has become the hallmark of the city, people prefer to live close to the offices/manufacturing and commercial areas to save time and money, but above all the headache. At an average a person spends 2 to 3 hours in travelling because of traffic jams etc. Experts say that number of high rise building is on the rise in Karachi city due to various reasons, worst being over expanded size of the city and land prices becoming too high as government has not initiated new schemes.
Since independence the government has not come up with appropriate residential schemes, barring a few years when low cost houses were built in Karachi to remove katchi abadies. Now almost all the work is being done by the public at its own. One may say that a large number of housing units are being constructed every year in Karachi, but most of these are beyond the reach of more than 90% population of the city. In the absence of housing finance companies, owning a housing unit of 700 sq. feet covered area is not within the reach of people.
Since poor can’t afford to own a house in the approved areas, slums are growing at a fast speed. This business of ‘land grabbers’ is thriving because of full supported by political parties, ethnic and linguistic groups. Most of the katchi abadies are devoid of basic facilities, electricity, gas, potable water and sewerage disposal system. Since these abadies are sponsored by the land grabbers, also having contacts with underworld, drug paddlers and even militant/extremist groups, often the residents are often used as human shields. With the passage of time the residents also become strong vote bank for the sponsors of katchi abadies.
With law and order situation getting precarious people prefer to live in areas where they feel secure. As a result most of the construction work is going on in already developed areas with most of the building having ground plus four and even ground plus nine floors. As a result demand for cement, gravel and steel has gone up considerably. This can be judged from the fact that cost per square foot now exceeds Rs3000 as against Rs100 in late eighties/early nineties.
Lately steel prices have gone too high because of limited local production, in fact production is on the decline due to 1) disruption in production process at Pakistan Steel Mills, 2) scrap ships becoming expensive and 3) many of the rerolling mills running at dismal capacity utilization due to extensive load shedding of electricity and gas despite fabulous hike in taffies. Rerolling mills were often accused of pilfering electricity and gas. Some of them may still be pilfering but nothing can be done when outages go beyond 12 hours.
According to a report, Pakistan Steel Mills (PSM) has witnessed a massive decline over the last one decade as its output reduced due to capacity and financial constraints despite. PSM’s steel production declined from 1.1 million metric ton in FY01 to 0.4 million metric ton in 2011, showing a decline of 64 percent of its output in 10 years. As per conservative estimate, the local demand of finished iron and steel products (hot-rolled (HR), cold-rolled (CR), and galvanized coils and sheets; and long rolled products, such as bars, rods, angles, and sections), hovers around 6 million metric tons annually.
The country imported more than 3.2 million metric ton of iron and steel in 2011 amounting to US$2 billion which came to roughly 5% of the annual import bill. Interestingly, the finished steel imports are price competitive despite high import duties (from 10 to 35 percent), 16 percent sales tax, and 3 percent withholding Tex.
The prices of various products produced locally by Pakistan Steel Mills (PSM) vary from Rs 75,000 metric ton to Rs 97,000 metric (including sales tax) ton whereas the prices of imported products ranging from Rs 70,000 to Rs 92,000 products available in the local markets.
Industry analysts said that low capacity utilization ailing PSM is the sole processor of iron ore in Pakistan and constitutes a little less than 20% of the country’s capacity for finished steel. The situation emerged as deteriorated in the past five years at times when democratic government took over the affairs of the state-own steel producing company. In better times, the mills supplied raw material (billets and HR sheets) to the private sector as well. But since 2009 as PSM reported huge losses of Rs 104 billions, crude steel production has been going downhill, dropping from 80 percent of installed capacity in 2008 to only 23.8 percent in 2011.
The 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, the PSM has been unable to emerge out of the low funds-low capacity cycle.
This is distressing given Pakistan’s 1.4 billion metric tone unexploited proven iron ore reserves as well as sufficient domestic capacity of roughly 4.5 million metric ton but owing to incapability of leadership at largest country steel producer, the local production remains stagnant and not available for local consumption. The low capacity utilization lowered scale economies because the PSM is a complex of interconnected mills which feed raw material and energy into each other. When functioning at a reasonable capacity, the excess heat generated during coke burning (for making raw steel) is used to generate electricity. This electricity, being low in voltage, is then swapped with the Karachi Electric Supply Company (KESC) for high-voltage current to run the rolling mills.
After PSM, there has been only one truly large-scale investment in Pakistan’s steel industry, a 1.5 million tons complex of Tuwairqi Steel Mill (TSM). Once operational, TSM will reduce the country’s dependence on imported raw material to a great extent by supplying raw material to the rolling industry. Secondly, it will utilize indigenous iron ore to a greater extent.
The TSM was initially planned to start functioning in 2010, but commissioning was repeatedly delayed due to uncertainty over utility supplies. Specifically, the TSM will be a natural gas-based facility, a resource which is already in short supply. TSM will be energy efficient – for example, to produce the same quantity of steel, it will consume lesser quantity of natural gas. While other industries can use alternate fuels, TSM will be using natural gas a feedstock, which is not substitutable.