Sales tax regime change for steel
The government has changed the sales tax regime for long steel manufacturers from sales tax special procedure rules 2007 to sales tax-style FED. The regime change has no direct impact on long steel manufacturers. It holds mixed implications for the end consumer. For the retail base (approx. 60% of the total offtake), the regime change raises the cost basis for retail clients (17% sales tax – style FED now vs. approx. 14% effective sales tax in the previous regime), as they are largely nontax filers. For corporates (36% of the total sales), the sales tax-style FED is adjustable, thus reduces their input cost.
The consumption of steel in Pakistan is around 35 kg per capita. Domestic steel production is to reach 4.5 million ton by mid-2019. Additional steel capacity of 1.7 million ton is expected to come online by mid-2019, as major players in the domestic industry are pursuing aggressive expansion plans at a cost of around Rs15 billion to cash in on the rising domestic demand. This would augment the local steel production capacity to 4.5 million ton from the current 2.8 million ton capacity.
On the domestic front, steel bar sales have slumped in the last three months amid slow demand due to suspension of mega projects by the government and private sector developers. The construction industry is passing through a critical period due to the existing ban on construction of high rise buildings in Karachi. Ban on high rise have hurt the construction industry as around 600 projects are currently awaiting approval, investments in the sector have stopped and more than 500,000 people are rendered jobless. Government projects account for nearly 50% of the total steel bar sales, 35% come from private high rise and housing projects and remaining from the individual construction by consumers.
The steel industry is catching up fast with the expected rise in demand. The demand of steel has been fueled by a wave of capital expenditure aimed at capturing the swelling demand of quality steel products that will come about as a result of infrastructure projects such as power plants, dams, airports and road networks along with public and private housing schemes. Manufacturing growth led by investments in the auto and appliance sector is expected to spike demand for flat steel. The rehabilitation and expansion cycle in oil, gas and other industries, along with planned pipelines projects, would require huge quantities of steel pipes.
Cement sees 70 million ton of capacity
Cement players had an eventful year where regulatory changes mostly contributed to the agony of local players. Already marred by excess capacity posing significant pressure on prices (local prices declined by PkR140/bag during Jul’19-Sep’19), increase in FED by PkR25/bag to PkR100/bag and implementation of axle load limits increasing the transport costs by 50-60% resulted in margins declining to 5% in 1QFY20 against 24% in 1QFY19.
As per international standards, every five ton of cement used in infrastructure projects require one ton of steel. By 2022, Pakistani cement industry will have about 70 million ton of capacity. By that estimate, steel capacity should be around 12 million ton, but it is only going to be 4.5 million ton. Demand coming from CPEC projects already underway will remain but the new government has cut down a lot on development expenditure. Meanwhile, interest rates are not conducive for new investments. Real estate development, especially in the commercial sector may become lethargic. It is anticipated that automotive demand will also get affected going forward which in turn would affect steel demand. This reduction in demand could be met with the Naya Pakistan Housing plan that envisages construction of five million new houses which should lead to an annual 20 to 22 million ton of additional cement. Cement companies have invested in expanding operations in anticipation of burgeoning demand owing to construction activity under the China-Pakistan Economic Corridor and the growth in housing projects.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]