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The demise of Pakistan Steel Mill

Steel Mill Downfall started in Mush era when golden shake hands were given to employees and only those with political backing remained back while rest of the people who were on merit had to leave
U hit the nail on the head. This seems to be the biggest problem. People with merit(without the backing of someone powerful) are sidelined and instead the department is filled with ppl who r related to these goons or are on good terms with them. I personally knew ppl who "worked" for PIA, PTCL, and the Police Department who were ill suited for their jobs. I personally witnessed them doing from very little to nothing in their respective jobs. The person in PIA was the best at being a freeloader. He hardly ever showed up to work and mostly collected his pay just sitting at home. The PTCL worker at least showed up to work but just sat in their air conditioned office doing absolutely nothing but socializing with friends and retired with a hefty amount of pay. This is what leads to losses in the government sectors.
 
I have written before that the steel mill is a white elephant and should be have been closed down long ago. I see here many emotional outbursts about politicians and remarks about steel mill which bear no relationship with the reality. I was in Pakistan when PSM project was initiated and have tried to follow its progress ever since. I seek your indulgence to read my views about why the steel mill has been a drain on Pakistan economy for so long.

Pakistan Steel Mill foundation stone was laid by ZA Bhutto in 1973 with the funding assaistance by USSR and technical supervison of V/O Tiajproexport.. Starting in 1973, it took nearly 12 years to complete and cost Rs 24.7-billion to build (about $1-billion at the exchange rate of that period). Spread over 14,600 acres, it is the largest industrial complex in Pakistan to date.

Based on the Soviet technology, it was not state of art even at its birth and got into financial problems right from the start. There were many reasons.

Firstly, the top management under the Zia and later under the PPP & Nawaz Sharif regimes was mostly incompetent and seldom appointed on merit. Against projected requirement of about 15,000 employees, en-mass recruitment during the first Benazir gov’t resulted in PSM having 23,000 employees by the mid-1990s'. Later civilian gov’ts and especially the Zardari period meant PSM having almost 30,000 staff including the daily workers. Thus manpower costs are too high.

Very high Debt to Equity ratio (Highly financial leverage) translated into Debt charges higher than the gross profit. Net result being that PSM suffered losses during first 3 years of operation. 1988-1989 was the first time PSM made profit but went into the red again from the very next year.

Its capacity utilisation was close to 90 percent initially but in 1991 it was down to 62%. According to a report published Dawn on Oct 5, 2015, PSM’s accumulated losses and liabilities, which stood at Rs26- billion at end-2008, had increased to Rs350-billion, including Rs160- billion in losses and Rs190-billion in payable debt liabilities. In addition, the government has injected over Rs85-billion out of the federal budget in different bailout package. 79% of PSM assets are the shape of land. As of March 2015, estimated assets were Rs 280-billion with land, whereas liabilities were Rs 174. Thus PSM has severe liquidity problem and unable to pay either the employee wages or the creditors.

PSM performed better during Musharraf time and made a profit of Rs 2.7-billion in 2007. To be honest, it was not due a magic wand in the hands of Shaukat Aziz but mainly because steel prices at that time were very high. It is much easier to sell a profit making company than a loss making one. But thanks to the worst CJ (Ch. Iftikkar Ahmed) in the history of Pakistan, that sale deal was nullified.

Since 2008-09, PSM has had seven consecutive years of losses, which now amount to 87pc of its total assets. One the reasons being the severe under-utilization of capacity (currently at 2%) due to liquidity issues, but also because of the international factors.

Below is a graph of interantional steel prices in $ per metric ton.

upload_2016-10-31_23-3-24.png



These days no country can compete with Chinese steel. China’s share of the international steel market has been growing steadily at the expense of traditional steel makers such as Germany, Japan & Britain. At more than 800-million tons and with exports exceeding 100-million tons per year. China is currently world largest steel producer and exporter.Chinese steel is cheaper than the cost of production in UK. Understand US Steel is laying off 25% of her labour force.

Under these circumstances, how can an outdated plant such as PSM can afford to exist?

Finally, I freely admit that I have surfed the internet including the Wikipedia in writing this post. So please no sarcastic remarks. However, if there is a mis-reporting of facts, correction will be more than welcome.
 
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If its govt owned and in losses then why not sell it to some private business house

Because noone wants to buy it. Just look at the international steel market, flooded with Chinese Steel relying on States to impose Tariffs.

The amount of uncertainty, debt, value it has currently doesn't warrant 21.86 Billion Rupees it was gong to be sold for in 2006 ($364Million in June 1, 2006 exchange value).
 
Most of you people are crying the lost of something big, Its 50 year old, capacity of one million tons....a baby steel mill. I remember when it started the employee count was 20000+, seriously you think this company will ever make any profit. It was ZAB project, part of Roti, Kapra aur Makan and that all it was. Here in Hamilton Ontario there are three steel mills, in one mile radius, each mill having capacity of 20 times that of Pakistan Steel. Closing this mill will be a favor to Pakistan and loss of 20000 Family votes to PPP another favor to Pakistan.
 
Under make in India campaign we can always help you with expertise on Steel, stainless steel production as our Ind has now started picking up and soon be zooming and booming.

Are there any govt run steel mills in India, and if there are are they run in profit or loss?
 
Let the open market dictate... the government shouldnt subsidize or run white elephants...
 
Steel industry is reeling under dumping by Chinese manufacturers. You can hardly blame Pak govt for this. All over the world steel industry is in crises. Steel is now in over capacity and it should take some time maybe 4-5 years for this level to stabilise
 
While that is one possible solution to the problem but what bothers most ppl is that there shouldn't have been this problem to begin with. It's not just this either it's a pattern. Pakistan Railway and PIA just to name a few. If that's what's going to happen with all the state owned enterprises then what's the point of electing these goons to do anything...why not just privatize the entire country and call it a day.

Its actually best for smaller - middle developing countries to not have state run businesses at all.

The govt responsibility must be a few core things (defence, administration, court system etc) given they dont even have a wide tax base to fund complex business structures and expect some modicum of efficiency and social net benefit like developed countries and large economies have the fiscal option of conducting.

Adding more on top of these basics just punishes the tax payer and is thus a detriment to increasing the number of tax payers (through growth) over time....given how much money is soaked up by the inefficiencies/vested interests promoted by govt/military run businesses.

Free market dynamics is the great litmus test of efficiency, the more you expose something to it....the better off you are in the long run. Insulation from free market needs a very high level of justification....which Pakistan electorate is in no position to demand from their govt (till they themselves get much better educated overall and break local feudal power). I really hope the enlightened minds in Pakistan govt/bureaucracy realise this over time.

I have written before that the steel mill is a white elephant and should be have been closed down long ago. I see here many emotional outbursts about politicians and remarks about steel mill which bear no relationship with the reality. I was in Pakistan when PSM project was initiated and have tried to follow its progress ever since. I seek your indulgence to read my views about why the steel mill has been a drain on Pakistan economy for so long.

Pakistan Steel Mill foundation stone was laid by ZA Bhutto in 1973 with the funding assaistance by USSR and technical supervison of V/O Tiajproexport.. Starting in 1973, it took nearly 12 years to complete and cost Rs 24.7-billion to build (about $1-billion at the exchange rate of that period). Spread over 14,600 acres, it is the largest industrial complex in Pakistan to date.

Based on the Soviet technology, it was not state of art even at its birth and got into financial problems right from the start. There were many reasons.

Firstly, the top management under the Zia and later under the PPP & Nawaz Sharif regimes was mostly incompetent and seldom appointed on merit. Against projected requirement of about 15,000 employees, en-mass recruitment during the first Benazir gov’t resulted in PSM having 23,000 employees by the mid-1990s'. Later civilian gov’ts and especially the Zardari period meant PSM having almost 30,000 staff including the daily workers. Thus manpower costs are too high.

Very high Debt to Equity ratio (Highly financial leverage) translated into Debt charges higher than the gross profit. Net result being that PSM suffered losses during first 3 years of operation. 1988-1989 was the first time PSM made profit but went into the red again from the very next year.

Its capacity utilisation was close to 90 percent initially but in 1991 it was down to 62%. According to a report published Dawn on Oct 5, 2015, PSM’s accumulated losses and liabilities, which stood at Rs26- billion at end-2008, had increased to Rs350-billion, including Rs160- billion in losses and Rs190-billion in payable debt liabilities. In addition, the government has injected over Rs85-billion out of the federal budget in different bailout package. 79% of PSM assets are the shape of land. As of March 2015, estimated assets were Rs 280-billion with land, whereas liabilities were Rs 174. Thus PSM has severe liquidity problem and unable to pay either the employee wages or the creditors.

PSM performed better during Musharraf time and made a profit of Rs 2.7-billion in 2007. To be honest, it was not due a magic wand in the hands of Shaukat Aziz but mainly because steel prices at that time were very high. It is much easier to sell a profit making company than a loss making one. But thanks to the worst CJ (Ch. Iftikkar Ahmed) in the history of Pakistan, that sale deal was nullified.

Since 2008-09, PSM has had seven consecutive years of losses, which now amount to 87pc of its total assets. One the reasons being the severe under-utilization of capacity (currently at 2%) due to liquidity issues, but also because of the international factors.

Below is a graph of interantional steel prices in $ per metric ton.

View attachment 348032


These days no country can compete with Chinese steel. China’s share of the international steel market has been growing steadily at the expense of traditional steel makers such as Germany, Japan & Britain. At more than 800-million tons and with exports exceeding 100-million tons per year. China is currently world largest steel producer and exporter.Chinese steel is cheaper than the cost of production in UK. Understand US Steel is laying 25% of her labour force.

Under these circumstances, how can an outdated plant such PSM can afford to exist?

Finally, I freely admit that I have surfed the internet including the Wikipedia in writing this post. So please no sarcastic remarks. However, if there is a mis-reporting of facts, correction will be more than welcome.

Excellent analysis. I wish I could give you a positive rating for it.

Pakistan must focus on sectors that offer most jobs per unit of investment anyway (and preferably least amount of training required till situation improves over time). These would revolve around low-end manufacturing + construction with other levels of manufacturing as extra bonus depending on what Pakistan can output from its education right now.

Crude Steel is not one of these massive job/investment ratio industires. It is extremely investment dependent, the jobs made are not that great in number.

Pakistan would do best to sell everything off in crude steel production and just import cheap chinese steel for its requirements....save a lot of money....and use these savings to promote more job intensive industries that process the imported steel (for construction and manufacturing - which is where and how India has been able to insulate its own steel production somewhat successfully from Chinese imports). Pakistan must think long term here.
 
Its actually best for smaller - middle developing countries to not have state run businesses at all.

The govt responsibility must be a few core things (defence, administration, court system etc) given they dont even have a wide tax base to fund complex business structures and expect some modicum of efficiency and social net benefit like developed countries and large economies have the fiscal option of conducting.

Adding more on top of these basics just punishes the tax payer and is thus a detriment to increasing the number of tax payers (through growth) over time....given how much money is soaked up by the inefficiencies/vested interests promoted by govt/military run businesses.

Free market dynamics is the great litmus test of efficiency, the more you expose something to it....the better off you are in the long run. Insulation from free market needs a very high level of justification....which Pakistan electorate is in no position to demand from their govt (till they themselves get much better educated overall and break local feudal power). I really hope the enlightened minds in Pakistan govt realise this over time.
I agree with u on all of this. U r speaking based on ground realities. I wrote my post more in terms of anger/frustration and an optimism of what could've been had we actually been blessed with good leaders that didn't put their self interest before the interests of their nation.
 
Its actually best for smaller - middle developing countries to not have state run businesses at all.

The govt responsibility must be a few core things (defence, administration, court system etc) given they dont even have a wide tax base to fund complex business structures and expect some modicum of efficiency and social net benefit like developed countries and large economies have the fiscal option of conducting.

Adding more on top of these basics just punishes the tax payer and is thus a detriment to increasing the number of tax payers (through growth) over time....given how much money is soaked up by the inefficiencies/vested interests promoted by govt/military run businesses.

Free market dynamics is the great litmus test of efficiency, the more you expose something to it....the better off you are in the long run. Insulation from free market needs a very high level of justification....which Pakistan electorate is in no position to demand from their govt (till they themselves get much better educated overall and break local feudal power). I really hope the enlightened minds in Pakistan govt/bureaucracy realise this over time.



Excellent analysis. I wish I could give you a positive rating for it.

Pakistan must focus on sectors that offer most jobs per unit of investment anyway (and preferably least amount of training required till situation improves over time). These would revolve around low-end manufacturing + construction with other levels of manufacturing as extra bonus depending on what Pakistan can output from its education right now.


Crude Steel is not one of these massive job/investment ratio industires. It is extremely investment dependent, the jobs made are not that great in number.

Pakistan would do best to sell everything off in crude steel production and just import cheap chinese steel for its requirements....save a lot of money....and use these savings to promote more job intensive industries that process the imported steel (for construction and manufacturing - which is where and how India has been able to insulate its own steel production somewhat successfully from Chinese imports). Pakistan must think long term here.

Steel industry is reeling under dumping by Chinese manufacturers. You can hardly blame Pak govt for this. All over the world steel industry is in crises. Steel is now in over capacity and it should take some time maybe 4-5 years for this level to stabilise

Source: https://defence.pk/threads/the-demise-of-pakistan-steel-mill.458813/page-2#ixzz4OjmgocD3
'Dumping'.

Yayayayayaya.

If Company A can accept making lesser profits/having a lower margin for the same type of goods that Company B produces- why should the former be blamed for 'dumping' when the latter is the 1 that is incapable of adapting?

Why cant a steelmill worker drawing a $10/hr wage in Company B agree to having a $5/hr one that a worker in Company A is drawing?

In other words, why should Company B's own uncompetitiveness and inadaptability be blamed on Company A?
 
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yayayayayaya.

If Company A can accept making lesser profits/having a lower margin for the same type of goods then Company B, why should the former be blamed for 'dumping' when the latter is the 1 that is incapable of adapting? Why cant a steelmill worker drawing a $10/hr wage in Company B agree to having a $5/hr one that a worker in Company A is drawing?

In other words, why should Company B's uncompetitiveness and inadaptability be blamed on Company A?

Where did I mention "dumping" as inherently unfair in this particular case? I didn't even mention the word in my post. I said Pakistan is better off importing chinese cheap quality steel rather than forcing inefficient domestic production and accruing what is tantamount to very bad debt over long time (esp given its govt owned).

The opportunity costs in trying to advance Pakistan capacity are just too great.

The labour is much better employed in manufacturing and construction using the cheapest steel on the market, which in todays world originates from China. Whether that is dumping, overcapacity or just sheer Chinese efficiency (or combination of them) is another topic altogether (and its best discussed when we compare another major steel producer alongside China).

For Pakistan it makes no difference in this terminology/reasoning given they literally produce a quantity of steel in one full year that China does in a little more than a day.
 
Let the open market dictate... the government shouldnt subsidize or run white elephants...

There's a saying 'if you can't beat your enemy- join him'

Where did I mention "dumping" as inherently unfair in this particular case? I didn't even mention the word in my post. I said Pakistan is better off importing chinese cheap quality steel rather than forcing inefficient domestic production and accruing what is tantamount to very bad debt over long time (esp given its govt owned).

The opportunity costs in trying to advance Pakistan capacity are just too great.

The labour is much better employed in manufacturing and construction using the cheapest steel on the market, which in todays world originates from China. Whether that is dumping, overcapacity or just sheer Chinese efficiency (or combination of them) is another topic altogether (and its best discussed when we compare another major steel producer alongside China).

For Pakistan it makes no difference in this terminology/reasoning given they literally produce a quantity of steel in one full year that China does in a little more than a day.

My apologies, i meant to quote Rajarala Chola's post only. You did a good analysis actualy.

like i said, if you cant beat your enemy- join him.
 

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