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 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.
