The recent financial crisis of the steel industry has left many companies in Pakistan facing losses, insolvency, closure, and even bankruptcy. In order to help save the steel industry in Pakistan, let’s look at some of the issues causing this crisis and then see what can be done to resolve them.
A recent report released by the World Steel Association indicates that steel production in Pakistan has declined by 19% in the first six months of 2020, compared to last year. These findings show that this industry may shut down entirely unless measures are taken immediately due to its heavy losses and depleting stock prices. Here are some suggestions on how to save this industry before it’s too late.
The financial crisis of the Steel Industry in Pakistan, Key Data, and More
In 1947, after gaining independence from Britain, Pakistan combined its existing steel industry. The era of this collaboration was generally viewed as a positive one. The steel mill production in Pakistan grew by eight million tonnes during the course of the next decade, while the productivity at this factory grew by 5%.
Yet around 1967 some major changes would occur. Rising energy prices increased operating costs and initiated a greater reliance on coal. At this time Muhammad Ali Jinnah was appointed Governor-General and imposed martial law in order to fix what he thought were poor management policies, which he believed to be responsible for both economic failures and political failures such as political unrest against other countries such as Afghanistan.
The Main Causes for the Downfall of the Steel Industry
After experiencing significant growth rates in the early 2000s, steel producers in Pakistan are now experiencing a drastic decline. There are many causes for this downfall, one of which is imports, but there are also some actions that can be taken to recover. Firstly, devaluation and widening current account deficit have led to depreciation and a high dollar value of imports, contributing to the rising inflation rate. Secondly, the higher oil prices will significantly increase the cost of raw materials such as iron ore, crude oil, and scrap metal; these prices have already been increasing at a steep trajectory over time. Finally, there is a need for an urgent shift from free trade agreements (such as TTP) towards bilateral or regional trade agreements or abolishing them completely.
Reasons Why Financial Crises Impact the Steel Industry
Steel plants rely heavily on raw materials like coal and iron ore, so price fluctuations or shortages in these resources can cause steel prices to rise or fall rapidly. This happened from 2008 through 2009 when the global financial crisis caused prices for coal and iron ore— two key steel raw materials—to rise steeply in price.
Despite this upheaval, Pakistan still has enormous opportunities for steel exports. It has demonstrated an ability to grow its trade with new partners around the world and plans are underway for ambitious projects such as a plan by Pakistan Railways (PR) to spend US$2 billion over four years on rail track upgrades, buying passenger cars, and locomotives from Spain’s Talgo.
The Possible Outcomes if Current Policies Continue
Pakistan, as an emerging market economy, faces many different challenges in keeping its steel industry afloat. These challenges vary from long-term stagnant growth rates to global overcapacity and dependence on imported iron ore and coking coal. The future of the steel industry is looking shaky. The government is tackling this issue by minimizing imports and increasing exports by either easing restrictions on raw materials or creating new ones. Unless these measures are successful, there are three possible outcomes for Pakistani steel companies: They will be forced out of business due to an unprofitable business model; prices for consumers will increase due to lower supply, or productivity will increase through technological advances in existing factories.
Financial Crisis: Conclusion
Pakistan’s steel industry is going through a tough time with plummeting prices. The industry will only be able to survive if there are changes in prices and or production capacity. Policymakers need to work together with manufacturers and consumers, as well as follow local market conditions for a solution. One idea might be reconsidering tariffs on steel imports which would make domestic steel more competitive by removing imported products from the equation.
