The steel industry in Pakistan plays an important role in the country’s economy and infrastructure. The industry provides the building blocks required to construct buildings and other structures, which improves living standards while also supporting growth and development. As such, any negative changes within this industry can be highly disruptive to the country as a whole. Recently, the government has approved a massive increase in power tariffs, which will impact the steel industry in Pakistan significantly, so this raises major concerns that need to be addressed. To learn more about how this hike in power tariffs could affect the steel industry in Pakistan, keep reading to find out more below.
A 5.2% increase in the electricity tariff by the Pakistan Energy Regulatory Commission has now made energy cost one of the biggest expenses faced by the industry, causing severe financial pressure on businesses and increasing operational costs as well as prices of steel products to consumers. In this article, we will examine how businesses in the sector are dealing with this rise and what they think can be done to ease their financial burden caused by the hike in energy costs.
What is the Impact of the Massive Hike in Power Tariff?
Pakistan’s government, led by Prime Minister Imran Khan, has begun taking measures to provide power for industries at the cost of $4 billion. The power tariff is set to be raised from Rs5.1 per kilowatt-hour (kWh) to Rs10.6 kWh from December 15th, 2019 onwards – a massive hike that is expected to have a significant impact on the Pakistani steel industry. The increased tariff rate will burden manufacturers, who are already struggling with high rates and difficult economic conditions; moreover, they do not expect it to change their manufacturing costs or production structure due to a lack of alternative means for generating cheaper electricity.
Pakistan has one main electricity grid that supplies energy nationwide and six other substations that feed into the national grid during peak hours only.
Impact on Steel Industry
Pakistan’s steel industry is seeing serious issues as a result of a massive hike in power tariff by 22% from Rs. 7 to Rs. 9 per unit, which is well above the international price of coal. The sudden increase has resulted in the shutdown of plants and delayed investment decisions, as well as raised concern about electricity shortages for households and other industries that depend heavily on thermal power generation. All plants faced load shedding with consumption dipping to 2,500 MW against a peak demand of 6,500 MW. These factors are posing an additional challenge to an already struggling industry that needs both coal and cheap power supply to reduce production costs and become competitive enough to export their product abroad.
Steel Industry’s Response to the Power Tariff Hike
Pakistan’s steel industry has expressed concerns about the upcoming hike in power tariffs, which is due to come into effect at midnight tonight. The steep increase from Rs 3.85/unit to Rs 5.38/unit will lead to an estimated increase in raw material and utility costs for mills, ranging from 2% to 12%. As well as this, the hike in power tariff will affect refining and processing costs-adding up to an expected 25-30% rise. Despite such a hefty rise in energy prices, major buyers such as construction companies are still not willing to pass these increased expenses onto their customers until these rises are officially confirmed.
The Consequences of the Recent Power Tariff Hike on the Economy
In 2016, a power tariff hike of 25% had been pushed for by PESCO (Pakistan Electric Supply Company). The hike was deemed necessary to improve the power sector and maintain it in equilibrium. The economic consequences of this would be a shortage of funds for businesses that depend heavily on electricity, and a need for more jobs as factories were forced to invest more into maintaining their production units. Eventually, it was predicted to cause an increase in inflation that would make things like food and clothing costlier.
Still, politicians remained adamant about pushing ahead with their plans due to promises made when they were first elected. Needless to say, it caused concern among workers and further mistrust between PESCO and its clients – especially those that could afford it least.
In conclusion, this increase in power tariff has dealt a severe blow to industries that use large amounts of electricity. We do not foresee any relief for steelmakers, who continue to be burdened with higher costs. This will lead to more pressure on profitability and may trigger cost-cutting initiatives that could further hamper investments.