September 24, 2019 (MLN): The ongoing global economic slowdown, coupled with worsening economic situation of Pakistan has undoubtedly taken a toll on some of the major industries operating within the country, including the steel sector.
Steel industry was ultimately forced to evacuate its comfort zone during the Fiscal Year 2019, as most of the companies within this sector suffered all sorts of adversities, ranging from consistent depreciation of Pakistani Rupee (PKR) to declining demand for steel products owing to economic slowdown.
Steel products are generally classified into four broad categories: long steel products (re-rolled bars); flat steel products such as Hot Rolled Coils (HRC), Cold Rolled Coils (CRC), and Hot Dipped Galvanized Coils (HDGC); piped products for use in road construction, etc.; and semi-finished products that are sold to other manufacturers or consumed internally for processing into finished products.
Cumulatively, the domestic manufacturers cater around 50 and 60 percent of the total domestic demand for galvanized and CRC, respectively. High imports, even after record domestic production, illustrate high demand for steel products.
As per the report prepared by State Bank of Pakistan titled ‘Developments in Steel Sector’, there are approximately four factors that stand out on the demand side. Firstly, there is now a dynamic customer base for steel commodities in automotive, defense, transportation and appliances sectors. Secondly, an increase in overall industrial activities has created further room, as most of the construction-allied industries are investing heavily in expansions. Thirdly, population surge has created a housing shortage and the private housing projects are gearing up to cater to this shortfall. Fourthly, higher public spending and CPEC related infrastructure undertakings are fueling further demand for steel.
From the supply side, the domestic manufacturers face tough competition from imported finished products, particularly from China. Competitive in terms of both price and quality, the imported products are especially impacting sales of domestic small players, who are unable to compete due to high costs of doing business and double taxation across the industry. Recently, the industry has had some respite after the government imposed anti-dumping duty on top of already imposed regulatory duties on finished steel products
Steel sector, or rather known as engineering sector, is mainly dominated by five companies, though majority of them are not listed on the Pakistan Stock Exchange. These are International Industries (INIL), International Steels (ISL), Aisha Steels (ASL), Amreli Steels (ASTL) and Mughal Steels (MUGHAL). Hence, the financial analysis of the sector based upon the consolidated financial statements of these companies is as follows;
Financial Results of Steel Sector for the year ended June 30, 2019 (PKR'000)
Cost of Sales
Selling and distribution expenses
Other operating charges
Profit before taxation
Profit after taxation
The sector saw a decline of 44.8% in net profits on account of multiple reasons, rise in input costs being one of them. The sales revenue exhibited an increase of 22.7%, due to increase in the volumetric sales by the companies, increase in the prices of rebar, as well as capacity enhancement.
The company’s cost of sales shot up by 30%, due to persistent devaluation of local currency, increase in depreciation costs owing to ongoing expansion projects by several companies, as well as inflationary pressures, a report by Topline Securities pointed out.
The inability of these companies to pass on the adverse impact onto the consumers further worsened the gross margins of the sector.
Owing to ongoing and new expansion projects undertaken by some of the companies, the finance costs of the sector jumped by 104% as requirement for borrowing increased. Higher benchmark interest rates also played a crucial role in dragging up borrowing costs.
International Industries Limited
INIL’s profits for the year ended June 30, 2019 amounted to Rs. 3.2 billion (EPS: Rs. 18.26), i.e. nearly 37% less than the figures recorded in last year. The depleting performance was a result of increase in cost of sales by 18% during the period.
International Steel Limited
ISL reported net profits of Rs. 2.6 billion (EPS: Rs. 6.12) for the year ended June 30, 2019, which is around 39% lower than the earnings of last year. The decline in company’s profit was mainly due to lower than expected volumetric sales during the last quarter. This can be attributed to the increase in prices of Cold Rolled Coil and Hot Dipped Galvanized Coil due to PKR devaluation.
ISL successfully enhanced its cold-rolling capacity to over 1 million MT per annum in June 2018, subsequent to which, a continuous pickling line and additional annealing capacity were commissioned during the year under review. To add to this, ISL held a groundbreaking ceremony for one of two planned steel service centers in Port Qasim during the year, which will add value to its existing business.
Aisha Steels Limited
ASL’s annual net profits declined massively by 80% to Rs 253 million, owing to increase in cost of sales by 19% which allowed company’s gross profits to decline by 49% to Rs 1.67 billion from Rs 3.3 billion last year.
The decline in earnings was an outcome of the recent capacity additions to HDGC and CRC capacity, which led to an oversupplied market. On the contrary, the company saw 7% growth in revenue on account of increase in the prices of CRC.
Amreli Steels Limited
ASTL declared net earnings of Rs. 32.8 million (EPS: Rs. 0.11) for the year ended June 30, 2019, which is around 98% lower than the earnings reported in last year. The company endured significant slump in profits despite increase in sales revenue by 85%, prompted by rise in sale of rebars post commissioning of the new Dhabeji plant.
The gross profits of the company fell by 12% due to hike in scrap prices, teething issues at the new plant which led to higher gas and electricity costs, as well as consultancy and staff training costs incurred for the new plant.
Mughal Iron and Steel Industries Limited
MUGHAL reported a slight increase of about 6.4% YoY in its net profits to Rs 1.37 billion from Rs 1.29 billion observed last year. Net sales of the company jumped sharply to Rs 30.8 billion from Rs 22.2 billion, showing a remarkable increase of 39% YoY. But the gross profits of the company increased slightly by 14%YoY due to corresponding rise in cost of sales by 42% YoY.
The graph above shows the performance of benchmark KSE-100 index and the steel sector during FY19. As evident from the trends shown, the performance of the sector not only went downhill, but consistently deviated from the benchmark index. Needless to say, steel sector seldom plays a role in driving the performance of the KSE-100, which means that its contribution to the index is usually minimal. This notion is backed by the fact that the steel companies listed on KSE-100, i.e. ISL, INIL, ASTL and ASL (ASTL and ASL got ousted in April’19) snatched nearly 227 points from the benchmark index during the year.
Going by the report of SBP, the sector is intensifying efforts to reduce import dependence on raw materials. While scrap imports would continue to increase (given that the domestic scrap materials do not yield quality products), the industry players have started expanding their billet manufacturing, which is further processed into long bar products by the manufacturers.
Overall, the domestic steel industry is benefiting from an encouraging investment and operational stimulus. However, as the new capacity comes online, the profitability of the manufacturers would depend on the overall activities in real and construction sectors going forward.
Copyright Mettis Link News