Steel Sector review – A sad state of affairs!

November 18, 2019 (MLN): The Steel Sector of Pakistan remained subdued during the quarter of July-September 2019, as various inevitable factors continued to downplay the sector’s resilience against ongoing economic adversity.

It is imperative to mention that the term ‘economic adversity’ obviously refers to the global economic situation in this context, for Pakistan’s economic indicators showed an astounding amount of improvement during the above mentioned period.

On the global front, the prices of steel continued to decline during the quarter, as the ongoing trade war between America and China further escalated into a full-blown crisis. It is worth mentioning that the implications of this war are affecting most of the world economies.

According to company filings, the HRC prices dropped from around $500 in July to around $440, in China, with a similar trend observed in all major markets including EU, USA, Japan, India, and Russia. The iron ore and hard coking coal prices also declined from $120 and $190 to $95 and $135 respectively, in Australia.

On the domestic front, the demand remained depressed throughout the quarter as the macro-economic adjustments curtailed demand leading to cut back in industrial output. The auto sector was hit hard in particular leading to slow off-take of CRC, the main raw material for the sector.

Fortuitously, the antidumping duty case moved against Russia and Canada was finally decided in the sector’s favor, as a provisional anti-dumping duty of 13.94% was imposed on both the countries on September 20th, 2019.

Another major development concerning the sector is that International Steels Limited and Aisha Steels Limited have reduced the prices of CRC and HDGC by Rs. 5000 each, due to the availability of cheaper coils in the domestic markets.

To cut a long story short, the steel sector underwent a pretty rough time during the quarter, as the above-mentioned factors continued to take a toll on its financial well-being. To further validate this standpoint, a detailed financial analysis has been carried out after taking into consideration the financial performances of the major players within the sector, though majority of them are not listed on the KSE-100 index. These are International Industries (INIL), International Steels (ISL), Aisha Steels (ASL), Amreli Steels (ASTL) and Mughal Steels (MUGHAL).

Statement of Comprehensive Income for the quarter ended September 30, 2019 (Rupees'000)




 % Change





Cost of sales




Gross profit




Selling and distribution expenses




Administrative expenses




Other operating expenses




Other income




Finance cost




Profit before taxation








Profit after taxation




As evident from the table above, the Profit after Tax figure of the sector declined by around 89% during the period, as the overall earnings (after taking into account losses incurred by INIL, ASTL, and ASL) stood at Rs. 274.5 million, as opposed to Rs. 2.5 billion recorded in the same period of last year.

From what it appears, factors such as the limited ability of companies to pass on the impact of higher input prices onto the consumers, rise in working capital requirement as well as the cost of ongoing expansions of various companies kept the earnings of the sector at bay.

According to a research report by Foundation Securities, the input costs of the sector were largely elicited by the conditions set by International Monetary Fund, regarding the hike in electricity and gas tariffs, which ultimately led to increase in energy cost for long steel and flat steel manufacturers. As a consequence of this, the cost of sales increased by 15.3% during the period.

The finance costs showed a 1.7x increase during the period, on account of an increase in the working capital requirement, a rise in borrowings amidst ongoing expansions and higher interest rates.

Considering the worsening operating environment and deteriorating earnings, some of the companies within the sector, i.e. ASL, ASTL, and ISL received assistance in the form of tax credit during the period.

International Steels Limited declared net earnings of Rs. 347.9 million (EPS: Rs. 0.8) for the quarter, i.e. nearly 58% lower than the earnings of the same period last year. The sales revenue remained stable, despite the company’s decision to lower prices of HRC.

Moreover, the rise in the prices of HDGC and CRC, due to devaluation of the local currency, failed to pull the revenue up. The finance cost escalated by 133% due to an increase in working capital requirements as well as higher interest rates on borrowings.

International Industries Limited incurred losses of Rs. 52.6 million (LPS: Rs. 1.87) for the quarter, as opposed to profits of Rs. 851 million reported in the same period last year. The decline in the company’s profits were attributed to change in the duty structure on CRC import and contraction in the demand for tubes and pipes.

Moreover, the inability to pass on the impact of inflation and rupee depreciation on customers further pushed the company towards losses. The rise in finance cost by 119% owing to higher interest rates was another factor that led to this jeer-worthy performance.

On top of that, the non-core income of the company fell by 91%, thanks to considerable exchange losses incurred during the aforementioned period. Nevertheless, INIL managed to report growth in topline earnings by 5% on account of higher retention prices.

Amreli Steels Limited reported a loss worth Rs. 81 million (LPS: Rs. 0.27) during the quarter against the profits of Rs. 408 million reaped in the same quarter previous year. The losses during the quarter were mainly attributable to a 162% increase in finance cost due to higher working capital requirements and interest rates.

The top-line earnings of the company increased slightly by 3% mainly due to higher retention prices. However, the cost of sales also increased by 8% during the quarter, thereby resulting in a 26% decline in gross profits.

Mughal Iron and Steel Industries Limited reported net profits of Rs. 264.3 million (EPS: Rs. 1.05) for the quarter, i.e. 25% lower than the earnings of the same period last year.

The revenue of the company jumped by 11% on the back of higher volumetric sales and an increase in retention prices. Similarly, the gross profits hopped by 14% due to the same reasons. On the other hand, the finance cost grew by 146% owing to the increased working capital requirement as well as a hike in interest rates.

Aisha Steel Mills: reported losses of Rs. 203.9 million during the period, as opposed to profits of Rs. 120.7 recorded in the same period of last year. The company’s revenue during the period was Rs. 6,160 million, as compared to Rs. 3,091 million achieved in the corresponding period in 2018-19, showing an increase of about 99%.

The company’s financial stability was largely hit by a 1.7X increase in the finance cost, on account of rise in working capital requirement and higher interest rates. The absence of non-core expenses and a tax credit of Rs. 36 million failed to bring the company out of the pothole.

The Engineering Sector contributed merely 7.8 points to the KSE-100 index during the period under review. As mentioned before, not all the companies operating within the sector are listed on the KSE-100 index, and therefore, the impact of the companies that are listed, i.e. INIL and ISL, is quite limited.

The graph above shows that the performance of the steel sector was somewhat in line with that of KSE-100 index, with some amount of eccentricity shown in the month of July. Nonetheless, the performance of the sector picked up and even exceeded that of KSE-100 during September, on account of some favorable factors such as plans by the Prime Minister to increase spending on the construction sector.


Flat steels sector is expected to witness rising business risk given the significant volatility in steel prices and HRC-CRC margins, as well as the threat of dumping. This along with weak demand dynamics are expected to persist during FY20.

The sector is also likely to face some hurdles in the form of a slowdown in large infrastructural projects, hike in policy rate as it will put further burden on the profitability of domestic producers, and rise in commodity prices such as iron ore and steel scrap. Moreover, the commencement of capacity expansion by major players amidst low demand may result in supply glut in the upcoming year.

On the brighter side, local players expect sales to be supported by a decline in imports (currently imports are sizeable) due to imposition of preliminary Anti-Dumping Duty on flat steel imports from Russia and Canada. Moreover, the sector is expected to benefit from recovery in HRC-CRC margins as a result of the reduction in tariff by the United States.

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Posted on: 2019-11-18T15:11:00+05:00