- Md. Mehedi Hasan Steelmakers of Bangladesh: Forging Ahead amid Overcapacity The first industrial revolution in Britain towards the end of the 18th century and the second one in Germany and the United States approximately a hundred years later, were similar in many ways despite being removed almost a century from each other. During the two periods concerned, new products and processes were generated mostly through a steady stream of innovations and inventions. Many of these inventions and innovations would not have had commercial value without iron and steel as critical inputs. Indeed, the early spread of industrialization traced to Western Europe between 1750 and 1800 was enabled by the development of iron and steel, when Britain had industrial monopoly compared to other parts of the world. The same can be said of America in the mid-1800s when the founding of heavy iron and steel industries and the advent of a nationwide rail network that integrated regions across the USA led to the birth of modern industrial capitalism. Thus, history teaches us that industrial development and movement of economies from the primary to the secondary and onto the tertiary stages of production are explicably linked, as the ability of societies in Western Europe, the Americas and in Japan to cope with their environment and provide for the welfare of their people was possible due to their progressive development, mastery and use of iron and steel products during different stages of their history. For developing countries in the 21st century, progress in steel-making technology does not represent starting from scratch; rather the objective should be to obtain, learn and apply the technologies in existence. In short, developing countries need to absorb foreign technology through mimicking, self-teaching, investing in foreign licenses, or technical assistance from international bodies/ developed countries and so on. The economy of Bangladesh is a rapidly developing market- based economy. According to the International Monetary Fund (IMF), Bangladesh is ranked as the 44th largest economy in the world in 2011 in purchasing-power-parity terms and 57th largest in nominal terms; it has also been included among the Next Eleven or N-11 of Goldman Sachs and D-8 economies. Over the last few years the economy has grown at 6%-7% per annum. Additionally, a separate assessment by the Asian Development Bank in 2012 also theorizes that the Bangladesh economy should exhibit stable 6%-plus growth rate for the next two years, buoyed by a 6.1% growth in the services sector and a massive 9.0% growth in the industrial sector led by construction and small- scale manufacturing efforts targeted at the domestic market. Prospects indeed look bright for the South Asian nation. However, infrastructural weaknesses remain. Proper national development is only possible through expansion of industrial capacity and infrastructural support by means of self-sufficiency. As stated before, the movement towards a progressive national economy thus, partially but strongly depends on how we make steel and produce deformed bar and other by-products. Historically, the art of steel shaping and making have long been in practice in Bangladesh. Source: World Steel Association 8 IDLC MONTHLY BUSINESS REVIEW Source: Seminar on Quality Steel and Its Importance in Civil Engineering Applications, BSRM However, changing times have led to changing consumption patterns and demands from both domestic and international audiences; indeed the quality of the steel products has not always met the level of local and international consumers. According to local steel manufacturers, Bangladesh consumes 4 mn tons of steel per annum and per capita steel consumption is 25 kilograms, which is less than half of per capital steel consumption in India. Considering the population of Bangladesh being roughly equal to 160 mn, this penetration is exceedingly poor when compared to Indias 1 bn plus populace. Nonetheless, more than 400 steel mills of different categories and sizes currently operate in the country. Together, their combined production capacity stands at 8 mn tons while the industry has a net worth of about BDT 300 bn. Dynamics of the Steel Industry Depending on the type of raw materials used, steel can be produced in two distinct manners. Conventional Process: Steel Production from Iron Ore Alternate Process: Steel Production from Scrap Metals The conventional process of steel manufacturing contributes approximately 65% of world steel production. Under this method, steel production is accomplished in an integrated steel plant through three basic steps. First, we ensure that the blast iron furnace in which the iron ore is to be melted has all the correct settings, such as proper temperature and proper containment measures. Secondly, the iron ore is placed in the furnace and melted at about 1700C. This melts the scrap, lowers the carbon content of the molten iron and helps remove unwanted chemical elements; here pure oxygen is used instead of air. Finally, the molten iron is processed through a variety of means to produce steel. The alternate process contributes approximately 35% of world steel production. Plants used in the alternate process are known as mini steel plants. Steelmaking from scrap metals involves melting the scrap metals, removing any impurities through either a Direct Reduced Iron/Sponge Iron and casting it into the desired shapes. Typically, the alternative process involves the use of Electric Arc Furnaces (EAF). The EAFs melt scrap metal in the presence of electric energy and oxygen. The process does not require the three steps refinement as needed to produce steel from ore. On a smaller scale, this particular manner of steel production has proven to be more economical and cost- reducing. In Bangladesh, most steel factories are producing steel by following the alternate process due to unavailability of quality coke and iron ore. Quality Testing When we talk about quality of steel, we mean the desired specification with respect to chemical composition, cleanliness and gas content. Quality of good steel can be ranked according to the following carbon level which can be tested through an Ultrasonic Thickness Machine (UTM). Figure: Steel making process Carbon Equivalent (CE) Weldability 0 to 0.35 Excellent 0.36-0.40 Very Good 0.41-0.45 Good 0.46-0.50 Fair Over 0.50 Poor 9 IDLC MONTHLY BUSINESS REVIEW Source: World Steel Association Production Capacity of Steel Industry in Bangladesh Currently, the demand of steel is around 4 mn tons per annum whereas the combined capacity of the industry is around 8 mn tons. Although the installed capacity of 4 mn tons is not being utilized currently, this overcapacity may prove tricky as a demand fall coupled with the overcapacity may pressurize profit margins. Product Types There are a few types of steel products manufactured in Bangladesh, namely Billet - MS Angle - MS Channel -Flat Bar - Round Bar/ Shaft 40 Grade Deformed Bar - 60 Grade Deformed bar Deformed Bar Extreme 500 W TMT (thermo-mechanical treatment) bar TMT steel bar is a newer variety of steel used for construction purposes. Earlier, people had been using TOR Steel (trade name for deformed bars) for concrete reinforcement in houses and infrastructure projects, but now usage has shifted more towards TMT steel. TMT bars offer several advantages over the other traditional types of steel. No twisting operation is involved in the production of the TMT steel bar, as a result the steel produced contains no residual stresses in its makeup. This in turn, increases the corrosion resistance. Players of the Steel Industry As an emerging country that has been average 6% growth over the last few years, Bangladesh has seen sizeable investment in the steel sector. Big business conglomerates such as PHP and Abul Khair Group have stepped in to take advantage of growing market demand. Kabir Steel & Re-rolling Mills (KSRM) has set up a 300,000-ton mild steel rod plant in Chittagong. The plant has been designed by famous European steel plant designer Pomini, is fully automated and has the capacity to produce from prime quality billets. The KSRM announcement came just a month after the countrys largest conglomerate, Abul Khair Group, formally entered the sector, unveiling a BDT 7000 mn investment for an 800,000-ton plant. Bashundhara Group, the realtor-turned-tissue to paper giant, has also decided to enter the steel production market. At present, the groups subsidiary Bashundhara Steel Complex Limited (BSCL) has two Steel Melting Units and two Steel Re-rolling Units with a capacity of 100,000 metric tons per year; one M. S. and G. I. Pipe manufacturing units with the capacity of 20,000 metric tons per year; one LPG Cylinder manufacturing unit with the capacity of 300,000 cylinders per year and one Ferro-Alloy Plant with the capacity 7000 metric tons per year which is in the commissioning stage. Yet another Re-Rolling Mill with TMT technology is under a trial production run, whose production capacity is expected to be 60,000 metric tons per year. Another Chittagong based mill Ratanpur Steels and Re-rolling Mills has started marketing 75-grade mild steel rod since late 2011 from its state-of-the-art steel factory worth BDT 2000 mn. On the other hand, Sarker Steel has automated its factory with state of the art technology in an effort to increase the quality of its product offering. Currently, the company has a monthly capacity of 5000 metric tons. Baizid Steel also produces high quality 75000 psi deformed bar and has an annual capacity of 180,000 metric tons. Its sister concern CSS Corporation (BD) Ltd has a similar annual capacity of 170,000 metric tons billet. Net Profit margin in Steel Industry Full auto technology with billet plant 3% to 4 % Manual Production process 1% to 2% Note: Profit margin may vary depending on the market demand & supply condition, raw material cost, exchange rate, backward linkage etc. Most of the firms set up their own billet plants which helps them to secure better margin nowadays. Business Arenas Factories of steel and re-rolling mills are mainly located at the following areas: Zone Area Dhaka Demra, Shampur, Matuail, Gazipur Narayanganj Rupganj, Modonganj Chittagong Bhaitari, Fouzdarhat, Kumira, BaizidBostami, Nasirabad Major Players in Steel Market: Domestic International BSRM Steel Mills Limited ArcelorMittal (UK) Rahim Steel Mills Co. (pvt.) Ltd. Hebei Group (China) Ratanpur Steel Rerolling Mills Ltd Basosteel Group (China) Bashundhara Steel Complex Limited (BSCL) Posco (Korea) Sarker Steel Limited (SSL) Wuhn Group (China) KSRM Steel Plant Ltd Nippon Steel (Japan) Abul Khayer Steel(AKS) Shagang Group (China) Baizid Steel Industries Ltd Saleh Steel Industry Ltd. On the other hand, world steel capacity utilization ratio in 62 countries in July 2012 declined to 78.7% from 80.4% in June 2012. Compared to July 2011, it is 0.8 percentage points lower. Overall, it can be inferred that supply tends to outstrip demand in the consolidated steel industry. 10 IDLC MONTHLY BUSINESS REVIEW Another big player, Bangladesh Steel Re-rolling Mills (BSRM), has not remained idle in the face of such broad scale mobilization in recent times. In turn, it has aggressively engaged in capacity building. BSRM producer of high-grade steel caters to more than 25% of the total domestic steel demand. BSRM had a production capacity of 375,000 tons per year in FY 2012. Currently, it is conducting a trial production run of its newly installed BDT 3.5 bn plant that is expected to have an output level of 300,000 ton per annum. The steel giant has also unveiled plans to invest another BDT 5000 mn to raise its capacity to around 1 mn tons within the next five years. Global Steel Production Status: World crude steel production for the 62 countries reporting to the World Steel Association was 130 mn ton (Mt) in July 2012, an increase of 2.0% compared to July 2011. Chinas crude steel production for July 2012 was 61.7 Mt, an increase of 4.2% compared to July 2011. Elsewhere in Asia, Japan produced 9.3 Mt of crude steel in July 2012, up by 1.2% compared to the same month last year. South Koreas crude steel production for July 2012 was 5.9 Mt, an increase of 4.4% compared to July 2011. In the EU, Germany produced 3.6 Mt of crude steel in July 2012, a decrease of -2.1% on July 2011. Spains crude steel production for July 2012 was 1.0 Mt, 7.0% higher than July 2011. In July 2012, the UK produced 0.9 Mt of crude steel, up by 6.6% compared to July 2011. Turkeys crude steel production for July 2012 was 3.1 Mt, an increase of 9.7% compared to July 2011. In July 2012, Russia produced 5.9 Mt of crude steel, an increase of 3.6% compared to the same month last year. The US produced 7.4 Mt of crude steel in July 2012, up by 0.9% on July 2011. Brazils crude steel production for July 2012 was 3.0 Mt, -4.1% lower than July 2011. Challenges of steel industry in Bangladesh After a decade of steady growth, local steelmakers are now facing tough times due to a surge in production costs and a slowdown in consumption by both the government and private sector. In addition, a low pressure of gas, depreciation of the local currency, rising costs of raw materials, electricity and bank borrowing, and a tight liquidity situation have hurt the BDT 300 bn steel industry. Competitive Market: Newly invested companies have started operations, with even more in the pipeline while existing companies are looking to expand on existing capacity. The latest investment boom in rod, a key construction component, is likely to outpace the countrys annual demand for rod and might result in an investment glut and erce competition. Economic Crunch: World recession and the socio-political situation that prevailed in 2008 stagnated all development works in the country. This was especially alarming considering that the government accounts for nearly 40% of the total steel consumption. At present, consumption has been down signicantly due to a slowdown of the development works of the present government. Financing issues regarding the Padma Bridge and disruption credit ow from the World Bank and other donor rms like JICA, IFC also resulted in an adverse impact on the steel industry particularly, and the construction sector as a whole. Moreover, the stock market crash of 2011 negatively aected the real estate sector badly which lead to the slowdown of demand of steel rod. High borrowing cost and Exchange rate risk: High interest rates of banks and nancial institutions were a noteworthy contributor to the reduced prot margins of the steel producing companies. Moreover, the cost of producing a ton of 60-grade rod has increased by BDT 18,000 between January 2011 and January 2012, mainly because of depreciation of the taka against the dollar. Steelmakers import at least 70% of their raw materials, thus uctuations in exchange rate tend to aect them badly. According to the Bangladesh Bank, Bangladesh imported iron, steel and base metals worth USD 2004 mn during the FY2010- 2011. However, at present the cost of raw materials is stable in the international market and a sizeable number of ships have been stocked in the ship breaking zone (from which a large quantity of steel is procured). A moderate price trend in the coming years is expected. Energy Crisis: The energy crisis in Bangladesh is worsening day by day. Steelmaking requires exhaustive power requirements, in the form of uninterrupted power supply and gas in production. However, the lack of realization of this basic need has posed, and is posing a serious hindrance to growth in the Bangladeshi steel industry. Technology Risk: Many steel factories in the country still use manual production methods, despite new e ciency-enhancing, cost-reducing technology being readily available in the market. An example would be most of the factories in the Shyampur area of Dhaka. Most of the mills there are on the verge of extinction, as they cannot compete with automated factories in terms of cost, e ciency and production volume. Environmental Risk: Bangladesh possesses no iron ore deposits or mines, which render ship-scrapping (and ship breaking, Source: World Steel Association 11 IDLC MONTHLY BUSINESS REVIEW by extension) as the major source of raw materials. The ship breaking industry is currently supplying more than 60% of the raw materials for local steel industry. However, Bangladeshi ship breakers found themselves at the forefront of criticism as NGOs and pressure groups exposed some questionable practices of the ship-breakers that posed serious environmental and human hazards. On the ruling of Bangladesh Environmental Lawyers Association (BELA), the judicial courts of Bangladesh established certain environmental standards for all ship breakers to adhere to, and decreed that violation of these standards would result in a ban. The courts decision meant that by 2010 the ship-breaking industry had come to a halt. And it lead to the sharp rise of rod price. However, withdrawal of the ban in late 2011 paved the way for Bangladeshs comeback in the global ship-breaking sector in 2012. Demand for the ship-breaking sector is expected to remain high as Bangladeshs building construction sector solely depends on steel recycled from ship-plates. The demand of steel is poised to increase as the country is in a phase of real-estate boom that also encompasses infrastructure development. Also, the Ministry of Industries (MoI) and international bodies such as the Norwegian Agency for Development Cooperation (NORAD) has also shown its interest to support the local ship-breaking industry in accordance with international standard and law of the land. Currently, the industry is following governments Ship Breaking & Recycling Rules act that was instituted in 2011. Steel plays a vital role in infrastructure and overall economic development of a country. Thus, the growth of steel industry is often thought to be a parameter of economic progress. This sector has seen increased activity in terms of new investment during the last few years. To be more cost effective, companies are also upgrading their technology and manufacturing processes. To reduce the dependency on billet import, local companies are now investing heavily to set up their own billet plants. Most of the mid-level and large scale steel mills have installed fume-extraction systems and effluent treatment plants (ETP) to protect the environment by controlling the harmful fumes discharged from the plant. However, excess capacity is very much a reality in the steel industry. Government support towards facilitation of exporting the excess steel will not only stabilize the domestic market, but also provide the millers with an extra source of income. In fact, steel manufacturers have been lobbying for the Bangladesh government to approach India in order to remove the non-tariff barriers for steel exports to the north-east states of the latter country, as Bangladeshi millers believe that particular region to be a good potential market. Apart from that, we have seen that the construction sector of Bangladesh has grown at a calculated average growth rate (CAGR) of 12.2% over the last 10 years. This growth is expected to continue. Although the global economy is passing through a difficult time and our real estate sector is facing a temporary slowdown of demand due to overall macroeconomic pressure and contraction policy of government, the local manufacturers believe the steel industry should continue to grow at 10% in the next few years, riding on government programs centering its vision for 2021, a real estate boom in urban areas and an inflow of remittance in rural areas. One part of those expectations the real estate boom has seen slight realization during the tail-end of 2012. Though government steel consumption has gone down significantly, it is planning few very big projects like Padma Multipurpose Bridge and Metro Rail. The two projects will cumulatively cost more than USD 6 bn. Successful implementation of these projects holds a very good potential for top line growth, as steel and steel rods in particular feature prominently as raw materials of the two projects. Above all the government needs to ensure basic infrastructure, power, gas and an educated workforce -without which, industrial growth will sputter. (The writer is working as a Senior Credit Analyst of Credit Risk Management department of IDLC Finance Ltd. He can be reached at HMehedi@idlc.com.) Prospect of backward linkage (Ship breaking Industry) Bangladeshs ship-breaking industry was the worlds largest until 2009 when various legal campaigns by environmental groups almost shut down the sector. In 2010, due to court restrictions only 19 vessels were broken. However, last year, courts lifted the ban on the import of ships until government ministries formulate detailed guidelines for the ship-breaking sector. That has seen business pick up pace again, with 150 ships dismantled in 2011. Approximately 143 ships have already been broken in the first six months of 2012. Bangladeshs unique geography is also another reason why ageing ships are taken to the beaches there. The industry is worth around USD 1 bn and shipyard-owners say the sector employs nearly 200,000 workers. Good prospect of this industry will facilitate more steel production in our country. Ship breaking scrap contribution to steel production and consumption in BD (millions) Steel Consumption 5 m tons Steel Production 2.2 to 2.5 m tons Scrap steel from ship breaking (SB) Up to 1.5 m tons SB Contribution to steel production 50% SB Contribution to consumption 20-25% Rerolling mills 250-350 Source: World Bank Report 2010