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January 29, 2003

Development of Steel Sector in the Past: Detrimental To EmploymentOpportunities and Foreign Exchange Savings

Group Captain (R) Engr. M. Akram Niazi

Due to ignorance or lack of interest on the part of decision makers and elected representatives,feasible Kalabagh Steel Mill project based on local iron ore was not commenced in 1956 and againin 1967, and Nokkundi iron ore project in 1972. However, Pak Steel Mill based on imported iron orewas established at Karachi in 1985. Pakistan may be the only poor country in the world to adopt acomparatively outdated machinery and technology for which iron ore had to be imported from faraway countries like Brazil and Australia. Consequently, the nation lost over 20 years of steelmaking till 1985, thousands of Pakistanis are deprived of jobs for mining and transporting millions oftonnes of local iron ore, and hard earned foreign exchange is being spent on imports which iscontributing towards socio-economic uplift of the people of other countries.

Some relevant facts are summarized in the succeeding paragraphs to apprise the worthy readersof the urgency of improving working efficiency of Pak Steel Mill instead of its expansion, utilizationof local iron ores found at various locations, and establishing state-of-the-art mini- steel mills neariron ore deposits, instead of depending only on one iron ore import-based steel mill with anoutdated machinery which is meeting only about 25% of our annual steel requirements.

In 1956, M/S Krupp of Germany offered to set up a steel mill based on Kalabagh iron ore, coal andmost other minerals available within about 11 miles. Reportedly, the concerned minister from asteel-importing family managed to shelve this project and, in protest, the illustrious Chairman ofPIDC, Mr. Ghulam Farooq, resigned.

In June 1966, another German company M/S Salzgitter produced in Germany 5,000 tonnes ofquality steel from 15,000 tonnes of Kalabagh iron ore in the presence of some international experts,and sold it to Volkswagon. The company offered in August 1967 to set up Kalabagh Steel Mill ofover 0.8 million tonnes per year (mtpy) capacity based on Kalabagh iron ore and imported coal atan estimated cost of Rs. 1.542 billion (including foreign exchange cost of Rs. 878 million). SomeEuropean banks offered loans for this project, which confirms technical and financial viability of theproject. PIDC selected a site with about 80% raw materials available within 11 miles. Unfortunately,this offer was also shelved.

In 1972, Chinese experts found a substantial quantity of iron ore in Nokkundi area of Balochistan.Steel experts from America and Japan confirmed its suitability for steel production andrecommended to set up a mini-steel mill in Balochistan. Later on, this ore was found suitable forPak Steel Mill after upgradation. The News of January 31, 1999 confirmed that offers from Chinaand Iran for a mini-steel mill in Balochistan were under consideration of the government.

In April 1968, our President General M. Ayub Khan accepted the Russian offer for Kalabagh SteelMill project, and the next President General Yahya Khan signed the project agreement with Russia.Subsequently, it transpired that Russia did not have the technology to produce steel from theKalabagh iron ore. Instead of reviving the German offers based on local raw materials, site of thesteel mill project was shifted to Karachi and Pak Steel Mill was established with a comparativelyinferior machinery, based on imported iron ore and coal.

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Construction of Pak Steel Mill was commenced at an estimated cost of Rs. 14.287 billion andcommissioned at a cost of Rs. 24.7 billion in 1985, with an installed production capacity of 1.1million tonnes per year (mtpy).On the average, about 70% to 80% of installed production capacityof 1.1 mtpy has been utilized during the last 17 years. The installed machinery is generally blamedfor this inefficiency. For comparison, a Brazilian Steel Mill set up in 1956 with Japanese machineryand technology was producing 4.3 million tonnes steel annually with 13,000 employees

(Newsweek, November 4, 1991), whereas the Pak Steel Mill commissioned in 1985 producedabout 0.75 million tonnes steel in 1991 with 28,000 employees including 4,000 temporary. Public

Accounts Committee (PAC) announced in March 2002 over Rs. 10 billion loss of Pak Steel Mill(The News, March 22, 2002). Chairman of the Pak Steel Mills Corporation confirmed payable loanof Rs. 19.117 billion (The News, November 5, 2002). It is not clear whether the PAC alsoconsidered Rs. 24.7 billion initial investment, government grants from time to time, loans convertedinto equity of the public sector banks and the government (for paying the bank interest) because ofinability of Pak Steel Mill to pay even the bank interest. In brief, technical and financial performanceof Pak Steel Mill since 1985 does not prove its viability, rather a perpetual financial burden on thispoor nation. Instead of special efforts to achieve sustained utilization of the 1.1 mtpy installedcapacity and proving financial viability of Pak Steel Mill, its expansion to 3.0 mtpy at an estimatedcost of US $ 1 to 2 billion (as reported in the press on different dates) is under seriousconsideration since 1994.

Pakistan Steel Mills Corporation under a Chairman was established to develop steel sector on all-Pakistan basis, and Kalabagh and Nokkundi Steel Mill projects were transferred from the PIDC tothe Corporation for necessary action. Practically, the successive Chairmen concentrated only onthe Pakistan Steel Mill, which, in fact, was the responsibility of its Managing Director. WorthyChairman should be able to clarify the reasons for ignoring development of steel sector, includingthe confirmed feasible projects, in other provinces of Pakistan.

According to The Muslim of July 29, 1996, an Italian Danieli & Co. signed a contract withPhilippines F. Jacinto Group of Companies to set up a state-of-the-art 1.2 mtpy Steel Mill (includingsupply, installation and commissioning) at an estimated cost of US $ 600 million. A smaller steelmill of about 0.8 mtpy capacity should cost much less. It suggests in favour of setting up modern

mini-mills based on local iron ores in Punjab, NWFP, and Balochistan conforming to the recentyears preference for state-of-the-art mini-mills which are more cost-effective and easier tomodernize when required as compared to modernization of the old large steel mills with an out-dated technology and worn-out machinery, vide Newsweek of February 24, 1992 and The NewsInternational of April 6, 1991.

In view of the above, it may be desirable to constitute a Parliamentary Committee, comprised ofrepresentatives from all the provinces, to consider ways and means to develop steel sector basedon local iron ores, with the assistance of foreign, federal and provincial experts. To achieve thedesired objective, the committee may please consider the following suggestions also.

a) A seminar may be held to examine various local iron ores suitable for steelproduction.

b) Pak Steel Mill should achieve sustained utilization of its 1.1 mtpy installed productioncapacity and prove its financial viability to justify consideration of its expansion.

c) Pak Steel Mill should develop a suitable technology, in collaboration with the PCSIRand other research laboratories, to utilize local iron ore and coal.

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d) State-of-the-art mini-mills based on local iron ores may be considered for Punjab,NWFP, and Balochistan to meet about 75% of our steel requirements now being metthrough imports.

e) Steel Sector Development Authority, with due representation of the provinces, maybe established under administrative control of the Prime Minister to develop steel

sector on all-Pakistan basis. However, Pak Steel Mill may continue to be administeredby the Ministry of Industries and Production like other public sector industrial units.

Source: www.mianwalionline.com