• Sunday, Jul 05, 2020
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Uncertain schedules, uncertain times

  • Published at 11:53 pm June 29th, 2020
Uncertain schedules, uncertain times

The industry suffered an estimated loss of Tk3,000 crore in March and April, and it could rise to as much as Tk15,000 crore by December

The modern urban landscape is a jungle made of iron and steel. The versatility and the innovativeness of the alloy has a significant effect on almost every area of our life as well as in driving the growth of an economy. So, as Bangladesh continued to develop and flourish over the years, national steel consumption increased and the steel market grew. 

But the recent lack of demand has curbed the upward trend the steel market was on and has forced them to tackle a number of challenges amidst a global crisis.The agonizing situation has pushed them to the brink of uncertainty as steel makers contemplate whether to continue full speed ahead with production, as sales continue to stay low or adopt a different manufacturing strategy that is more befitting of the current scenario.

However, it is the value and importance of steel itself — which is undoubtedly one of the core building blocks of modern society— that is creating the dilemma among steelmakers since any shortage of steel in the market or in production can lead to a steep rise in construction costs and may even result in debilitating the real estate and the construction sector which uses rebar as a primary raw material.

At a time like this, clear decisive action is vital, as is support from the government and those with authority. Yet, the current scenario is wholly averse to the sustainability of the sector.Steel manufacturers have been pondering whether they will see support in any form as the economy continues to plunge.

As it is a volumetric industry with low profit,the sustainability of steel production is dependent on making a large number of sales — something current conditions are preventing. During April and May, the sale of steel had gone down by about 70%due to the stoppage of all construction activities.But even before the spread of the novel coronavirus in Bangladesh, steelmakers have been facing challenges despite elevating the sector to the forefront of national economic growth.

One of those major said challenges is the continual price hike of power and gas. Steel production requires a large volume of electricity and gas. But every year the price goes up — sometimes even a few times in a single year. The onset of FY19-20 saw gas prices increase by 32.8%, and as recent as February, power prices went up by 5.3%— which has increased by a staggering 98% since 2009.

Coupled with the fact that steelmakers have to pay high amounts of VAT, advance tax on imports, regulatory tax and income tax, the overhead cost of steel keeps increasing and it is the consumers,despite the best efforts of the steelmakers, who ultimately have to shoulder the high cost of the product.As a result of all these unfavourable measures, the price of 40-grade mild steel (MS) rod increased by 14.15% at the beginning of this calendar year.

Despite the challenges, the steel sector of Bangladesh was roaring and was set to nearly double the current per-capita rebar consumption from 45kg to 75kg by 2022. The annual demand was about eight million tons in 2019, which was easily met. And the manufacturers were more than ready and capable of producing as much as nine million tons of steel as demand continued to rise.

Since the appearance of the coronavirus, that demand has become almost non-existent though.Production capabilities certainly took a big hit, especially during the early portion of the two-month long general holiday when, one by one, all the steel mills were forced to shut off their production due to shortage of raw materials— almost the entirety of which is imported.

While production has since then resumed after the end of the general holiday period, sales are yet to pick up. That is because construction is yet to resume on a regular basis. The two biggest consumers of steel — infrastructure and real estate — have not regained their foothold enough to renew construction activity.

There are still health hazards and a lack of action plans that are preventing construction at a national level as well as at an individual level. Until constructions resume, there can be no hope of the sale of steel to revert to the rate it was originally on. But even then, recuperating the amount of loss being incurred might take years as it piles up day by day.

According to the chairman of Bangladesh Steel Manufacturers Association (BSMA), the industry suffered an estimated loss of Tk3,000 crore in March and April, and it could rise to as much as Tk15,000 crore by December, because even if sales do return to normal, there are wages of the workers and other expenditures, not to mention production costs, that must be borne.

That is why it is predicted that once construction activities resume, the price of steel will probably increase quickly,even if the demand does not pick up immediately, and there is no way around it.The production schedule of a steel manufacturer greatly impacts the pricing of the product. Generally, the shorter the schedule, the less time it takes to manufacture, ship it to the market and sell. It also means less expenditure and more profit.

But in this current scenario, continuing on with regular production practice, however, will keep increasing the overhead cost and may extend the amount of time necessary to recover the loss incurred. Alternatively, stockpiling a large amount of product and pausing production may lessen the loss by reducing production cost. Although, adopting such a strategy would mean the manufacturer needs to be properly equipped to resume production at full speed with short notice.

In the recent Bproperty Talks episode, the general manager of KSRM’s R&D wing stated that they are adopting a similar strategy to steel production at the moment. Manufacturing of finished products is currently on pause while a stockpile of around seven to 70,000 tons of steel has been kept ready to be supplied to the market. However, the production of steel billet, necessary for manufacturing steel bars, is still ongoing at KSRM so that it can be available in a moment’s notice.

This is a sound strategy but might not be feasible for all, especially considering the uncertain nature of the current crisis. It can be months before construction can properly resume — until which, cost and loss will continue to rise. But stopping altogether is not an option the steelmakers have either. The industry employs many people and the national demand for the alloy will still be present, even if in a limited capacity. Failing to meet demand when necessary will result in a catastrophe for any manufacturer.

So, while many of the calls by the steel manufacturers for the upcoming budget have remained unheard by the government, for now, they need some support to stay afloat. But most of all, the industry needs a clear course of action — a plan on how and when the economy and construction activity will fully resume so that they can strategize the right course for production.

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