Criticality of RD on imported steel

The Pakistan Steel Mills (PSM) has formally approached the National Tariff Commission seeking the imposition of an anti-dumping duty on import of steel products particularly hot rolled colls (HRCs) from China. The reason for the demand: PSM manufactured HRCs are unable to compete with Chinese imports in the market as its price in the “international market has declined drastically from 530 dollars per ton in January to 362 dollars per ton in May,” stated the Chief Executive Officer of PSM Major-General Zaheer Ahmed Khan (Retd).

There is no question that local production must be supported over and above imports given that local output implies not only higher national productivity contributing to the growth rate but also higher employment levels. However, this is all the more relevant in instances where the import price reflects dumping and the CEO of PSM maintained that there is dumping of the product by China. His proposal therefore is to enhance the regulatory duty on import of HRC from the existing 12.5 percent to 30 percent. To strengthen his argument he cited the examples of Turkey, Egypt, the Philippines, Malaysia and Vietnam imposing an anti-dumping duty on Chinese steel imports.

As matters stand today, the PSM’s operational performance remains appallingly poor. There is overwhelming evidence to suggest that its earlier commitment to increase its capacity output to 77 percent subsequent to the release of yet another bailout package of 18.5 billion rupees that enabled the Mills to pay salaries of their employees has not been met. The CEO of the Mills noted that “presently the Mills is operational at 36 percent production capacity with nine months average production of 22 percent but the lower sales are not supporting our efforts being made for the revival of PSM.” While critics of the performance of the management claim that there appears to be little in the way of improvement during the past seven years or so, and this view is shared by relevant government ministers including the Privatisation Minister Mohammad Zubair, yet one cannot but support dumping by other countries in our markets which is compromising the Mills capacity all the more.

Be that as it may, there is a serious concern in government circles that any attempt to levy an anti-dumping duty may fuel the Chinese ire and, in turn, may compromise a huge investment committed by the Chinese President during his recent visit to Pakistan for Pakistan’s deficient infrastructure. Pakistan has a penchant for developing transactional relationships with foreign powers and therefore it is a challenge for our governments to formulate an anti-dumping/regulatory duty policy that is truly independent. Needless to add, Pakistani governments have been unable to implement long-term auto policy allowing for import of used cars beyond three years because of Japanese government’s pressure as Tokyo is the highest aid/grant given in cash. In recent months, the government has insisted that local car manufacturers/traders must enforce the agreement of stakeholders with the Engineering Development Board which is meant to enhance the indigenization of the manufacturing process.

It is critical to protect Pakistan’s domestic steel industry as China now accounts for more than 50 percent (up from 18 percent in 2002) of world steel production. A cascading tariff structure for not just hot rolled steel, but for the entire steel value chain needs to be worked out and established. Let us also work towards eliminating SROs governing this sector. Moreover, countering FTA is also needed by imposing regulatory duty. Pakistan needs to work with open and transparent tariff structures to counter under-invoicing leading to corruption in the revenue departments, by sufficient monitoring and heaving an effective mechanism in place to counter under-invoicing. Incentivising Sales Tax registration is sorely needed to expand the tax base. At present, flat products’ world market size is 849 million tons. In total, steel output of the share of HRC, CRC and GP is 53 percent; while domestic production is only 2 million tons, ie, 26 percent share in the domestic steel mix. Similarly, long production of steel in crude steel world production (1610 tons) is 553 tons. Pakistan’s domestic output 55.2 million tons which is 65 percent of local production and majority of this quantity consists of re-rolled iron bars used in construction. Surprisingly, the RD on raw material as well as finished products is 10 percent of re-rolled steel bar, while on pipes it is 15 percent, making Pakistan a rarity where the retail price of steel pipes is lower than re-rolled steel bars’. This RD needs to change and Pakistan needs to encourage investment in steel sector through a built-in tariff protection, in line with investment in order to build domestic capacity of value-added steel products. By doing this it may lead to more FDI and once higher domestic production is achieved some steel products can be of export value as well.

Economists argue against mollycoddling a manufacturing sub-sector that is operating at well below capacity as they deem it more appropriate to import from a more efficiently-run sector as that would benefit the consumers. However, dumping is frowned upon by all countries. In this context, one can only hope that the raised regulatory duty would be levied by the government and the Chinese government be made to understand our economic compulsions as well.