Kashif Shah: Aisha Steel Mills was incorporated in 2005 as a joint venture between premier Pakistani and Japanese Groups of Companies. MetalOne Corporation is owned by Japan's Mitsubishi Group. MetalOne is the largest integrated steel trading company of the world. It is one of three partners in the JV. The second party in this venture is Universal Metal Trading Corporation, which is a steel trading company.
Arif Habib Group is the local partner in Aisha Steel Mills. The business model is import substitution. For this consideration, the location of the facility has been selected very carefully. It is our resolve to pursue import substitution across all grades of cold rolled coil (CRC) of steel.
The auto assemblers and producers of white goods such as televisions, refrigerators and washing machines, generate demand for high-end of quality of CRC. Then there are many affiliated vendor industries in the light engineering sector, such as companies making fuel tanks for motorbikes and trucks. At the other end of the demand spectrum are producers of door hinges, nails and other low-cost items.
The machines selected for Aisha Still Mills were chosen, keeping in mind the diverse needs of the domestic market. Steel Plant Tech Company has supplied all major components of the Mills. It is among the world's biggest producers of steel making machinery. The furnaces were purchased from Ebner, which is the world leader in heat treatment furnace facilities.
BRR: What is the market share of Aisha Steel Mills in the domestic market?
KS: Pakistan Steel Mills has a nameplate capacity to produce 100,000 metric tons of CRC of steel; but PSM has been operating at about 10 percent capacity over the past few years. On the other hand, domestic demand for CRC is between 550,000 and 600,000 metric tons per year. However this number includes about 160,000 tons of steel that is produced and internally consumed by International Steel, because they use it to make galvanised steel.
If we set aside this component of the demand for CRC, you end up with a domestic demand of about 450,000 metric tons each year. We are also looking at regional markets such as Sri Lanka, the Middle East and Afghanistan as export markets for us as we increase capacity. India is also a net importer of CRC but there are significant non-tariff barriers in place there, which effectively rules out foreign competitors in this market.
The nameplate capacity of International Steel Mills is about 75,000 to 80,000 metric tons per year, and they are producing at comparable levels. Our Mills have the capacity to produce about 220,000 metric tons and we have started production already, so in terms of output of CRC, we are the largest domestic player in this market.
We started our trial run at the end of June this year, following which commenced with commercial operations on October 1. The Company was listed on July 3 and 4, 2012. We were very fortunate to have received an overwhelming response; we were over-subscribed by 2.7 times, which is the highest response received among recent Initial Public Offerings (IPOs).
BRR: The demand for CRC that Aisha Steel aims to tap is currently met through imports. What sort of Government support is needed to help domestic production substitute imports?
KS: Indefinite and unending protection against imports through high duty tariffs and non-tariff barriers is a recipe for rendering the domestic industry inefficient and unfeasible; we are not looking for such moves from the Government. However, the Government should consider providing some assistance to the nascent domestic steel industry and link this support to benchmarks in the domestic and foreign markets.
For example, if the government were to increase tariff protection for domestic mills for the next five years, and offered to maintain that difference for another five years if we are able to raise production capacity by 50 percent in the first period; that would really give an impetus for growth of Aisha Steel Mill and other producers. This could be followed by more milestones so that the industry keeps moving in the desired strategic direction. Unfortunately, the government does not set smart targets for domestic industries when providing protection of any sort. That is why many industries have emerged and then failed to evolve beyond the nascent stage.
Smuggling from Iran is also a significant hurdle for the domestic industry. Smugglers do not pay 16 percent import duty. Plus ever since Iran fresh sanctions were piled on Iran by the international community; the quantum of this illegal trade has also gained a menacing prominence. Each truck carries 80-100 tons of cargo; and if half a dozen trucks make it into the country each week, these smuggled consignments are able to hurt prospects for domestic producers.
Cracking down against the smuggling of steel should be relatively easy because it is not like other products that can be sneaked in on mules through the mountains. There is only one road from the Taftan border and trucks carrying steel can only smuggle it into the country from this route.
BRR: What market share does the Company aim to capture in the next 5-7 years?
KS: Typically, large manufacturing firms do not buy raw material from a single source. They will usually ascribe an upper limit of about 50 percent of total procurement to their main supplier but would also ensure that they have others lined up. Even our Company is not dependent on one company for our raw material requirements. So we do not see ourselves becoming the sole suppliers to any of the major industries.
However we do aim at providing about 40-45 percent of the CRC needed by the auto assemblers. We expect this market to make up about a third of our total sales, along with producers of white goods. Additionally we expect engineering sector to buy up about 40-45 percent of our output. The remainder of the demand is expected from the packaging industry.
There are many small firms that are affiliated with the bigger players in the form of vendors and materials suppliers. We aim at converting many of these firms into clients that solely rely on us for all their raw material needs.