Steel Industry on the brink

Faced with low demand Industries say they will all have to close shop if the current economic climate continues

Barley after recovering from the 2008 global financial crisis and the consequent slump in steel prices, Bhutan’s domestic steel industry comprising of five major factories employing around 1,500 Indian and Bhutanese workers is again headed for a collapse.

The factories say that their situation has increasingly worsened even since April 2012 when the Financial Institutions restricted housing and construction loans and most of them would have to shut down if there is no improvement.

This is because all steel factories depend in a major way on the domestic construction industry which has come to a virtual standstill after banks stopped giving loans.

Already most of the steel companies have been on an on and off production cycle shutting the factories for weeks and days and opening only when there is some small order.

Bhutan Concast since August 2012 has been forced to shut operations in certain time periods. Recently it shut shop for two weeks in December 2012 and for 10 days in January.

Lhaki Steel has been closed for two and a half months and will soon open to see what the market is like.

Druk Iron and Steel has moved from a double shift production to a single shift production where even a 50% production is rare.

KK Steel and Bhutan Rolling Mills have also seen a significant drop in steel productivity operating on a reduced scale.

The Bhutanese talked to senior management figures in all five factories but all of them agreed to talk on the condition of anonymity.

A senior official in Lhaki Steel said, “There is no denying that after the stopping of construction loans the steel industry has seen a virtual slow down. Each of our construction clients who are all big contractors has been unable to pay their dues to us which run into Nu three to five million per client. A lot of our money is thus stuck for the last nine to 12 months”

He said that on the other hand a single consignment of raw material imports would cost up to Nu 100 million.

He said, “It is a very bad situation and sales are nothing with hardly one or two customers per week.”

If the domestic slump has hit them hard then the steel factories cannot see any respite in their export market of India which itself is experiencing slow economic growth.

A senior management figure of Bhutan Concast said, “We are exporting some steel to the North East in India but that export is very less and our products are not competitive due to the excise duty that is levied on imports.”

Bhutanese steel industries on importing raw material for their steel ordinarily have to pay an excise of 12.36 percent to the Indian government who in turn refunds it to the Bhutanese government.

The Concast official said that one way to allow Bhutanese products to be more competitive in India would be refunding the excise duty to the factories.

He said that the slowdown in Bhutan’s construction and real estate sector had hit them badly as well.

A senior figure at Druk Iron and Steel also confirmed that they were hit due to the slump in the domestic construction industry made worse with slow growth in the Indian economy.

He said, “We are highly dependent on domestic markets and times are tough.” He said that if the situation continued for a year or more than most steel plants if not all steel plants would definitely have to shut down for good.

He said that most steel companies had banked on strong demand from the hydro projects but in reality their steel was used only in the supporting infrastructure projects and not in the main works like dam, tunnel and power house construction where imported steel was preferred.

Seconding his thoughts the senior official of Lhaki Steel said, “Our Company manufactures the same high quality steel meeting international standards and if it’s accepted for the main hydro project works than it will be good. The government can also save money with steel manufactured in the country and there will also be less rupee flight.”

A senior management figure who works in both KK Steel and Bhutan Rolling Mills said that steel production had dropped by around 40 percent due to lack of domestic demand.

He said that his companies KK Steel and Bhutan Rolling Mills also supported Bhutan Ferro and Bhutan Business Solutions employing in total of around 300-400 Bhutanese employees. “If KK Steel and Bhutan Rolling Mills are affected then all companies will have to be shutdown affecting up to 400 Bhutanese employees.”

He said that the government should refund the excise duty to Steel factories.

“With reference to INR the steel Industry earns more INR than it spends and so it should not be clubbed in the same category of government projects where more INR is spent. The government should look at different modalities like high taxes for imports of goods and services,” he added.

All the senior management figures of the five companies said that if the current financial situation continued with no loans being given to contractors then they would have to shut down their steel factories.

However, with the credit crunch expected to continue for a while steel industries may have to face even tougher times in the coming months ahead.

The five steel industries combined are estimated to be worth up to Nu 1.5 bn and all factories except Bhutan Concast manufactures TMT bars used for construction. Bhutan Concast makes the ingots that are used to make TMT bars.