Asia Energy - Coal and Power for Bangladesh

There is a lot of concern these days over the increasing prices of steel in the country. There is also a negative campaign against the steel industry. Here I attempt to explain the real situation of the industry and also the underlying causes of price increases.
Bangladesh is basically an import dependent country for basic raw materials for a lot of industries, steel being one of them. The following are some of the reasons for the price increases of steel world over:
a) Over the past year, world economy has been growing steadily and China has been growing rather quickly. China s growth rate is reported to be nearly 20% mainly due to the various export zones, the ongoing Olympic preparations and the undertaking of huge infrastructure projects. Hence China has become the biggest consumer of steel in the past year. Its appetite for steel is continuously growing which has led to increase in raw material prices worldwide.
b) The oil prices are at a record high, as a result of which the shipping industry is asking for higher freight charges. A chartered vessel from the UK used to charge, say, $55 per ton and now the rates are over $90 per ton with demurrage rates over $30,000 per day for a vessel of 20,000 tons.
c) The US Dollar has depreciated by nearly 40 per cent against Euro and as a result all the European suppliers are asking for more dollars for every ton of steel they sell and for every Euro currency that they want. Bangladesh currency is so weak that we could not revalue our currency.
d) The earthquake in Iran and the reconstruction of Iraq are sucking away all the finished steel in the world market.
Prices of raw materials as well finished products of steel have touched levels never ever recorded in the history of steel trading which says a lot of about increasing prices not only in Bangladesh but all over the world. Even iron ore and coke, which in the past were available abundantly, have now become scarce. It takes nearly one and half month of waiting for the vessels carrying iron ore for the Pakistan Steel mills to take cargo from Australia to Karachi, which eventually has led Pakistan Steel to increase their prices by nearly Rs. 10,000 per ton in the last one year alone!
Reasons for price increases in Bangladesh
 As mentioned above, increase in international raw material prices has led to increase in prices of goods in Bangladesh. The table below shows the increase and effect on landed costs:
Besides the above, costs of chemicals, silicon, manganese, consumables, etc, which are all steel related, have increased substantially.
From the above table it is clearly seen that raw material prices have increased more than the local steel rod prices. Hence pressure for upward push in rod prices is imminent. Local prices have not increased as much because the industry always has some older stock at a lesser price which is enabling everyone to survive. However, stocks are depleting fast and nearing end. No significant purchases are being made by the industry for raw materials because by altering the duty structure recently, government has negatively affected the whole operation cycle.
Government actions in the past and its effects
The government has reduced duty on steel rods, billets and ships. Reducing duty arbitrarily without any strong justifications and based on pressure from developers is not very professional. The government has reduced duty on rods from 30 per cent to 15 per cent, billets from 15 per cent to 7.5 per cent and ships from 15 per cent to 7.5 per cent and keeping the scrap duty same at 7.5 per cent though value addition in the melting sector is very high. Even with such a drastic and sudden reduction of duty on rods, prices have not decreased mainly because of continuously increasing prices in the international market. Moreover, government has reduced the amount of VAT on finished products and removed AIT and IDSC charges at the import stage. Since international prices are increasing, these kind of small reductions will not help in reducing prices of steel products in the domestic market.
Recommendations
a. Maintain a balanced duty structure
Government should not think about maintaining or decreasing duty on finished steel. Policy has to be consistent for all industries. It should be 7.5 per cent for raw materials, 15 per cent for semi-finished such as ships and billets and 30 per cent for finished products. If government does not maintain this and arbitrarily changes the duty structure, it loses credibility in other industries as well and hampers investment due to inconsistent policies. Steel contributes a huge amount per year to the government in terms of VAT, power, gas, taxes, duties and most important, employment and value addition. If the duty structure is not balanced, the whole industry is threatened where entrepreneurs have made huge capital investments to set up plants based on a specific government policy.
b. Fix tariff value for steel scrap at $125
Focus of the government should be to concentrate and help industry in reducing the cost of raw materials. Steel scraps should be assessed at $125 regardless of the import price to bring the cost down at import stage. At a price of $380, there will be a saving at import stage of approximately Tk 3,500 in terms of duty and VAT at $125 tariff value. Hence prices will go down by that amount given stable international prices.
c. Remove container restrictions and transport restrictions at port
Currently there are unnecessary container weight restrictions at the port which increases the freight amount of containers. For 20 ton container, port allows maximum 24 tons weight while as for 40 feet containers port allows 30.48 tons. At ports abroad, 28 to 30 tons weight for a 20-ton container is common. Moreover, for bringing any item in bulk, there is a restriction at the port for carrying maximum 5 tons in a truck while those trucks can carry minimum 10 to 12 tons.
d. Remove PSI on scrap
PSI needs to be removed on scrap imports, at least for a short term. Availability of scrap is so difficult, it has basically become a supplier s market. No supplier wants to wait for the PSI company to come and do the inspection at their convenient time. Scrap stuffing in containers take time and suppliers do not want to go through the hassle in waiting for the PSI company to come according to a fixed schedule or cannot arrange a convenient schedule for the PSI company to come and see the loading. Hence they prefer not to go through this hassle and therefore, sell the material to other countries. Thus all scraps from the Middle East is going to Pakistan and India at $250 per ton levels. Customs could do 100 per cent inspection at Chittagong Port after the arrival ofsScraps.
e. Remove VAT at import stage
Removing 15 per cent VAT at import stage for steel raw materials will help in substantially reducing the cost of imports. For instance, at current prices, for melting scraps, vat amount at import stage comes to Tk. 3,600 per ton, for ships breaking Tk. 1,900 per ton and for billets Tk 4,300 per ton. Steel is a big contributor to national exchequer hence government may think about removing this head for the short term till international prices come down.
It is speculated that international prices of steel are not going to come down at least till 2008 when the Olympics will be staged in China. We do not have any option but to adjust with these prices and bear the extra costs till the slowing down of China takes place and reconstruction of Iraq is finished.
If the government starts making arbitrary changes in the policy under the pressure of some quarters this will lead to the closure of major steel industries.
The author is Director of Bangladesh Steel Re-Rolling Mills Ltd., Chittagong.

Bis says....

Look at Japanese exports to Bangladesh exploding upwards


Bangladesh demand for steel in icreasing at an alarming rate, as prices rise they must look to build up their own production as they will not be able to afford the bill.

Here is one person who recognises the need