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IDLC MONTHLY BUSINESS REVIEW

- Md. Mehedi Hasan
Steelmakers of Bangladesh: Forging Ahead amid Overcapacity
The first industrial revolution in Britain towards the end of the 18th century and the second one in Germany and the United States
approximately a hundred years later, were similar in many ways despite being removed almost a century from each other. During the
two periods concerned, new products and processes were generated mostly through a steady stream of innovations and inventions.
Many of these inventions and innovations would not have had commercial value without iron and steel as critical inputs. Indeed, the
early spread of industrialization traced to Western Europe between 1750 and 1800 was enabled by the development of iron and steel,
when Britain had industrial monopoly compared to other parts of the world. The same can be said of America in the mid-1800s when
the founding of heavy iron and steel industries and the advent of a nationwide rail network that integrated regions across the USA led
to the birth of modern industrial capitalism. Thus, history teaches us that industrial development and movement of economies from
the primary to the secondary and onto the tertiary stages of production are explicably linked, as the ability of societies in Western
Europe, the Americas and in Japan to cope with their environment and provide for the welfare of their people was possible due to their
progressive development, mastery and use of iron and steel products during different stages of their history.
For developing countries in the 21st century, progress in steel-making technology does not represent starting from scratch; rather
the objective should be to obtain, learn and apply the technologies in existence. In short, developing countries need to absorb
foreign technology through mimicking, self-teaching, investing in foreign licenses, or technical assistance from international bodies/
developed countries and so on.
The economy of Bangladesh is a rapidly developing market-
based economy. According to the International Monetary Fund
(IMF), Bangladesh is ranked as the 44th largest economy in the
world in 2011 in purchasing-power-parity terms and 57th largest
in nominal terms; it has also been included among the Next
Eleven or N-11 of Goldman Sachs and D-8 economies. Over the
last few years the economy has grown at 6%-7% per annum.
Additionally, a separate assessment by the Asian Development
Bank in 2012 also theorizes that the Bangladesh economy should
exhibit stable 6%-plus growth rate for the next two years, buoyed
by a 6.1% growth in the services sector and a massive 9.0%
growth in the industrial sector led by construction and small-
scale manufacturing efforts targeted at the domestic market.
Prospects indeed look bright for the South Asian nation. However,
infrastructural weaknesses remain. Proper national development
is only possible through expansion of industrial capacity and
infrastructural support by means of self-sufficiency. As stated
before, the movement towards a progressive national economy
thus, partially but strongly depends on how we make steel and
produce deformed bar and other by-products. Historically, the
art of steel shaping and making have long been in practice in
Bangladesh.
Source: World Steel Association
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IDLC MONTHLY BUSINESS REVIEW
Source: Seminar on Quality Steel and Its Importance in Civil Engineering
Applications, BSRM
However, changing times have led to changing consumption
patterns and demands from both domestic and international
audiences; indeed the quality of the steel products has not always
met the level of local and international consumers. According to
local steel manufacturers, Bangladesh consumes 4 mn tons of
steel per annum and per capita steel consumption is 25 kilograms,
which is less than half of per capital steel consumption in India.
Considering the population of Bangladesh being roughly equal
to 160 mn, this penetration is exceedingly poor when compared
to Indias 1 bn plus populace. Nonetheless, more than 400 steel
mills of different categories and sizes currently operate in the
country. Together, their combined production capacity stands at
8 mn tons while the industry has a net worth of about BDT 300
bn.
Dynamics of the Steel Industry
Depending on the type of raw materials used, steel can be
produced in two distinct manners.
Conventional Process: Steel Production from Iron Ore
Alternate Process: Steel Production from Scrap Metals
The conventional process of steel manufacturing contributes
approximately 65% of world steel production. Under this method,
steel production is accomplished in an integrated steel plant
through three basic steps. First, we ensure that the blast iron
furnace in which the iron ore is to be melted has all the correct
settings, such as proper temperature and proper containment
measures. Secondly, the iron ore is placed in the furnace and
melted at about 1700C. This melts the scrap, lowers the carbon
content of the molten iron and helps remove unwanted chemical
elements; here pure oxygen is used instead of air. Finally, the
molten iron is processed through a variety of means to produce
steel.
The alternate process contributes approximately 35% of world
steel production. Plants used in the alternate process are known
as mini steel plants. Steelmaking from scrap metals involves
melting the scrap metals, removing any impurities through
either a Direct Reduced Iron/Sponge Iron and casting it into the
desired shapes. Typically, the alternative process involves the
use of Electric Arc Furnaces (EAF). The EAFs melt scrap metal in
the presence of electric energy and oxygen. The process does
not require the three steps refinement as needed to produce
steel from ore. On a smaller scale, this particular manner of
steel production has proven to be more economical and cost-
reducing. In Bangladesh, most steel factories are producing steel
by following the alternate process due to unavailability of quality
coke and iron ore.
Quality Testing
When we talk about quality of steel, we mean the desired
specification with respect to chemical composition, cleanliness
and gas content. Quality of good steel can be ranked according
to the following carbon level which can be tested through an
Ultrasonic Thickness Machine (UTM).
Figure: Steel making process
Carbon Equivalent (CE) Weldability
0 to 0.35 Excellent
0.36-0.40 Very Good
0.41-0.45 Good
0.46-0.50 Fair
Over 0.50 Poor
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IDLC MONTHLY BUSINESS REVIEW
Source: World Steel Association
Production Capacity of Steel Industry in Bangladesh
Currently, the demand of steel is around 4 mn tons per annum
whereas the combined capacity of the industry is around 8 mn
tons. Although the installed capacity of 4 mn tons is not being
utilized currently, this overcapacity may prove tricky as a demand
fall coupled with the overcapacity may pressurize profit margins.
Product Types
There are a few types of steel products manufactured in
Bangladesh, namely
Billet - MS Angle - MS Channel -Flat Bar - Round Bar/ Shaft
40 Grade Deformed Bar - 60 Grade Deformed bar Deformed
Bar Extreme 500 W
TMT (thermo-mechanical treatment) bar
TMT steel bar is a newer variety of steel used for construction
purposes. Earlier, people had been using TOR Steel (trade name
for deformed bars) for concrete reinforcement in houses and
infrastructure projects, but now usage has shifted more towards
TMT steel. TMT bars offer several advantages over the other
traditional types of steel. No twisting operation is involved in the
production of the TMT steel bar, as a result the steel produced
contains no residual stresses in its makeup. This in turn, increases
the corrosion resistance.
Players of the Steel Industry
As an emerging country that has been average 6% growth over
the last few years, Bangladesh has seen sizeable investment in
the steel sector.
Big business conglomerates such as PHP and Abul Khair Group
have stepped in to take advantage of growing market demand.
Kabir Steel & Re-rolling Mills (KSRM) has set up a 300,000-ton mild
steel rod plant in Chittagong. The plant has been designed by
famous European steel plant designer Pomini, is fully automated
and has the capacity to produce from prime quality billets. The
KSRM announcement came just a month after the countrys
largest conglomerate, Abul Khair Group, formally entered the
sector, unveiling a BDT 7000 mn investment for an 800,000-ton
plant.
Bashundhara Group, the realtor-turned-tissue to paper giant, has
also decided to enter the steel production market. At present, the
groups subsidiary Bashundhara Steel Complex Limited (BSCL)
has two Steel Melting Units and two Steel Re-rolling Units with
a capacity of 100,000 metric tons per year; one M. S. and G. I.
Pipe manufacturing units with the capacity of 20,000 metric tons
per year; one LPG Cylinder manufacturing unit with the capacity
of 300,000 cylinders per year and one Ferro-Alloy Plant with the
capacity 7000 metric tons per year which is in the commissioning
stage. Yet another Re-Rolling Mill with TMT technology is under
a trial production run, whose production capacity is expected to
be 60,000 metric tons per year.
Another Chittagong based mill Ratanpur Steels and Re-rolling
Mills has started marketing 75-grade mild steel rod since late
2011 from its state-of-the-art steel factory worth BDT 2000 mn.
On the other hand, Sarker Steel has automated its factory with
state of the art technology in an effort to increase the quality of its
product offering. Currently, the company has a monthly capacity
of 5000 metric tons. Baizid Steel also produces high quality 75000
psi deformed bar and has an annual capacity of 180,000 metric
tons. Its sister concern CSS Corporation (BD) Ltd has a similar
annual capacity of 170,000 metric tons billet.
Net Profit margin in Steel Industry
Full auto technology with billet plant 3% to 4 %
Manual Production process 1% to 2%
Note: Profit margin may vary depending on the market demand & supply
condition, raw material cost, exchange rate, backward linkage etc. Most of
the firms set up their own billet plants which helps them to secure better
margin nowadays.
Business Arenas
Factories of steel and re-rolling mills are mainly located at the
following areas:
Zone Area
Dhaka Demra, Shampur, Matuail, Gazipur
Narayanganj Rupganj, Modonganj
Chittagong Bhaitari, Fouzdarhat, Kumira, BaizidBostami,
Nasirabad
Major Players in Steel Market:
Domestic International
BSRM Steel Mills Limited ArcelorMittal (UK)
Rahim Steel Mills Co. (pvt.) Ltd. Hebei Group (China)
Ratanpur Steel Rerolling Mills Ltd Basosteel Group (China)
Bashundhara Steel Complex
Limited (BSCL)
Posco (Korea)
Sarker Steel Limited (SSL) Wuhn Group (China)
KSRM Steel Plant Ltd Nippon Steel (Japan)
Abul Khayer Steel(AKS) Shagang Group (China)
Baizid Steel Industries Ltd
Saleh Steel Industry Ltd.
On the other hand, world steel capacity utilization ratio in 62
countries in July 2012 declined to 78.7% from 80.4% in June 2012.
Compared to July 2011, it is 0.8 percentage points lower. Overall,
it can be inferred that supply tends to outstrip demand in the
consolidated steel industry.
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IDLC MONTHLY BUSINESS REVIEW
Another big player, Bangladesh Steel Re-rolling Mills (BSRM), has
not remained idle in the face of such broad scale mobilization
in recent times. In turn, it has aggressively engaged in capacity
building. BSRM producer of high-grade steel caters to more
than 25% of the total domestic steel demand. BSRM had a
production capacity of 375,000 tons per year in FY 2012. Currently,
it is conducting a trial production run of its newly installed BDT
3.5 bn plant that is expected to have an output level of 300,000
ton per annum. The steel giant has also unveiled plans to invest
another BDT 5000 mn to raise its capacity to around 1 mn tons
within the next five years.
Global Steel Production Status:
World crude steel production for the 62 countries reporting to the
World Steel Association was 130 mn ton (Mt) in July 2012, an increase
of 2.0% compared to July 2011. Chinas crude steel production for
July 2012 was 61.7 Mt, an increase of 4.2% compared to July 2011.
Elsewhere in Asia, Japan produced 9.3 Mt of crude steel in July 2012,
up by 1.2% compared to the same month last year. South Koreas
crude steel production for July 2012 was 5.9 Mt, an increase of 4.4%
compared to July 2011. In the EU, Germany produced 3.6 Mt of crude
steel in July 2012, a decrease of -2.1% on July 2011. Spains crude
steel production for July 2012 was 1.0 Mt, 7.0% higher than July
2011. In July 2012, the UK produced 0.9 Mt of crude steel, up by 6.6%
compared to July 2011. Turkeys crude steel production for July 2012
was 3.1 Mt, an increase of 9.7% compared to July 2011. In July 2012,
Russia produced 5.9 Mt of crude steel, an increase of 3.6% compared
to the same month last year. The US produced 7.4 Mt of crude steel
in July 2012, up by 0.9% on July 2011. Brazils crude steel production
for July 2012 was 3.0 Mt, -4.1% lower than July 2011.
Challenges of steel industry in Bangladesh
After a decade of steady growth, local steelmakers are now facing
tough times due to a surge in production costs and a slowdown
in consumption by both the government and private sector. In
addition, a low pressure of gas, depreciation of the local currency,
rising costs of raw materials, electricity and bank borrowing, and
a tight liquidity situation have hurt the BDT 300 bn steel industry.
Competitive Market: Newly invested companies have started
operations, with even more in the pipeline while existing
companies are looking to expand on existing capacity. The latest
investment boom in rod, a key construction component, is likely
to outpace the countrys annual demand for rod and might result
in an investment glut and erce competition.
Economic Crunch: World recession and the socio-political
situation that prevailed in 2008 stagnated all development
works in the country. This was especially alarming considering
that the government accounts for nearly 40% of the total
steel consumption. At present, consumption has been down
signicantly due to a slowdown of the development works of
the present government. Financing issues regarding the Padma
Bridge and disruption credit ow from the World Bank and other
donor rms like JICA, IFC also resulted in an adverse impact on the
steel industry particularly, and the construction sector as a whole.
Moreover, the stock market crash of 2011 negatively aected the
real estate sector badly which lead to the slowdown of demand of
steel rod.
High borrowing cost and Exchange rate risk: High interest rates
of banks and nancial institutions were a noteworthy contributor
to the reduced prot margins of the steel producing companies.
Moreover, the cost of producing a ton of 60-grade rod has
increased by BDT 18,000 between January 2011 and January
2012, mainly because of depreciation of the taka against the
dollar. Steelmakers import at least 70% of their raw materials,
thus uctuations in exchange rate tend to aect them badly.
According to the Bangladesh Bank, Bangladesh imported iron,
steel and base metals worth USD 2004 mn during the FY2010-
2011. However, at present the cost of raw materials is stable in the
international market and a sizeable number of ships have been
stocked in the ship breaking zone (from which a large quantity of
steel is procured). A moderate price trend in the coming years is
expected.
Energy Crisis: The energy crisis in Bangladesh is worsening day
by day. Steelmaking requires exhaustive power requirements, in
the form of uninterrupted power supply and gas in production.
However, the lack of realization of this basic need has posed, and
is posing a serious hindrance to growth in the Bangladeshi steel
industry.
Technology Risk: Many steel factories in the country still use
manual production methods, despite new e ciency-enhancing,
cost-reducing technology being readily available in the market.
An example would be most of the factories in the Shyampur area
of Dhaka. Most of the mills there are on the verge of extinction, as
they cannot compete with automated factories in terms of cost,
e ciency and production volume.
Environmental Risk: Bangladesh possesses no iron ore deposits
or mines, which render ship-scrapping (and ship breaking,
Source: World Steel Association
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IDLC MONTHLY BUSINESS REVIEW
by extension) as the major source of raw materials. The ship
breaking industry is currently supplying more than 60% of the
raw materials for local steel industry. However, Bangladeshi ship
breakers found themselves at the forefront of criticism as NGOs
and pressure groups exposed some questionable practices of
the ship-breakers that posed serious environmental and human
hazards. On the ruling of Bangladesh Environmental Lawyers
Association (BELA), the judicial courts of Bangladesh established
certain environmental standards for all ship breakers to adhere
to, and decreed that violation of these standards would result in
a ban. The courts decision meant that by 2010 the ship-breaking
industry had come to a halt. And it lead to the sharp rise of rod
price. However, withdrawal of the ban in late 2011 paved the way
for Bangladeshs comeback in the global ship-breaking sector in
2012. Demand for the ship-breaking sector is expected to remain
high as Bangladeshs building construction sector solely depends
on steel recycled from ship-plates. The demand of steel is poised
to increase as the country is in a phase of real-estate boom
that also encompasses infrastructure development. Also, the
Ministry of Industries (MoI) and international bodies such as the
Norwegian Agency for Development Cooperation (NORAD) has
also shown its interest to support the local ship-breaking industry
in accordance with international standard and law of the land.
Currently, the industry is following governments Ship Breaking &
Recycling Rules act that was instituted in 2011.
Steel plays a vital role in infrastructure and overall economic development of a country. Thus, the growth of steel industry is often
thought to be a parameter of economic progress. This sector has seen increased activity in terms of new investment during the
last few years. To be more cost effective, companies are also upgrading their technology and manufacturing processes. To reduce
the dependency on billet import, local companies are now investing heavily to set up their own billet plants. Most of the mid-level
and large scale steel mills have installed fume-extraction systems and effluent treatment plants (ETP) to protect the environment
by controlling the harmful fumes discharged from the plant. However, excess capacity is very much a reality in the steel industry.
Government support towards facilitation of exporting the excess steel will not only stabilize the domestic market, but also provide the
millers with an extra source of income. In fact, steel manufacturers have been lobbying for the Bangladesh government to approach
India in order to remove the non-tariff barriers for steel exports to the north-east states of the latter country, as Bangladeshi millers
believe that particular region to be a good potential market.
Apart from that, we have seen that the construction sector of Bangladesh has grown at a calculated average growth rate (CAGR) of
12.2% over the last 10 years. This growth is expected to continue. Although the global economy is passing through a difficult time
and our real estate sector is facing a temporary slowdown of demand due to overall macroeconomic pressure and contraction policy
of government, the local manufacturers believe the steel industry should continue to grow at 10% in the next few years, riding on
government programs centering its vision for 2021, a real estate boom in urban areas and an inflow of remittance in rural areas. One
part of those expectations the real estate boom has seen slight realization during the tail-end of 2012. Though government steel
consumption has gone down significantly, it is planning few very big projects like Padma Multipurpose Bridge and Metro Rail. The two
projects will cumulatively cost more than USD 6 bn. Successful implementation of these projects holds a very good potential for top
line growth, as steel and steel rods in particular feature prominently as raw materials of the two projects.
Above all the government needs to ensure basic infrastructure, power, gas and an educated workforce -without which, industrial
growth will sputter.
(The writer is working as a Senior Credit Analyst of Credit Risk Management department of IDLC Finance Ltd. He can be reached at [email protected].)
Prospect of backward linkage (Ship breaking Industry)
Bangladeshs ship-breaking industry was the worlds largest until
2009 when various legal campaigns by environmental groups
almost shut down the sector. In 2010, due to court restrictions
only 19 vessels were broken. However, last year, courts lifted the
ban on the import of ships until government ministries formulate
detailed guidelines for the ship-breaking sector. That has seen
business pick up pace again, with 150 ships dismantled in 2011.
Approximately 143 ships have already been broken in the first six
months of 2012. Bangladeshs unique geography is also another
reason why ageing ships are taken to the beaches there. The
industry is worth around USD 1 bn and shipyard-owners say the
sector employs nearly 200,000 workers. Good prospect of this
industry will facilitate more steel production in our country.
Ship breaking scrap contribution to steel production and
consumption in BD (millions)
Steel Consumption 5 m tons
Steel Production 2.2 to 2.5 m tons
Scrap steel from ship breaking (SB) Up to 1.5 m tons
SB Contribution to steel production 50%
SB Contribution to consumption 20-25%
Rerolling mills 250-350
Source: World Bank Report 2010