Here's why steel makers are unable to benefit from global price fall

| Updated: February 06, 2023 17:33:09

Here's why steel makers are unable to benefit from global price fall

Steel manufacturers could not reap any benefit when the prices of raw materials cooled off in the global market in recent months.

They could not open letters of credit to buy less expensive materials due to the dollar crunch; banks have been unable to supply dollars as needed to finance imports.

The leading steel manufacturer, Bangladesh Steel Re-Rolling Mills (BSRM), have managed to open one-third LCs against the demand, said Shekhar Ranjan Kar, head of finance and accounts of the BSRM Group.

Mr Kar insisted that the scenario is not unique for BSRM; rather its competitors in the steel sector and even other import-reliant businesses have been facing the challenge.

LC opening slumped 14 per cent year-on-year in July-December of the FY23 and settlement declined 9 per cent, according to the data from the Bangladesh Bank.

As a result, the production of goods has slowed down.

The crisis has been intensified by frequent power cuts caused by gas supply shortage. On top of that, the taka continued to lose value against the dollar, bleeding steel manufacturers, including BRSM.

BSRM, which accounts for one/fourth of the sector, managed to return to profit in the second quarter of the FY23 ended in December last year, riding on higher revenue. It was in the red in the first quarter.

If its earnings in the six months through December 2022 are put together, the company endured a loss of Tk 1.10 billion, according to unaudited financial statements. That means the loss made in Q1 surpassed profit in Q2.

The company blamed the loss on the foreign exchange loss, costly raw materials and the lack of power supply that pushed up the production costs.

The steel maker's sales revenue, however, rose 19 per cent year-on-year in Q2 of the FY23 to Tk 22.92 billion while the production cost jumped 22 per cent to Tk 21.57 billion.

BSRM's finance cost multiplied 21 times year-on-year to Tk 278 million in the three months through December 2022. It soared so high because the taka has been devalued about 25 per cent against the greenback since the Russia's invasion in Ukraine in February last year.

The additional expenses increased the prices of goods sold.

The MS rod, the key construction material, became 7 per cent more expensive in the three months to December 2022 in the wholesale market, said Mr Kar.

As the prices of MS rod rose, the sales value went higher leading to a positive growth in revenue.

That points to the fact that the revenue growth may not be translated into higher sales volume.

Industry insiders say that the sales volume of non-essential products fell on an average by around 15 per cent in the second quarter of the ongoing fiscal year.

Shekhar Ranjan Kar, head of finance of the BSRM Group, said the company could not increase the selling prices of steel products in tandem with the cost hike and had to keep delivering goods to the ongoing development projects.

"Even though the company incurred a loss for the six months [July-Dec 2022], it had to pay the minimum tax," he said.

When imported raw materials are costlier, the latest electricity and gas tariff hikes would further escalate the production costs in the months to come, he added. BSRM Steels endures loss in Q2

A concern of BSRM, it reported a 53 per cent drop in profit year-on-year to Tk 438 million for the Oct-Dec quarter of the FY23. The previous quarter, Q1 saw a loss of Tk 348 million.

The company gained a profit of Tk 90 million in the six months through December 2022, a 95 per cent plunge year-on-year owing to the significant increase in foreign currency conversion rate and the shortage of power supply.

There are about 40 active steel manufacturers with a combined capacity to produce more than 10 million tonnes of steel a year. The steel industry in Bangladesh is worth Tk 550 billion, according to the Bangladesh Steel Manufacturers Association (BSMA).

The annual demand for steel in Bangladesh is 7.50 to 8.0 million tonnes and BSRM, Abul Khair Steel, GPH Steel and KSRM meet more than half of the annual demand.

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