Analysisofpakistansteelindustryandcpec PDF

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Capstone Project

ANALYSIS OF PAKISTAN STEEL INDUSTRY AND CPEC

SUBMITTED BY:

ASMA AYUB IRFAN KHAN QAMAR ABBAS SHAHAB ASHFAQUE

SUPERVISOR: MISS FAKHRA

Date:

11/22/2016

PHASE 1

Supervisor’s Certificate of Project Completion Project Title:_________________________________________________________________ ______________________________________________________________________________ It is certified that the work on above title for MBA Capstone has been completed under my supervision by students mentioned as follows. It is also certified that the Capstone document is based on original research work and meets all criteria and standards laid down for MBA degree.

Name: _____________________________ Reg No.:____________ Signatures: _____________ Name: _____________________________ Reg No.:____________ Signatures: _____________ Name: _____________________________ Reg No.:____________ Signatures: _____________ Name: _____________________________ Reg No.:____________ Signatures: _____________ The following areas have been critically mentioned: 1. Conformity to the APA format 2. Precise and correct use of language 3. Relevant and comprehensive literature review 4. Relevant references 5. Appropriate methodology and estimation techniques

Supervisor’s

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and

Designation: Dated: _________________________

Signature:

______________________________

_____________________________________

Student Declaration we hereby declare that this submission is our own work and that, to the best of my knowledge and belief, it contains no material previously published or written by another person nor material which has been accepted for the award of any other degree or diploma of the university or other institute of higher learning, except where due acknowledgement has been made in the text

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Dated: _________________________

Executive summary

Pakistan and China political, strategic relations have been strengthened by CPEC project, which use Pakistan’s geographic location to boost their trade and get access to the natural resources. This project development can also help in boosting Pakistan’s economy. But there are some concerns that we need to look. China under FTA agreement under CPEC project will likely to damage Pakistan’s local industries (steel, cement etc.) in long run. The objective of this project is to examine the impact CPEC on local Pakistani steel industry. The information used for analysis in this project will be collected from both primary and secondary sources. Primary sources include collection of information through interviews and secondary source include collection of information through news, articles and historical data of Pakistan and China export and import. The interviewees included government employees and industry representatives. Our major purpose of this research project was to analysis; does the CPEC positively or negatively impact upon steel industry of Pakistan during and after the development of CPEC road infrastructure and how does it will help Pakistan industry grows in the long term. From interviews we have found that CPEC will help to boost our local steel production as local industrialists are upgrading their plants from 200 tons per day to 1000 tons per day and also they are upgrading their manual steel plants to semi-automatic plants which will help to boost domestic production and reduce the cost of production. The government needs to use various mechanisms such as anti-dumping and other protection agreements, to save the local industry. And access what incentives will be provided to domestic steel makers in Pakistan to help them invest in new projects. Also provide them easy loans to encourage investment and able to gain competitive advantage in export.

Acknowledgement

We would like to express our gratitude to Allah almighty that enables us to do this research and also make it profitable and practical. Miss Fakhra has been an active project facilitator. She helped us throughout the project and encourages our work thoroughly so we are grateful to her. Her sage advice, insightful criticisms, and patient encouragement aided the completion of this project and writing of the report in innumerable ways. We would like to appreciate the work of Mr. Imran Hameed, who provided us an ideal platform of innovative project and built a relationship of trust with us. We hope that he would like our work.

TABLE OF CONTENTS

Introduction...........................................PAGE NO.9

Agreement (CPEC)..............................................10 Pakistan Steel industry.......................................13 Problem Statement.............................................15 Impact on Pakistan’s steel industry...........................15 Export and import of Pakistan iron and steel..................17 SWOT Analysis....................... .........................19 PESTEL Analysis...............................................21 CPEC Effect on Increase in Demand............................ 25 Theoretical framework.........................................25 Factors explaining underutilization of Pak steel..............26 LITERATURE REVIEW.............................................29 EMPIRICAL RESEARCH............................................39

Issue and Discussion..........................................41 Strategy/Approach.............................................66 Achievement and Limitations of Mandate........................69 Findings and Conclusion.......................................73 Recommendations...............................................75 Reference.....................................................77

CHAPTER 1 INTRODUCTION

1.1 Background The relationship between Pakistan and china was initially based on security and defense cooperation, and later it diversified in the political, economic, strategic, education and trade area. The span of their diplomatic relations stretched over six decades. Both nations are tied by geopolitical dynamics as geographical location aids route linking China with Central Asian Republics (CARs) and Middle East. The Central Asian states have about three thousand billion cubic meters of gas reserves and two hundred billion barrels oil. By using Pakistan’s location china can enable trade and pipeline routes for the export of natural resources from CARs (Alamgir, 2011) Pakistan and China political, strategic relations have been strengthened by CPEC project, which use Pakistan’s geographic location to boost their trade and get access to the natural resources. This project development can also help in boosting Pakistan’s economy. The energy rich central Asian republics can use economic corridor as an opportunity to export there natural resources to the rest of the world. In 2012, China imported 5.4 million barrels of crude oil which is almost 56% of their consumption, of which 48.1% was exported from the Gulf region. As the Consumption of eco-friendly fuel has become a pressurizing demand from the western countries. Gawadar deep sea port is set up on the seashores of Pakistan with an initial investment of about 248 million US$ (Mughal, 2009). Xinjiang in China lies about 4,500 kilometers from China's east coast but just 2,500 kilometers from Gwadar sea port. This distance differential makes it beneficial for China to use Gwadar sea port for some of its external trade.

.

1.2.

Agreement (CPEC)

The China-Pakistan Economic Corridor Council (CPEC) was launched on 9th April, 2015. CPEC is the largest investment of china in a foreign country, which worth 45.69 billion $. This project is of high significance because of its most vital geostrategic locations in South Asia. CPEC will act as a trade bridge between China, the Middle East and Europe through Pakistan. It has lot of significance for Pakistan as it will generate thousands of jobs, business opportunities and revenue worth billions of dollars. The CPEC will undertake the construction of highway, pipeline and railway links running through most of Pakistan starting from Gwadar in Balochistan to Kashgar in western China, passing through Balochistan, Sindh, Punjab, Khyber Pakhtunkhwa and GilgitBaltistan in Pakistan to reach China.

1.2.1 Cost and projects under CPEC: Following are the number of projects under CPEC along with their estimated cost:

Estimated Cost

Sr. No.

projects

01

720MW Karot hydropower project

$1.65bn

First phase projects

$45.69bn

01

Energy

$33.79bn

02

Roads

$5.9bn

03

Railway network

$3.69bn

04

Lahore Mass Transit

$1.6bn

05

Fiber optic

$4m

06

Gwadar

66m

short-term projects

$17bn

01

Peshawar-Lahore-Karachi railway line

$3.7bn

02

Thar coal-fired power plants

$2.8bn

03

development of two Thar coal mining blocks

$2.2bn

04

the Gwadar-Nawabshah natural gas pipeline

$2bn

05

06

(Million $)

imported coal-based power plants at Port Qasim

$2bn

a solar park in Bahawalpur

$1.3bn

07

Havelian-Islamabad link of the Karakoram Highway

$930m

08

a wind farm at Jhimpir

$260m

09

Gwadar International Airport

$230m

1.2.2 Benefits for Pakistan: Under CPEC project Pakistan can fulfill its energy needs which are beyond its own production; additionally it can also grab number of benefits such as: 

Currently Pakistan is heavily flooded with chines cheap products. Major part of it contributes illegal trade. So under this project the smuggling will become useless because of the absence of FTA. So under this scene documentation of this trade can lead to generate good amount of tax and will increase CBR collection for Pakistan.



It will transform Pakistan into a regional economic hub and will act as a confidence booster for investors and attract investors not only from China but also from other parts of the world as well. Enhance trade opportunities with Middle East and CARs.



Pakistan can improve foreign exchange reserves by making lot of foreign exchange through transit fee. And this transit fee can be utilized for development purposes later on.



It will provide improvement and growth opportunities in most of the backward areas.



Living style and literacy rate can also be improved.



New jobs would come up because of this projects which would increase the overall rate of employment.



Hotel industries and Tourism can be boosted. Moreover, the overall economy of the country will be improved.

However, there were some concerns raised by international and local stakeholders that require to be dealt with for long-term economic and development goal.

1.3 Pakistan Steel industry

Pakistan’s steel industry is currently producing approximately 6 million metric tons (MT) each year. The steel industry is extremely fragmented in Pakistan there are around 600 big and small players in the steel industry in Pakistan, with no clear market leaders to provide direction to the industry. Steel industry is mainly divided into following categories: 

Raw product which include iron ore and scrap.



Flat products which include sheets and plates that are used in the automation sector.



Long products such as steel bars, wire rods, rails and structural used in infrastructure development, tubes and pipes.

Although the industry is unable to meet the market potential, some individual players have seen vital growth within the past 3 to 5 years. These include Agha Steel, which started its operations in 2013 and have produced 0.15 million tons in 2015. Agha Steel aims to double their current capacity to 0.3 million tons in 2016; Amreli Steels in 2015 produces 0.18million tons and had successful IPO in that year. Amreli steels aims to reach 0.5 million tons in 2017. International Steel Limited sold around 0.463 million tons in 2015 and aims to uplift there capacity to 1million ton in 2016. Pakistan steel mill have a production capacity of 0.645 million tons (steel converters having capacity of 260 tons, 1700 hot strip mill having capacity of 445,000 tons, cold rolling mill having capacity of 200,000 tons). Tuwairqi Steel Mills installed capacity of steel is 1.28 million tons per year. Aisha Steel Mills has an installed capacity of 0.22 million tons annually.

Following Table shows Pakistan contribution to global market.

Year

Pak contribution of steel as compare to the global market

2008

0.1%

2012

0.08%

2013

0.075%

2014

0.072%

2015

0.06%. Source: According to the World Steel Association

Chapter 2 Mandate/problem Area Despite all the positive outlook of the CPEC there are many potentially long run negative impact that CPEC shall have on Pakistan’s industrial sector that cannot be neglected. Especially while talking about the steel industry, as the steel industry of Pakistan is not stable and is unable to meet current demand. And China being the word biggest exporter of steel (51% of overall steel export) will surely dump there excess steel in Pakistan because of the FTA under CPEC. The steel import from China will surely flood Pakistan’s market more rapidly, which will possibly slow down or in worse case comply over take the local industry. Pakistan’s Local industry in this case will bear uncompetitive environment due to FTA.

2.1 Problem Statement Does the CPEC positively or negatively impact upon steel industry of Pakistan during and after the development of CPEC road infrastructure and how does it help Pakistan industry grows in the long term.

2.2 Impact on Pakistan’s steel industry Huge demand of steel is created under CPEC mega project, the industry fears to suffer gradual loss because of the cheaper Chinese steel, especially due to (FTA) free trade agreement under CPEC. Industry wants to compete but import under free trade agreement (FTA) with china will create one sided competition (The Express Tribune) The Chinese steel is mostly involved in all the major infrastructure development projects around the world; this is the reason which generates lot of demand for Chinese steel. Pakistan would need large amount of steel for this CPEC project and this amount might be imported from china thus directly hurting Pakistan local steel industry. China is the biggest steel producer of the world. Due to Chinese economic slowdown, it has excess capacity of around 300mt of steel. China produced 823 million tons in 2015 which is

about 50% of the total world steel production and exported a record 100 million tons of steel (Bloomberg), Pakistan is registered as one of their largest importers of steel this mega CPEC project will defiantly provide china a huge advantage to dump its excess steel to Pakistan which is likely to slow down or in worse case completely destroy Pakistani market (The Express Tribune) China provide billions of dollars to its steel industry in form of subsidies, no country is currently able to compete with its steel industry especially when talking about exporting its excess steel. Some of the finished steel products that are imported in Pakistan is lot more cheaper than the cost of local industry raw material so, this create an unfair competitive environment for the Pakistani steel industry. And soon this affect is likely to be seen under this(CPEC) project (Riyaz Chinoy).

2.3China’s steel export

2.4Export and import of Pakistan iron and steel In Thousand Rs. IRON AND STEEL Jan 2016 Dec 2015 Dec2014 Dec 2013

IMPORT 26,659,826 24,804,867 21287851 14998723

EXPORT 968963 1228730 2015706 2430351

Dec 2012

11647420

804239

Dec 2011

11818931

2071185

Dec 2010

9396358

2860523

Dec 2009

1623975

1623975

Dec2008

350427

396732

Dec 2007

402811

581383

Dec 2006

1629184

629184

Dec 2005

318689

318689

Source: state bank of Pakistan.

Pakistan iron and steel import and export trend.

Obj ect3

Source: state bank of Pakistan.

2.5. Crude steel production, 2000-2014 In thousand tonnes

Obj ect5

Source: WORLD STEEL ASSOCIATION

Chapter 3

ENVIRONMENTAL ANALYSIS 3.1. SWOT Analysis 3.1.1 Strengths: 1. The CPEC mega project will include many new infrastructures projects which will help in development and help in boosting Pakistan’s economy in a better way. 2. FTA agreement under this mega project will make smuggling useless. And help in the documentation of trade which will increase the tax collection so help in generating money for the government. 3. Pakistan will be transformed in to a regional hub and will help in a confidence booster for investors and attract investors not only from China but also from other parts of the world as well. It will enhance trade opportunities with Middle East and CARs. 4. The transportation and communication problem in KPK and Gilgit-Baltistan can be reduced under this mega project. Thus, enhancing socioeconomic benefit to the country. And help developing other sectors also. 5. Help in increasing the demand of steel and as we know that steel industry is the back bone of all the industries from small level to all the technologically sensitive industries. This generated demand will help in the small projects under this mega CPEC project. 6.

CPEC will help in the elimination of energy deficiency because of the energy projects, Dams, bridges under this particular project.

7. CPEC will also give us easy access to our mineral reserves in Baluchistan and KPK. 8. ‘Special Security Division’ is played by the Pakistani government for Chinese workers. To eliminate the security that may occur of the Chinese workers in Pakistan under the CPEC project and this will help in destroying of the image of Pakistan regarding terrorism and security issues.

3.1.2 Weaknesses: 1. There is a lot of corruption in government sectors. There is no transparency in government policies. Law and order situation is in control now days due to the operation zarb e azab against militant groups by Pakistan army and it needs to be improving initially.

2. The political parties are not satisfied on route of roads. Regarding CPEC, there is a route controversy between them. 3. There is a lack of seriousness on project implementation from political point of view there is no proper planning. Governme...