COVID-19 pandemic impacts on local steel industry

BMA Capital Management hosted a webinar on Steel Sector today where it invited Mr. Fazal Ahmed, COO & CFO of Amreli Steels Limited (ASTL) to discuss the outlook of the sector in the backdrop of COVID-19 pandemic.

Key takeaways from the session are given below:

The company reported a loss of PKR 688mn against profit after tax of PKR 224mn in the same period last year. Gross margins during 3QFY20 declined by 147bps to 6.4%. This compression in gross margin was primarily attributable to: 1) Industrial Support Package (ISPA) and Fuel Charges Adjustment (FCA) charge by K-Electric; 2) production loss of around 10 days; and 3) higher input costs. The speaker also shared that the benefit of lower scrap prices was largely offset by the PKR devaluation during the period under discussion. However, the impact of lower international scrap prices may take up to 3 months to reflect in the results.

ASTL recorded a surge in distribution cost (up 23% YoY) as it increased its sales footprint to 105 cities. Other charges also remained elevated at PKR 129mn compared to PKR 7mn in the previous quarter. This jump in other expenses was on account of PKR depreciation during the quarter.

Loss of production during the quarter is estimated to be ~10,000 MT as the company recorded sales of ~80,600 MT in 2QFY20 against the estimated production of over ~90,000 MT. Sales of Prime Bars during 9MFY20 clocked in at 221,179 MT compared to 180,622 in the same period last year. Ongoing lockdown situation due to COVID-19 pandemic is also estimated to take its toll on the ongoing quarter.

Industry demand in FY21 is likely to grow by 5% to 4.02mn MT from the current market size of 3.83mn MT where the north region is expected to account for 82% of the total sales.

Key challenges that the sector currently faces include: fragmented structure; high share of undocumented production units; and higher tax incidence

Speaker also shared that the construction package may generate some additional demand in FY21, however, total demand is estimated to grow by 5% in FY21.

Management believes that the commissioning of additional capacity from other players is unlikely to create pricing pressures in the industry.

ASTL’s current cost of electricity hovers around PKR 16.1/Kwh opposed to PKR 12.8/Kwh which may further increase up to PKR 19/Kwh. The company may consider generating its electricity over a while due to increasing cost.

Pioneers of Pakistan’s steel industry

Since its inception over four decades ago, Amreli Steels has grown from being a family owned company to one of the most prestigious companies listed on the Pakistan Stock Exchange by being a true pioneer in Pakistan’s steel industry. The management behind the company has always believed in staying ahead of the curve by investing in technology and people to deliver the best quality to the consumer. As such, some of Pakistan’s most iconic landmarks have been strengthened with Amreli Steels.

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