Written By Md. Mehedi Hasan

Bangladesh is the world’s 3rd fastest-growing economy and has buoyed above 6% GDP growth over the years despite political turmoil, structural constraints, pandemics, global volatility, and the Russia-Ukraine war. According to the Asian Development Outlook (ADO) September 2023 report, GDP growth in Bangladesh is predicted to be 6.5% in FY2024 as opposed to 6.03% in the previous fiscal year. Its galloping growth rate requires infrastructure development at an unprecedented scale, underscoring the demand for steel. The steel industry has consistently positioned itself as a vanguard of industrial progress, serving as the bedrock of an economy. Currently, the steel industry in Bangladesh is worth BDT 55,000 crore (USD 6.2 billion), as per The Business Standard with per capita steel consumption forecast to increase from 45 KG in 2022 to more than 100 KG by 2030. Production capacity is experiencing a sharp rise along with demand at an annual growth rate of 10%. At present, 40 modern and 150 traditional factories are producing steel in Bangladesh. The economic slowdown due to COVID-19 caused per capita consumption of steel to slightly decrease from 45 KG to 43 KG in 2022. 

 

                                                                                          

                                                                                                                                 

 

Meteoric Rise of the Steel Industry in Bangladesh

The steel industry experienced sharp growth in the early 1990s owing to private entrepreneurs’ investment in the sector. This industry is now flourishing, mainly relying on the investment of large conglomerates, diversifying products, and transforming production. As per the World Steel Association, Bangladesh manufactured 5.2 million metric tonnes of steel in 2022, and its net import of steel decreased to 2.2 million metric tonnes, implying that the country’s consumption of steel was roughly 7.4 million metric tonnes, whereas the combined production capacity of steel mills is around 9 million metric tonnes in Bangladesh. According to The Business Standard, there is an anticipated increase in the rate of expansion of factory capacity, with projections indicating a rise to 13 million metric tonnes by the year 2025. The increase in local steel manufacturers’ production capacity has coincided with a decline in imports, as per the World Steel Association. 

 

Global Outlook of Steel Industry

The global iron and steel market was valued at USD 1,599.4 billion in 2022 and is projected to reach USD 1,928.6 billion by 2027, with a compound annual growth rate (CAGR) of 3.8% during the forecast period from 2022 to 2027, as reported by MarketsandMarkets, a leading global market research and consulting firm headquartered in India. World crude steel production stood at 1256.4 million metric tonnes in the January–August 2023 period, registering a growth of 0.2% year over year, according to the World Steel Association. In the month of August 2023, world crude steel production stood at 152.6 million metric tonnes, a 2.2% increase compared to August 2022. China remained the leader in world crude steel production, with an output of 712.9 million metric tonnes in the January–August 2023 period, registering 2.6% yoy growth and accounting for 56.7% of world crude steel production during the first six months of 2023. India and Japan remain in the 2nd and 3rd positions, respectively, in the first half of 2023.

 

                              

 

Except for China, India, Russia, and Iran, global crude steel production in January–June 2023 remained on a declining trend in all the major steel-producing markets. Raw material prices are also in a declining trend. Iron ore and scrap future prices are hovering around USD 120 and USD 377, respectively, in October 2023, compared to USD 129 and USD 468, respectively, in March 2023. According to Trading Economics, steel rebar futures were at CNY 3,670 per tonne, and HRC steel futures were at USD 789 per tonne at the end of September 2023. As per the trend report by the Indian Steel Industry, global steel prices continued to remain volatile in the remaining year of 2023 due to a combination of local and global factors.

 

                                                                                        

 

Overview of the Steel Industry in Bangladesh

The nation’s steel consumption exceeds 7 million metric tonnes. The steel industry has a workforce of approximately 1 million individuals, both in direct and indirect employment. The steel industry in Bangladesh has transitioned from an oligopolistic market structure to a perfectly competitive one. In addition to BSRM, prominent steel manufacturers such as Abul Khair Steel (AKS), KSRM, and GPH Ispat are situated in Chattogram. These factories in Chattogram cater to nearly half of the country’s steel requirements. Several small millers, including steel product traders from Dhaka and Narayangonj, are establishing new plants with updated technology in an attempt to gain a foothold in the market. Large businesses are aiming for massive government projects, while small millers are mostly targeting the retail side of the market, which includes individual homebuilders and the real estate sector.

                             
                                                

 

                                                                                                                                                                                                       
                                       

                                                          

 

Major Players in the Flat Sheet Market

Currently, there are 9 CI sheet (flat steel) manufacturers in Bangladesh. Among them, AKS(Abul Khair Steel Mills), PHP Steels Mills, KY Steel Mills (KDS Group), S. Alam Cold Rolled Steels Ltd., and Karanaphuly Steels (TK Group) are the top players in flat steel manufacturers.

 

Consumption Dynamics in the Steel Industry in Bangladesh

Although the combined capacity of steel mills in Bangladesh is 9 million metric tonnes, the country consumed approximately 7.4 million metric tonnes in 2022, leaving the remaining portion of the production for exports to other countries. The primary driver of local steel demand can be attributed to government mega infrastructure projects such as the Padma Bridge, Metrorail, Bangabandhu Tunnel, road networks, economic zones, bridges, and rural infrastructure. Additionally, the construction of pucca houses in villages, fueled by expatriate income and private investment, has also contributed significantly to the overall demand for steel. Approximately 60% of the manufactured steel is used in government projects, 25% is used by consumers as per The Business Standard, and the rest, 15%, is reserved for the private sector.

 

                                       

 

 

Import of Steel Products in Bangladesh

Bangladesh’s steel mills import scrap metal to make intermediate castings that need additional processing into final objects. Ferrous waste, scrap, remelted ingots, angles, rods, plates, and pipes are all handled by the industry. Bangladesh is the second-largest scrap ship destination and ferrous scrap consumer, importing 4 million metric tonnes. About 261 ships weighing 3.5 million LDT were demolished in 2021. A ship’s lightweight displacement is its weight without people, cargo, bunkers, lubricating oil, ballast, fresh water, stores, etc. According to a UNCTAD analysis, Bangladesh remains the leading ship recycling nation despite a 65% drop in ship- breaking operations. Bangladesh recycled 50.4% oil tankers, 41% bulk carriers, 2% ferries and passenger ships, 1.9% chemical tankers, and 1.1% general cargo ships, accounting for roughly onethird of the worldwide ship recycling industry.

                                                                                                                               

                                                    

Bangladesh’s imported ferrous scrap market slowed due to limited trade. Mills are prioritising clearing pending letters of credit (LCs) for earlier orders due to foreign currency shortages. LCs for July and August reservations remain unresolved. Bangladesh imported 290,186 metric tonnes of bulk scrap in September, up by 37% compared to August. Bulk scrap imports are dominated by the US (133,443 metric tonnes), the UK (76,831 metric tonnes), and New Zealand (31,486 metric tonnes). The third quarter of 2023 had 1.31 million metric tonnes of scrap imports, with the figures rising by 0.33% relative to 2022.

Exports of Steel Products from Bangladesh

Because production costs are higher, the steel industry in Bangladesh is often viewed as being less competitive on a global scale. Most semifinished casting products and byproducts are exported from Bangladesh as steel. Pakistan, Thailand, India, Malaysia, Japan, Myanmar, and the United Arab Emirates are the top export destinations. China, Taiwan, India, and other countries received exports of ferrous waste and scrap. Bangladesh has achieved an international standard for finished product quality, but export volumes have not met expectations. Even so, the quantity that was shipped to northeastern India was quite small. Not too long ago, GPH Ispat earned USD 71 million in 2021 by exporting 1.20 lakh metric tonnes of billet to China.

 

Raw Materials Price Trend

Scrap, old ships, plates, and billets have been decreasing in price locally and globally for months due to a sluggish global economy and lower steel mill demand. Local demand declined owing to higher rod prices, low monsoon building, and slower government projects. Iron ore and scrap prices on the London Metal Exchange were USD 129 and USD 468 in March 2023 and USD 120 and USD 377 in October 2023. In the first week of October, local ship scrap prices declined from BDT 70,000 in May to BDT 56,000. Shipbreaking dealers risk losing money by stocking heavily. All shipbreakers are reducing scrap supplies to avoid this. Despite reduced international scrap prices, big steel producers import scrap. October’s first week saw the dockyard break roughly 80 ships. A large mill bought 15,000 metric tonnes of Japanese H2 material in the Kanto Tetsugen Scrap export contract this month. Booking cargo cost JPY 46,226/tonnene FAS (USD 405/tonnene CFR).

Local mills generate 6.5 million metric tonnes of billet annually, enough for 5.5 million high- quality rods. Approximately 35 mills import scrap for billet. Steel mills make billets for themselves and trade small amounts. Recently, GPH Ispat exported billets to China and Sri Lanka. The first week of October, local billet prices are BDT 67,000–BDT 70,000, and BSRM billet prices are BDT 75,000.

          

 

MS Rod Price Trend

High-quality 75-grade MS rod pricing touched BDT 100,000 per tonne in March and dropped to BDT 93,000 to BDT 95,000 in October due to steep depreciation in raw material prices (scrap, plate, and billet) and poor demand.

However, 60-grade rods (auto) have dropped by BDT 5,000 to BDT 7,000 per tonne in the previous several months and are now selling between BDT 83,000 and BDT 87,000 per tonne, depending on brand, down from BDT 90,000 to BDT 92,000 three months ago.

60-grade (semi-auto) rods, which cost BDT 90,000 three months ago, now cost between BDT 79,000 and BDT 80,000, depending on the brand.

 

Challenges Before the Steel Industry

The coronavirus pandemic in 2020 severely hampered the growth of steel production capacity. It is estimated that the total loss to steelmakers due to the coronavirus pandemic in 2020 was BDT 5,957 crore. Nevertheless, the situation has slowly normalised in 2021 after tackling the pandemic. However, another wave of crisis due to the RussiaUkraine war has put the industry under immense pressure. Amid these global issues, a myriad of challenges in the local economy are also severely hurting industry growth.

Greenback Crisis and Taka Devaluation

The net forex reserve fell to USD 18 billion in September 2023, which peaked at USD 48 billion in 2021. Continuously falling reserves cause negative pressure on the exchange rate with local currency. Bangladesh Bank has continuously devalued the taka, which is still not enough, according to expert judgment. The wrong exchange rate, simply the undervaluation of the US dollar or an artificial overvaluation of the Bangladeshi taka, is one of the main reasons behind the country being pushed to the edge of the forex reserve crisis. Steel industry-related businesses struggle to open LCs due to the dollar crisis. In addition, the cost of production increases due to the higher exchange rate, or taka devaluation. Currently, Bangladesh Bank has fixed the forward exchange rate of USD at BDT 123.91.

Higher Margin on LC Opening

Due to the greenback crisis, much importance is given to opening LCs for food, commodity, and daily necessity goods imports. Due to their non-essential nature, not only is LC opening a challenge, but a higher margin is also sought for opening LCs related to steel raw materials and ship imports. This puts pressure on the steel millers’ liquidity position to do business.

Higher Inflation: General inflation and food inflation remained at 9.93% and 12.56%, respectively, at the end of September. Inflation has consistently remained above 9%, and food inflation has exceeded 12% for the last couple of months, which significantly impacts the cost of living. Consumers are likely to spend more on essential food items, which can strain household budgets and reduce the purchasing power of individuals, leading to low demand for household construction in the country.

Slump of Private Sector Credit Growth

Private sector credit growth in Bangladesh slumped to 9.75% in August, the lowest in 22 months, despite Bangladesh Bank’s projection that the growth rate will be 10.9% in this quarter. The global recession, the upcoming national election, higher borrowing costs, lower imports due to the dollar crisis, etc. led to a slump in private sector credit growth in the country. Due to tighter monetary policy to restrain inflation, a liquidity crisis may emerge, and construction demand and capital-intensive investment will decline, which will negatively impact steel industry growth. The culture of default loans is another obstacle to private sector investment, which is also a threat to the steel industry.

Finance Cost

Steel is a capital-intensive sector. Naturally, any expansion or new steel capacity enrichment is done through borrowed capital. In Bangladesh, the cost of finance is extremely high compared to the cost of finance in developed countries like China, Japan, and Korea. Funds are set to costlier as Bangladesh Bank raises the benchmark rate to SMART 7.43% in October (applicable for November) from September’s 7.2% (applicable for October). Banks can charge a maximum of 10.93% interest, and NBFIs can charge a maximum of 12.93% interest on large-scale industrial loans, as per the latest circular from Bangladesh Bank. Our projection is that SMART will increase in the coming days, which will eventually increase the interest rate even higher. High borrowing costs will significantly impact the expansion and production of steel businesses.

Slow Payment of Government Projects

The economic crisis has slowed down ongoing projects nationwide, affecting industries related to infrastructure development, especially the steel sector. To keep the development momentum going, the government should continue the nation-building activities and financing plan. Timely fund release from the development partners and a coordinated master plan are prerequisites for the survival of the steel industry, as government projects are the major demand drivers for large steel mill production.

Energy Crisis

The oil, coal, and gas crises caused by import complications led to disruptions in electricity and gas supply at the factory, impacting production. In addition, the price of electricity has been revised upward multiple times in the last year. Gas prices for captive power plants rose to BDT 30 from BDT 16 (88% jump), and for large industries, the price went up to BDT 30 from BDT 11.98 (150% jump) in January 2023. Upward revision of energy costs significantly increases production costs. Business cost hikes ate the profit of all steel companies. The government can accommodate a separate utility rate or policy to stimulate the steel industry.

Logistics

The logistics costs in our country are significantly high, encompassing expenses such as importing goods and domestic transportation. Steel plants in most countries, unlike China, Japan, and Korea, are typically situated inland rather than near the coast. Managing logistics requirements for steel plants in Bangladesh has become more challenging. Bangladeshi steelmakers struggle with logistics due to significant infrastructure limitations on the railways. Upgrading the highway with better quality to allow for higher load limits on trucks can result in significant cost savings for steel millers.

Taxes, duties, and VAT To boost steel production, the government should reconsider the source tax policy. High source tax collects more tax at the source of scrap imports and finished goods sales than the firm owes in a fiscal year. Lawfully paid excess tax cannot be used for the following fiscal year’s tax. Thus, dealers pay more tax than is necessary each year. The opportunity cost is huge for this tax adjustment glitch. A coordinated national-level policy and reform, including an upgrade of taxes, duties, and VAT, are required for the steel sector of Bangladesh. In India, we have seen that the government has one steel ministry to support the industry. Even so, they introduced the “National Steel Policy 2017” to patronise their industry.

Political Turmoil

We are heading to a national election soon. Political turmoil during the election period may hamper the growth of the industry.

Environment

Environmental concerns are growing, and the steel sector in Bangladesh is no exception. The steel industry uses plenty of energy, which increases carbon emissions and inflicts damage on the environment. Steel manufacturing may be cheaper and more competitive by using energy-efficient processes. This is possible with advanced energy management systems and steel manufacturing technology. Inefficient and small steel manufacturers will struggle to meet stricter environmental standards. 

Digital Disruption and Emerging Technology in the Global Steel Industry

With robots, drones, and IoT providing business solutions, the global steel sector is undergoing an exciting period. These technologies automate operations and connect all plant units in realtime, improving system efficiency. Good asset performance and technology integration enhance labour productivity. This will lower industrial expenses and boost profits. However, new technologies will require a new talent pool and workforce upskilling. These places will benefit from education and training investments. Digital disruption has barely begun and will grow dramatically in 10 years. Successful adoption of developing technology is crucial for future success.

Forging a Path Forward

As Bangladesh works towards becoming an upper middle-income country by 2031 and a developed country by 2041, the steel industry has emerged as a major focus area given the dependence of a plethora of sectors on its output, raising eyebrows among many countries due to the following reasons:

• Bangladesh is the second-largest destination for shipbreaking facilities in the world.
• Scrap generation from shipbreaking is on the rise; imports rose by 40% in 2021.
• Bangladesh is becoming a new auto hub, with an annual growth rate of 8% in the last decade.
• Bangladesh’s steel melting capacity is likely to ramp up from 9 million metric tonnes to 13 million metric tonnes by 2025.
• Positive demand from ongoing mega projects (Rooppur Nuclear Power Plant, Padma Bridge Rail Link, Matarbari Coal Power Plant, Dhaka MRT Line-6, Dhaka Airport Third Terminal, Matarbari Deep Sea Port, Chittagong-Cox’s Bazar Rail Link, Dhaka Elevated Expressway, Bangabandhu Railway Bridge, etc.)

Increasing steel sector competitiveness should be a priority now. This requires supply chain cost reduction, logistical efficiency, energy security, investing in future technologies, and financial cost reduction. The industry needs a strong lending sector, a stronger investment climate, government policy change (tax, VAT, etc.), and infrastructural development. In particular, economic instability caused by high inflation, dollar crises, rising interest rates, and political unrest may limit growth if not controlled appropriately.

 

(Mr. Md. Mehedi Hasan is working as Assistant General Manager in the Department of Credit Risk Management at IDLC Finance Limited and can be reached at hmehedi@idlc.com)