Bangladesh is basically an import dependent country for basic raw materials for a lot of industries, steel being one of them. The following are some of the reasons for the price increases of steel world over:

a) Over the past year, world economy has been growing steadily but when talking about China, it is a fact that it has been growing rather quickly. It is said that these days China's growth rate is nearly 20 per cent mainly due to the various export zones set up by the Chinese, the Olympic preparations going on and the huge infrastructure projects going on in China, and hence it has become the biggest consumer of steel in the past year. Its appetite for steel is continuously growing over the past year which has led to increase in raw material prices for worldwide.

b) The oil prices are at record high which is making the shipping industry asking for more freights. Previously one charter vessel from UK used to cost say $55 and now the rates are over $90 per ton with demurrage rates over $30,000 per day for a vessel of 20,000 tons.

c) The US dollar has depreciated by nearly 40 per cent against euro and as a result automatically all the European suppliers are asking for more dollars for every ton of steel it sells for every euro currency that they want. Bangladesh currency is so weak that we could not revalue our currency. Rather our currency is now worth Tk 58.80 as against Tk 58.55 few days ago.

d) The earthquake in Iran and the reconstruction of Iraq are sucking away all the finished steels in the market.

Prices of raw materials as well as finished products of steel have touched levels never ever recorded in the history of steel trading which says a lot of about increasing prices not only in Bangladesh but all over the world. Even iron ore and coke which were available abundantly earlier are now scarce. It takes nearly one and half months of waiting for Pakistan steel mills iron ore vessel to take cargo from Australia to Karachi, which eventually has led Pakistan steel to increase their prices by nearly Rs. 10,000 per ton in the last one year alone! (This fact can be easily verified by the Bangladesh High Commission in Karachi).

Reasons for price increase
As mentioned above, increase in international raw material prices has led to increase in prices of goods in Bangladesh. The table below shows the increase and effect on landed costs:

Ship breaking landed cost of plates has been calculated after including breaking cost as well as VAT.

Besides the above, costs of chemicals, silicon, manganese, consumables, etc which are all steel related, have increased substantially. This fact can be easily verified and confirmed by the Chittagong and Benapole Customs Houses. Situation is even worse because even at the above prices, material is not available and who knows the raw material prices would have probably become even higher!

From the above table it is clearly seen that raw material prices have increased more than the local steel rod prices hence pressure for upward push in rod prices is imminent. Local prices have not increased as much because the industry always has some older stock at lesser price which is enabling everyone to survive. However, stocks are very much depleting and nearing end. No significant purchases are being made by the industry for raw materials because by altering the duty structure recently, government has negatively affected the whole operation cycle.

Government actions and effects
The steel industry is being blamed for the prevailing high prices. Government probably listened to some incorrect advice and decided to reduce duty on steel rods, billets and ships. Reducing duty arbitrarily without any strong justification and based on pressure from developers is not very professional. The government has reduced duty on rods from 30 to 15 per cent, billets from 15 to 7.5 per cent and ships from 15 to 7.5 per cent and keeping the scrap duty same at 7.5 per cent even though there is maximum value addition in the melting sector than all the other sectors. There was no need to alter the duty structure and if it needed any alteration such as this, then scrap duty should have been kept at 0 per cent for the industry to be in balance and keeping government policy consistent. Even with such a drastic and sudden reduction of duty on rods, prices have not decreased mainly because of continuously increasing prices in the international market. Moreover, government has reduced the amount of VAT on finished products and removed AIT and IDSC charges at import stage. Since international prices are increasing, these kinds of small reductions will not help in reducing prices, only it will lessen the growth rate of prices in the short term.

One questions the emergency created by some quarters when construction costs have risen only by Tk 150 per square feet with the current rod prices as mentioned in some newspapers recently. Construction cost of an average apartment comes to around Tk 800 per square feet without land when the selling prices are nearly double, therefore, this kind of increase in no way threatens their existence. Furthermore, it is natural to pass on some of the increase to the potential buyers of flats since no one has any control of these prices as prevalent in the international market. However, with the current duty structure and negative publicity, the whole steel industry's survival is threatened.

Recommended government actions
a. Maintain a balanced duty structure: Government should not think about maintaining or decreasing duty on finished steel as that will just crush the whole industry in some time. Policy has to be consistent for all industries. It should be 7.5 per cent for raw materials, 15 per cent for semi-finished such as ships and billets and 30 per cent for finished products. If government does not maintain this and arbitrarily changes the duty structure, it loses credibility in other industries as well and hampers investment due to inconsistent policies. Steel contributes a huge amount per year to the government in terms of VAT, power, gas, taxes, duties and most important, employment and value addition. If the duty structure is not made balanced, the whole industry is threatened where entrepreneurs have made huge capital investment to set up plants based on a specific government policy.

b. Fix tariff value for steel scrap at $125: Focus of the government should be to concentrate and help industry in reducing the cost of raw materials. Steel scraps should be assessed at $125 regardless of the import price to bring the cost down at import stage. At a price of $380, there will be a saving at import stage of approximately Tk 3,500 in terms of duty and vat at $125 tariff value. Hence prices will go down by that amount given stable international prices.

c. Remove container restrictions and transport restrictions at port: Currently there are unnecessary container weight restrictions at the port which increases the freight amount of containers. For 20 ton container, port allows max 24 tons weight while as for 40 feet containers port allows 30.48 tons. At ports abroad, 28 to 30 tons weight for a 20 ton container is common. Moreover, for bringing any item in bulk, there is a restriction at the port for carrying maximum 5 tons in a truck while those trucks can carry minimum 10 to 12 tons.

D. Remove PSI on scrap: PSI needs to be removed on scrap imports for at least a short term. Availability of scrap is so difficult, it has basically become a supplier's market. No supplier wants to wait for the PSI company to come and do the inspection at their convenient time. Scrap stuffing in containers take time and suppliers do not want to go through the hassle in waiting for the PSI company to come according to a fixed schedule or cannot arrange a convenient schedule for the PSI company to come and see the loading. Hence they prefer not to go through this hassle and therefore, sell the material to other countries. Thus all scraps from the Middle East is going into Pakistan and India at $250 per ton levels. Customs could do 100 per cent inspection at Chittagong Port after arrival of scraps.

E. Remove VAT at import stage: Removing 15 per cent VAT at import stage for steel raw materials will help in substantially reducing the cost of imports. For instance, at current prices, for melting scraps, VAT amount at import stage comes to Tk 3,600 per ton, for ships for breaking Tk 1,900 per ton and for billets Tk 4,300 per ton. This is a big contributor to national exchequer hence government may think about removing this head for the short term till international prices do not come down. By doing this the entire industry will be at even levels and no growth problems will be encountered in this sector, rather than adjustment of duty and taxes.

It is expected that international prices are not going to come down at least till 2008 when there is Olympics in China. Some believe, these prices will remain for an even longer period of time until the slowing down of China takes place and reconstruction of Iraq is finished, we do not have any option but to adjust with these prices and bear this extra cost. We have to take this with a pinch of salt. As a country and as in the whole world, we do not have any other option.

If the government starts making arbitrary changes in the policy under pressure of some quarters this will lead to closure of major steel industries and will definitely encourage all other sectors in the country to press the government for giving them support against every type of turmoil they face in the international market.

The notion that some vested quarters have manipulated steel market is a very sad one. Our own company was buying steel scraps from the local market at Tk 15,000 some six months back and today we have bought the same melting scraps at Tk 25,000 per ton which gives an idea where the market is going.

Aameir Alihussain is Director Bangladesh Steel Re-Rolling Mills Ltd, Chittagong.