Tuwairqi Steel: ECC withholds decision on gas supply at a discount

Forms committee that will come up with recommendations by the 15th

ISLAMABAD:

The Economic Coordination Committee (ECC) has withheld a decision on provision of feedstock gas at a concessionary rate to Tuwairqi Steel, a plan, if approved, could cause a revenue loss of billions to the national exchequer and lead to an increase in consumer gas prices.

The move came after the Ministry of Industries and Production tabled a plan before the apex economic decision-making body in a meeting held on July 17 this year.

The Finance Division and Ministry of Petroleum and Natural Resources opposed the plan, saying the government was not legally bound to provide gas at a concessionary rate, sources say.

The Ministry of Industries pointed out that Tuwairqi Steel Mills Limited (TSML), a joint venture between companies of Saudi Arabia and South Korea, had planned to set up Pakistan’s largest steel complex with a capacity of 1.28 million tons per annum.

The company was working on developing the project in three phases including a Direct Reduction of Iron (DRI) plant, melting shop for flat and long steel products and mechanised mining of iron ore in Pakistan as forward and backward integration.

TSML, a project of Saudi Arabia’s Al-Tuwairqi Group of Companies and South Korea’s Pohang Steel (Posco), was established at Bin Qasim Karachi over an area of 220 acres following a memorandum of understanding (MoU) signed with the government of Pakistan on May 28, 2004.

The Ministry of Industries proposed that the steel mill should be provided gas at a discount for running its DRI plant.

However, the Finance Division and Ministry of Petroleum did not support the proposal on the grounds that the government was under no legal obligation to reduce tariff for the steel mill, which would cause annual revenue loss of about Rs5 billion.

The financial impact of the lower tariff at Rs123 per million British thermal units (mmbtu) would be approximately Rs5 billion to Sui Southern Gas Company (SSGC), requiring 3.3% increase in gas prices for all consumers excluding domestic and fertiliser sectors.

Phase-I of the DRI plant has been completed with an investment of $340 million while investment in phase-II and III is estimated to be in the range of $850 to $900 million. This, however, has been linked with commercial success of the DRI plant.

In the MoU, the government gave an undertaking that 40 million cubic feet of gas per day (mmcfd) will be provided to the company as feedstock and 30 mmcfd as fuel. Tariffs for the gas would be the same as applied to other industrial consumers.

Meeting participants told the ECC that gas utilisation in the DRI phase was one of the most efficient in the country at about 85%, meaning a loss of only 15%. The efficiency utilisation was better than fertiliser and other sectors where natural gas was widely used.

They said the support required for applying a concessionary rate of natural gas would be about Rs4 to Rs5 billion per annum whereas estimated contribution by the DRI plant to the country would be Rs12 billion per year. Apart from this, foreign investment totalling Rs89 billion would be made in forward and backward integration of the DRI plant.

On the completion of integration, the industries ministry said, the mill would contribute Rs100 billion annually to the country’s economy in import substitution.

The ECC underscored the need of constituting a committee to discuss all issues and submit recommendations for consideration. The committee would submit the recommendations by August 15.

Published in The Express Tribune, August 1^st, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.