AURORA: Would you agree that even before Covid-19 struck, steel as an industry was already experiencing difficulties?
HADI AKBERALI: The period between 2014 and 2017/2018 was a good one for steel and we experienced increases in both margins and revenues. A lot of construction was going on and many CPEC projects really got going then. During this period, there was a lot of interest in steel, be it from current players who were expanding or new players entering the market. This was also a period when a lot of the macroeconomic indicators were being fuelled, such as pegging the dollar to Rs 100 and keeping interest rates low, all of which ultimately resulted in a very high deficit. When the new government assumed power, Pakistan had to go back to the IMF, which insisted that all the remedial measures be taken upfront before releasing any money, and as a consequence, the economy crash landed. The rupee was devalued by 50%, interest rates doubled, imports were curtailed. All this put a tremendous amount of pressure on steel (as well as other industries) and reduced our margins. Steel is a highly leveraged, high fixed cost industry. Most steel manufacturers have a lot of loans which they use as working capital, and the doubling of interest rates really affected us. All our raw material is imported and the devaluation of the rupee brought on huge cost increases and because the economy had ground to a halt, we could not pass them on to the consumer. So we went from doing really well for three to four years to nose diving, as our margins pretty much disappeared. In fact, last year we made a loss.
A: When you say ‘we’, do you mean the industry or just Amreli?
HA: The industry as a whole including Amreli. It takes three to four years to set up a steel manufacturing plant from the time you decide to do it to the time when you actually start production. What happened was that many players decided to expand their capacity at a time when the margins were good. When the crash came, some of them pulled out but others were too invested to do so. The result was that a lot of new capacity came online at a time when demand was in decline. Amreli’s expansion came online in 2018 and shortly afterwards we saw the economy unravel and the result is that we are at a much lower capacity utilisation than we would like to be; we are at about 50%, which is very low.
A: Did you have to lay off people?
HA: No; in steel the payroll cost is not a very high percentage of the total cost. We were grateful that we did not have to lay off people either due to the economic downturn or Covid-19.
A: What happened to the industry after Covid-19 hit?
HA: It was like the last nail in the coffin. We only restarted production at the beginning of June when the lockdown eased.
A: Do you think the current government’s emphasis on the construction industry as a way to boost the economy is a step in the right direction?
HA: Yes, because construction employs a lot of people and has a lot of allied industries. Boosting construction is a tried and tested way to revive an economy. China did it and so have Brazil and India. However, those economies had big government spending programmes to back them. Unfortunately, our government does not have that kind of money, so they decided to put together an incentive package for the private sector to incentivise construction.
A: Is it working?
HA: So far we have not seen an up-tick in demand. Despite the positive talk and the fact that many developers have registered their projects in order to take advantage of the incentives, on-ground demand has not taken off.
A: Why is that?
HA: Firstly, there is no real demand on the horizon. The economy is not going to suddenly take a turn upwards; it will be a gradual recovery. People have lost their jobs and margins for many industries are down. The economy has contracted and even if developers see an opportunity because of the incentives, if they do build, who will buy? Disposable incomes have shrunk and people are worried; they would much rather save in a bank in a fixed deposit than invest in property. Furthermore, the property market is not accessible to 95% of the people. Secondly, there are concerns about the time frame; developers have to complete the grey structure before September 2022 to be eligible for the incentives. In Pakistan, two years is a very tight timeline and developers do not want to be stuck in a place where they have invested but have not met the September 2022 deadline and therefore, cannot benefit from any incentives. Thirdly, one of the big concessions was the amnesty, whereby no questions are asked about the source of money, be it a buyer or a developer. However, there have been two amnesty schemes in the last few years, so the chances are that most of the people who wanted to take advantage of them have done so and the pool of people who missed the amnesty boat twice is now small. In my opinion, a more effective way to boost construction is for the government to take money from its own pocket. The Prime Minister has done this by announcing the 1.1 trillion rupee package for Karachi. I think this is the sort of thing that will really get things going.
A: Government projects account for up to 30 to 35% of the total share, which is quite substantial.
HA: It is a pretty big share. During these difficult times ensuring that funding is forthcoming is important. The government is trying to do this and despite their constraints, they are releasing the funds for projects and continuing on this path is important because the government component is a major share of the construction sector’s business.
A: Has the government announced any incentives for the steel industry?
HA: No. The thinking here is to incentivise builders and this will generate demand for all allied industries. The incentives are targeted towards people who are building or buying.
A: From the steel industry’s perspective, and Amreli’s in particular, has the situation improved since June?
HA: Since June, we have been catering to the pent up demand that existed pre-Covid-19. Construction takes a few years to complete and what we are now seeing is an upsurge in demand as activity resumes for existing projects. Demand now is as good as it was pre-Covid-19; the question is, how many new projects are actually going to materialise?
A: What is your feeling on this?
HA: I think people with projects in the pipeline will think twice before going ahead because there is not enough demand in the market. Government spending in terms of infrastructure may still continue and hopefully it will. The government is reaching out to the Asian Development Bank, the World Bank, as well as to bilateral donors to get funds, but I think recovery from the private sector is going to be tentative.
A: Do you think that the steel industry will continue to register a negative growth?
HA: No, hopefully there will be some improvement. The major reason for the negative growth was the increase in costs and as we were unable to pass them on to consumers, we had to absorb them and that killed our margins. Hopefully, if we are not hit by further significant cost increases and the rupee remains stable, we should be able to recover some of our margins and see the year through in a positive light.
A: What is Amreli’s market share?
HA: About 13%. Steel is a very fragmented market. Our main competitor would be Mughal Steel which have a similar market share. The rest are smaller players; from a revenue perspective, Amreli and Mughal are at the top and everything that follows is 50% or lower. One of the problems with having so many small players is meeting quality standards.
A: Are these standards enforced?
HA: They are not enforced at all and this is the one of the big issues we have. When standards are not enforced, substandard steel finds its way into the market and will obviously be a lot cheaper. We are talking about a technical product and most customers don’t know much about steel; it all looks the same, so it is very easy for them to opt for a product that is Rs 10,000 cheaper.
A: Would price be the main determinant in terms of what consumers buy?
HA: Most consumers go by whatever is recommended by their contractor. Our aim is to make steel a high-end involvement product. Steel is buried inside a house and nobody sees it, but it is the strength that matters. We believe people should get involved in the purchase decision and not leave it to someone else to decide for them.
A: How would you categorise your target consumers?
HA: Buyers generally fall into two categories. One consists of bulk consumers who deal directly with companies and with them our marketing is more BTL oriented and based on personal relationships. Bulk buyers are more informed because they have structural engineers and architects who supervise the quality of the steel that comes on site. The other consists of individual buyers; people building a house and who may require 10 to 20 tonnes of steel. However, in aggregate terms, they are a large market.
A: Is Amreli involved with CPEC?
HA: Yes, we are the largest suppliers to Chinese contractors as CPEC is mostly carried out by Chinese firms.
A: Do you face any competition from Chinese steel?
HA: Steel is not imported from China.
A: That is a very good thing.
HA: When CPEC was coming on-stream, we advocated the need to be inclusive, otherwise CPEC would never be viewed as beneficial to Pakistan. We have always maintained that material should be bought locally. There are exceptions where the government has given tax and duty exemptions to certain projects and they have been able to import steel at a cheaper price. But it is a small share; largely, they are buying steel locally.
A: Is there a Steel Association to look out for the interests of the industry?
HA: There are several. We are a very fragmented industry and a lot of the smaller players do not share the same vision we do in terms of how the industry should develop and how we can become globally competitive. We broke away from these associations and created the Pakistan Association of Large Steel Producers which represents about 60% of Pakistan’s primary steel capacity and is made up of like-minded companies that want to go beyond just talking about their own benefits and discuss where the industry is heading and the policies and frameworks the government should devise to implement a 10-year vision for the industry.
A: Has the government been responsive to that?
HA: This government has been more responsive. It is easy to pick holes with the government. Everybody makes mistakes and they made their own share, but I think they have a lot of the right people in the right jobs. They have constraints in terms of what is available to them, but they are listening and taking small steps, although obviously not as many as we would like.
A: Why doesn’t the government enforce standardisation? Surely that has to be a first step?
HA: They should. Standards come under the Pakistan Standards and Quality Control Authority (PSQCA) and they are a weak institution.
A: Can the government not intervene?
HA: We have stopped going to PSQCA because we have been banging on their doors for the past many years. We are now approaching other ministries and asking them to intervene, because PSQCA cannot solve problems. Frankly, until your documented and quality-oriented sector makes money, there cannot be progress. We don’t have the kind of wealth creation that would enable us to set up plants with huge capacities. And because of this we are undercut by informal players who do not comply with quality standards. Yet, we have invested a great deal of money to make sure that our product is compliant in terms of health, the environment and safety – all this costs money. All compliance costs money.
A: Do you have a nationwide presence?
HA: We do, although our margins are the highest in Sindh, because we started out from here and until 15 years ago, 90% of our sales were in Sindh. However, as our capacity started to increase we started to diversify by expanding regionally as well as by building up a retail presence rather than rely only on the corporate sector.
A: Are there Amreli branded shops?
HA: They have the Amreli branding, but they carry other brands as well; in other words, we don’t own the shop. The retailer is our stockist and we brand his shop so that he knows we monitor his weighing machine to ensure the consumers are getting the right weight and quality. Retailers are running a business and at the end of the day, they see where the margins are coming from and they push that product. It is very hard to get the loyalty of a retailer without giving him a big margin and sometimes economics do not permit us to give the highest margin. This is why a lot of our marketing is now aimed at the end consumer and today 60% of our sales are retail based, inclusive of what we sell to our distributors and stockists. This is why we prefer to talk directly to the end consumers and make them aware of the quality of our product and develop a connection between them and our brand, so that they eventually ask for Amreli.
A: Is this strategy working?
HA: I think so; we have made our way up to 60% and part of this success was ensuring our product is available at more places and marketing it to customers. The journey has been very interesting. We were the first steel company to undertake ATL marketing. Initially we made mistakes. For example, our ‘Resilience’ campaign was a very good one, but the problem was that because the involvement of an average customer with construction materials is pretty low, they did not make the connection with steel and the brand name Amreli was lost on them. We were too early in our advertising cycle to go for that kind of advertising. We then went for functional ads, but customers glazed over them; when people watch TV commercials, they don’t really want to learn about steel and the technology we use and our post campaign analysis showed that the recall was not there. Now, in our most recent campaign ‘Aap Ki Tarha Solid’ (‘Solid Like You’) we focused on strength of character and it was our most successful campaign.
A: Do you have an advertising agency?
HA: We have changed our model. We used to be very agency based but we have kind of deconstructed it. Our recent TVC was done by Arey Wah. We use The Agency for our design work and we have a couple of in-house people to do the digital part.
A: How important is digital in this business, or is TV your main medium?
HA: If you look at the stats, our target market is composed of SEC A men aged 40+. So although the need for an online presence is increasing, our mainstay is still TV.
Hadi Akberali was in conversation with Mariam Ali Baig. For feedback: firstname.lastname@example.org