The steel industry in Pakistan, a cornerstone of the country’s economy, is currently battling an unprecedented crisis. The sector, which plays a vital role in the country's industrial output, is facing a dramatic decline in activity. Several steel mills have shut down, while others are operating at a fraction of their capacity. Industry leaders have issued strong warnings that without decisive government action, the sector risks total collapse, threatening millions of livelihoods across the nation.
One of the primary challenges facing the steel industry is the skyrocketing cost of electricity. At Rs 52.39 per unit, Pakistan now has the highest electricity tariffs in the region. Steel production, being highly energy-intensive, has been disproportionately affected by this rise in energy prices. This is compounded by a lack of progress on the promised "wheeling" mechanism, which would allow steel manufacturers to buy cheaper electricity directly from independent power producers. Without this critical reform, steel mills remain at the mercy of exorbitantly high electricity costs, which are unsustainable for the industry.
The financial strain has been further exacerbated by soaring interest rates and the devaluation of the Pakistani Rupee. The sharp depreciation of the currency has nearly doubled the working capital requirements for steel manufacturers, making it difficult for them to maintain inventories or continue operations. With borrowing costs also climbing due to interest rates peaking at 25%, and only a recent reduction to 15%, steel manufacturers are still unable to access affordable credit. Many argue that a return to single-digit interest rates is essential for the recovery of the sector, which has seen a drastic reduction in profitability.
Compounding the industry's woes is a severe downturn in demand for steel. The public sector development program, which is a major source of steel consumption in Pakistan, has seen its funding slashed, causing infrastructure projects to come to a near halt. In the private sector, construction activity has slowed significantly as well. As a result, steel manufacturers are left with unsold inventory and growing losses. The decline in demand has reached such a point that large-scale manufacturing in Pakistan contracted by 0.76% in the first quarter of FY25, marking the third consecutive year of negative growth in the same period.
The crisis in the steel sector is also hurting foreign investment. Recently, a major Chinese steel producer abandoned plans to expand its operations in Pakistan, citing the country’s high energy costs, excessive taxation, and unsustainable borrowing conditions. This move is a blow to the country’s hopes of attracting foreign investment and economic growth. With the steel sector in freefall, the loss of foreign interest highlights the urgent need for structural reforms in Pakistan’s industrial policy.
The consequences of the steel sector's collapse are far-reaching. Thousands of workers have already lost their jobs as mills shut down or scale back operations. Entire communities that once depended on steel mills for economic stability are now struggling to survive. The economic impact extends to more than 45 downstream industries, including construction, transportation, and manufacturing, which rely on the steel industry for raw materials and economic activity. Without a thriving steel industry, the broader industrial ecosystem in Pakistan faces collapse.
The Pakistan Association of Large Steel Producers has called on the government to take immediate action to avert a complete industry collapse. The association has proposed several measures, including subsidizing electricity rates and introducing reforms to facilitate cheaper and more reliable energy access. Additionally, PALSP has urged the government to address the sector's financial challenges by lowering interest rates to single-digit figures. These measures, the association argues, would help steel manufacturers increase capacity utilization, reduce losses, and restore the sector’s growth potential.
The survival of Pakistan's steel industry is not just an industrial issue, but a national economic imperative. The industry supports millions of jobs and is critical to the country’s industrial output. Policymakers must respond to the crisis by implementing the necessary reforms to restore the steel industry and prevent its total collapse. Without urgent action, Pakistan risks losing a vital economic pillar, which would have devastating consequences for the broader economy.
