Home ›› 09 Apr 2023 ›› Front
Bangladesh ranks first in the global shipbreaking industry, but stakeholders are worried that the country may lose the position as letter of credit (LC) opening complexities are hampering raw material imports.
Import sector expenditures fell by 22.5 per cent in the first six months of FY23, but still many small and large factories, including shipbreaking, were closed as they could not open LCs due to the strict measures taken by the Bangladesh Bank.
Shipbreaking and steel factories faced the highest closures, with thousands of workers losing their jobs.
Scheduled banks have not been issuing LCs as per clients’ demand for a long time as the central bank’s restrictions on imports to prevent taka’s devaluation and measures to stabilise the exchange rate continue. Some banks are issuing LCs against the “LC limit” of big industries, but the Bangladesh Bank is cancelling LCs involving large amounts.
Bangladesh Ship Breakers Association President Md Abu Taher has been involved in the shipbreaking industry since 1982. Explaining the sorry state of the industry at present, he told The Business Post he is now unable to run his factory as LC opening has dropped by more than 80 per cent.
“I never faced such a crisis. I am unable to import scrap ships due to the dollar crisis. As a result, I cannot run the steel factory due to raw material shortages. Yet, I have to bear all the expenses, including workers’ salaries,” he said.
Taher further said shipbreaking yard owners are in dire straits.
LC settlements, known as import payments, fell by 26.66 per cent year-on-year to $5.62 billion in March 2023 due mainly to austerity measures taken by the central bank and the government. LC settlements were $7.67 billion in the same month last year.
Also, LC settlements fell in the first nine months of FY23. During the July-March period of FY23, import payments stood at $53.14 billion, down from $60.33 billion in the same period of the last fiscal year, as per the Bangladesh Bank data.
This happened after the government and the central bank introduced several policy changes to ease the pressure on the country’s foreign exchange reserves. Forex reserves stood at $31.24 billion on April 5, down from $44 billion on the same day in 2022, as per the central bank data.
The forex market is still unstable and this impacts banks’ profitability, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Mahbubur, also the former chairman of the Association of Bankers Bangladesh, said a number of banks are not able to open LCs due to the US dollar shortage as well as the austerity measures taken by the government and the central bank.
This is the right time to withdraw the austerity measures because most businesses are unable to open LCs due to the strict rules, as per industry insiders.
There are more than 160 shipbreaking yards in Chattogram, but only 35-40 are now operational and the rest are closed. This has resulted in many job losses while many more workers are at risk.
Scrap ship prices in the international market are on the rise amid the dollar crisis in Bangladesh. In this situation, the Bangladesh Bank has directed banks to open LCs within $520 per tonne. But in the international market, depending on type and quality, the average scrap ship prices are $580 per tonne.
Taher said the governor of the BB has been informed of the problems but the banking regulator has not yet taken any measures. He said there is a problem with the prices shown on the website of Indian companies although the Bangladesh Bank thinks those are right.
“Now I am worried whether the shipbreaking industry will even survive in Bangladesh. Relatively small ships are dismantled in India, but ships weighing even 50,000 tonnes are demolished in Bangladesh,” he said.
“Bangladesh holds the number one position in the global shipbreaking industry because relatively large ships are dismantled here. But there is now a risk that we will lose that position.”
On condition of anonymity, a big businessman in Chattogram told The Business Post he opened an LC involving more than $11 million a few days ago and it was approved by a foreign bank.
“But the Bangladesh Bank later cancelled it. So, the import of the consignment has halted, and production will thus be hampered. If there is no business, it will be difficult to pay the workers,” he said.
Tapan Sengupta, deputy managing director of the country’s largest steel manufacturer BSRM Group, told The Business Post, “90 per cent of our production depends on the imports of raw materials. LC opening has declined by over 50 per cent as banks are not issuing LCs as per the demand.”
“Earlier, we used to open LCs of $10-15 million regularly. Now we cannot even open LCs of $2 million. At the same time, we cannot get raw materials at low rates as we cannot open LCs at the right time even though prices have declined in the global market.
“If we cannot open LCs, we cannot import raw materials. And if we do not get raw materials, we cannot run factories. This means thousands of workers will become unemployed. At the same time, due to lower production, product prices have also gone up. At present, rod is sold for Tk 1 lakh per tonne,” he added.
According to the Bangladesh Steel Manufacturers Association data, the annual demand for steel in the country is about 75 lakh tonnes while production is nearly one crore tonnes. Of this, the factories in Chattogram produce at least 40 lakh tonnes.
Scrap is the main raw material of steel, and almost all of that is imported. Sitakunda’s shipyards meet 10-15 per cent of the demand for melting scrap while the rest is imported. But the dollar crunch has resulted in an import crisis, creating new risks for the steel industry.
In the latter half of last year, rod prices went down slightly when the prices of raw materials became normal in the world market. But due to the increase in the dollar exchange rate in Bangladesh, import costs did not fall.
As a result, the import of raw materials had to be reduced by 50 per cent due to the dollar crisis. Besides, due to the gas and electricity crisis, most factories had to keep production halted for a single shift every day. The failure to maintain uninterrupted production caused costs to go up.
Stakeholders said rod production costs increased by at least 40 per cent in the last two years. 43 out of 50 steel manufacturing factories in Chattogram have already shut due to discrepancies between selling prices and production costs, triggering the beginning of the collapse of the supply line.
Among the semi-auto factories that were recently closed are Peninsula Steel, Nazia Steel, BM Steel, Universal Steel, Balaka Steel, and Ambia Steel. Ratanpur Steel Re-Rolling Mills (RSRM), Ehsan Re-Rolling Mills, Rising Steel, MK Steel Builders, Islam Steels, Unique Steel, Khalil Steel, Bhatiari Steel, Majid Steel, Manti Steel, Brothers Ispat, Ambia Steel, Hillview Steel, Super Steel, Shafiul Alam Steel, Dinar Steel, and MT Steels faced closures in the last two years.
Meanwhile, HM Steel, Golden Steel, KR Steel, Asia Steel, Sitalpur Steel, and Sima Steel are continuing production amid difficulties.
Industry owners said it is necessary to open LCs for importing raw materials in order to continue production because more than 90 per cent of the raw materials used in large industries, including ready-made garment, are imported.
Besides, a large segment of consumer goods has to be imported as well. According to industry owners, the Bangladesh Bank has given directives to limit various types of imports, including luxury items, but banks are not opening LCs even for consumer goods as well as raw materials required for manufacturing and export-oriented industries.
They said banks are not opening LCs citing dollar crunch despite large industries having “LC limits” though those who have limits are supposed to get LCs. As a result, in addition to gas and electricity problems, if production cannot be continued due to raw material shortages, the industrial sector will face a big threat.
Moreover, they said entrepreneurs have been able to create a market for domestic products in the last three decades through huge investments. Now, they may lose the market if they cannot deliver products, which can possibly increase import dependency further.
Zahir Uddin Ahmed, managing director of Confidence Cement, told The Business Post it is not bad to limit various types of imports, including luxury goods.
“This has stopped the import of some unnecessary products. But even in our sector, LC opening decreased by over 10-15 per cent compared to last year. The LC processing time has also increased,” he added.
The central bank took various measures, including limiting imports, to handle the foreign exchange crisis that deepened after the Russia-Ukraine war. As a result, at the end of the first half of the current financial year, import expenditures fell below $7 billion while new LC opening decreased by 22.52 per cent to $5.5 billion.
The falling trend in forex reserves prompted the government to take austerity measures. In August last year, the government increased the duty and taxes on 300 non-essential and luxury items, such as sport utility vehicles, mobile phones, and home appliances.
Before that, the central bank in July last year asked banks to submit reports on all types of foreign exchange transactions, including those related to offshore banking operations.
In the same month, the banking regulator asked banks to inform it 24 hours before opening import LCs amounting to $3 million or above.
On May 10 last year, the central bank toughened the rules for luxury item imports. A day later, the government decided to stop foreign trips of its officials and postponed the implementation of less important projects that require imports.
