impact of pakistan's energy crisis on the manufacturing industry

TOPIC: 07

IMPACT OF PAKISTAN’S ENERGY

CRISIS ON MANUFACTURING

INDUSTRYSYED UMER NOMAN__________7457 SYEDA SAMIA ASIM __________8860

2/13/2014

SUBMITTED TO: SIR SOHAIL MAJEED

[IMPACT OF PAKISTAN’S ENERGY CRISIS ON MANUFACTURING INDUSTRY ]

To study the impact of energy crises on the industries in particular manufacturing industry of Pakistan, first we must see what energy is and its sources, energy crises in Pakistan, industries that are affected then the impact of energy crises on industries of Pakistan

INTRODUCTION

Energy is the utilization of resources (physical and chemical) to produce power to provide light

and heat. Energy plays a vital role for the country’s economic growth. There are various sources

of energy, the major source of energy in Pakistan are sun, wind, tides and water, natural gas,

coal, fossil fuel, petroleum and oil.

COAL; 0.1

HYDRO-ELECTRIC;

29.1

NUCLEAR; 5

GAS; 29.5

OIL; 36.3

Figure 1

In order to produce power following percentages of energy sources was utilized: coal

0.1%, hydroelectric 29%, nuclear 5%, gas 30% and oil is 36%. The supply of energy is

46.5 million tons and per capita availability is 0.28 million ton per year while

consumption is 48.3 million tons per year.

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SOURCE, NEPRA


These energy sources generate power that produce electricity and gas for the use in sectors such

as industrial, commercial, transportation, residential, agriculture and government. Energy is

directly related to the living standards of citizens and industrial growth. Energy as electricity and

gas are used in every sector for both living and work. It also has a major impact on industries for

the production of goods and services thus being a significant part of manufacturing industry.

Industrial growth is an important aspect of economic growth and provides a large contribution

for a country’s growth or expansion. For any country’s industrial growth there is a direct

relationship between energy and production.

The importance of energy is widely recognized in every sector of the economy, in relation to the

factors of production. With the globalization and transformation of era’s from hand made things

to machine made products have made production processes seriously reliant on energy, and

sustainable economic growth cannot be achieved without sufficient and continuous supply of

energy. Therefore, it is necessary for a growing country to explicitly accept the importance of

energy in order to achieve sustainable growth. Industrial sector of a country is a dominant factor

to economic growth. A sustained and continuous supply of energy is a determinant of industrial

sector performance, which further contributes to improved growth of economic indicators.

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ENERGY CRISES IN PAKISTAN

Being discussed about the importance of energy and its role in the industrial sector, now we

understand the utilization of energy for the purpose of making power. But sometimes it happens

that a country faces shortfall of supply of energy or there is a rise in the price of energy then it

means the economy is having energy crises and as energy is an important element of producing

power so ultimately it will have an impact on the country’s industrial growth in particular hitting

manufacturing industry. For the last several years Pakistan has been facing unprecedented energy

crises which are badly hitting the economy by damaging almost every sector of the country. It is

the single largest drain on Pakistan’s economy. The energy crisis caused two major issues gas

shortage and electricity production.

ELECTRICITY AND GAS SHORTFALLThe electricity crises actually started to get severe by late 2007 but its roots lies in the power

policy taken two decades ago when the government despite of utilizing its own natural resources

came up with the policies to quickly meet the power demand of the growing economy by having

foreign investments on power projects and particularly transforming the country’s power

generation on fuel based. Before that more than 60% of power was generated from hydropower

but those polices changed this power generation from hydropower to thermal power plants of

which most of them were fuel based. The crisis of electricity has reached up to 3220 megawatt

(MW) with the current demand for electricity is 12850 MW, and total production of 9630 MW.

Although being a country with full of gas resources Pakistan faces crucial gas crisis during last 3

years with the shortfall rising up to 1.8 billion cubic feet though it has the resource potential to

produce 282 trillion cubic feet of gas, but it is producing 6.5 billion cubic feet. Pakistan

industrial sector and power sector is heavily dependent on the supply of gas, that is 31% and

11% respectively.

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RESI-DENTIAL

47%IN-DUS-

TRIAL28%

AGRICULTURE12%

GOVERNMENT6%

COMMERCIAL8%

STREET LIGHTS1%

CONSUMPTION OF ELECTRICITY IN SECTORS (SHARES, 2013)

Figure 2

The consumption of electricity according to sectors: residential 47% that is the highest

percentage of the consumption part. The second largest sector that consumes electricity is

the industrial sector which uses 27% of the total; the rest is agriculture 12 %, government

6%, and commercial 7% and street lights 1%.

RESIDENTIAL 32%

IN-DUS-TRY31%COMMERCIAL

5%

CEMENT0%

FERTILIZER21%

TRANSPORT POWER11%

CONSUMPTION OF GAS IN SECTORS (SHARE, 2013)

Figure3

For the consumption of gas following are the percentages utilized by the different sectors:

residential 32%, industry 31%, commercial 5%, cement 0%, fertilizer 21%, transport

power 11%. Industrial consumption is the second largest sector to consume natural gas.

(Source: hydrocarbon development institute of Pakistan & economic survey of Pakistan, 2012-13)

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INDUSTRIES THAT ARE AFFECTED BY ENERGY CRISES

Electricity and gas shortage are affecting almost every sector of the country but the industrial

sector is the one which has faced the adverse consequences. Due to energy crises the industries

cost of production have drastically increased which made them to close their industrial units. As

a result of these energy crises total numbers of 1579 industrial units have been closed down

during last five years. 316 industrial units on average are closed every year, making it 26 units

per month thus increasing the unemployment as well. Besides closing down, gas shortage has

also made Pakistan’s once Manchester, Faisalabad “of no use” with the increase in gas

suspension forcing them to stop working. Moreover industries like oil refineries, soap

manufacturing and others are in miserable condition because their operation needs 10-12 hours

to start, relying on gas supply.

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Figure 4

TEXTILE INDUSTRYTextile industry is the biggest industry in Pakistan; it is the largest export industry. Due to lack of

resource the growth of the textile industry is slow. This industry is trying to move from old

machineries and handmade concepts to new technologies currently present in the market, but

unfortunately technology needs electricity energy for their working, yet we are standing at the

same position. This causes slow as well as low in quality of production. It contributes up to 8.5%

from its exports. Other impacts like increase in cost of production, increased taxes are declining

the rate of export. The major industries that are placed in Faisalabad are suffering from energy

crisis and year by year it is becoming a threat that is uncontrollable. The potential growth of the

industry is now being in danger.

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MANUFACTURING

INDUSTRY

ENGINEERING GOODS INDUSTRY

STEEL INDUSTRY

FERTILIZER INDUSTRY

LEATHER INDUSTRY

CEMENT INDUSTR

Y

TEXTILE INDUSTRY

AUTOMOBILE INDUSTRY


Pakistan’s auto industry is one industry that is currently in development phase but has a huge

growth potential in terms of demand of all type of vehicles in the country. It is the second largest

tax payer sector besides oil and petroleum sector. Auto industry despite having many production

and assembly units are not able to utilize the technology and to use the production capacity as its

best because of the energy crises. Many of the four wheeler assemblers have stopped assembling

activities as a result of energy crises. Furthermore, the hybrid car industry has also failed in

Pakistan because of the energy crises.

CEMENT INDUSTRYCement industry also have an important part to play in economy. Where infrastructure is based

on steel and aluminum it is also based on cement. The plants that existed at the time of

independence were 4 in numbers, and then total 29 industries developed (small and large) that

contributes to the economy cycle. This industry widely provides job opportunities to more than

100,000, hence reducing unemployment. The industry based on mechanical and chemical

processes, thus it requires gas and electricity for quality production of cement. Energy crisis have

also hit this industry as gas shortage leads to switching off of burners, reactors and machines that

ultimately pack those cements to be moved in the market. The count is reduced to 25 or less from

29, and it will exceed if the situation still remains the same. The cost and exports ultimately is

affected, and import of the general raw material for the production is being focused by the

industrialist for their productions.

SUGAR INDUSTRYPakistan being an agricultural country comprises of a sugar industry which is the largest agro

based industry other than textiles. There are 81 sugar mills which come under the sugar industry.

Because of the energy crises the industry is facing the high cost of production along with the

electricity shutdown which puts the burden on the mill owners who transfer this burden on the

general public by increasing the sugar prices.

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LEATHER INDUSTRYThe leather industry of Pakistan is the second largest export industry and one of the major

foreign exchange earning industry of Pakistan. The energy crisis has badly damaged this sector

and has made it uncompetitive in the industrial market. Due to the unavailability of gas and

extended load shedding hours many tanning units are closed and thus the exports are declined by

more than 14% during last five years. The leather industry of Pakistan is able to produce world

class leather but due to frequent shut downs the quality is also affected as it needs a continuous

processing and because of the electricity frequent shutdown the process gets interrupted which in

the end results in bad quality product and bad image for the country.

ALUMINUM INDUSTRYAluminum industry of Pakistan is not a big industry in terms of size as compare to textile and

leather industry. With the increase in load shedding and gas shortage this industry is also facing

the consequences of energy crises. The aluminum industry utilizes gas in terms of combustion

operation but as with the gas shortage and increased fuel and electricity prices the cost of

production of this industry is increasing making it difficult for the industry to survive.

STEEL INDUSTRYPakistan steel industry is one of the major industries of Pakistan. Currently there are more than

50 companies working in the steel sector. For the last ten years Pakistan steel industry is facing

massive decline because of the output not producing according to the maximum capacity despite

having high local demand. The reason behind it is the small scale production which increases

the steel cost. With the energy crises the situation is getting even more severe as with the gas

shortage the production has been affected and with increased electricity, fuel and material prices

the production cost is increased resulting in damaging the industry.

FERTILIZER INDUSTRY

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Pakistan’s fertilizer industry consists of 10 fertilizer units, out of them six are public and four are

in private sector. Along with the other industries fertilizer industry has also been affected

because of the energy crises. Many of the industrial units are closed down because of the energy

crises and those which are currently working are not able to produce to their maximum capacity

which is 4,298,000 N tons of fertilizer are manufacturing 2,624,000 N. tons because of the

frequent power break down resulting in damaging the industry.

ENGINEERING GOODS INDUSTRYIn Pakistan there are mainly four public sector engineering goods firms which come under the

engineering goods manufacturing industry. As manufacturing of engineering goods requires

technology usage and heavy machinery for production but due to energy crises the technology

implication is almost impossible and machines are unable to produce on their full capacity

because of the frequent electricity shutdown.

IMPACT ON MANUFACTURING INDUSTRIES

Energy is the backbone for industrial growth of any country. Out of the total consumption of

gas and electricity Pakistan’s industrial sector utilizes 31% of Gas and 27% of electricity for its

production usage, but due to the energy crises this industrial sector is facing adverse effects.

Gas reduction and electricity shortage has badly affected the performance of the industries. The

natural reserves of gas and resources to produce electricity in Pakistan are declining and the

major factor that prevents new suppliers to work in the field is the price. The shortage of the

power is due to the misallocation of the resources and low growth in the supply of gas and

electricity to the sectors. This is because of poor planning and managing of natural gas and its

supply.

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COST OF PRODUCTIONIn Pakistan manufacturing industries utilizes at least 33% of production cost in terms of energy

prices. With the energy crises going on the supply of energy have declined thus increasing the

cost of energy which ultimately affects the industries’ production cost. Industries are striving

hard to come up with the increased cost of production and decreased profit. If the industries go

for another source of energy that will also increase their cost as installation of any new source is

expensive. Eventually this burden of increased prices is faced by the manufacturing industries

thus their cost of production increases which results in decrease rate of output. So in order to

increase their profit they are increasing the price of their products.

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TECHNOLOGY IMPLICATIONS Technology play an important role in the industrial growth as by using the advanced technology

and having latest machinery we can achieve efficiency in production, reduce the cost of

production, can reduce the production time and can achieve the economies of scale but to acquire

the technology and to use it in industrial production one must have electrical energy only then

the technology can be utilized. In Pakistan the technology implications is impossible due to

energy crises and because of those industrial machineries are getting idle. Even if manufacturing

industries go for the latest technology they can’t apply it because of electricity crises.

LEAD TIME AND LIMITED QUANTITYDue to the energy crises we have gas and electricity shortage making it difficult for the industries

to meet the optimum quantity of their production. With the load shedding reached to 16-17 hours

the industries are unable to run their machineries and thus the production process is affected. The

manufacturing industries are going for the manual work for the production as for the order they

received for the supply of goods they are unable to supply them on time as their production

speed has slowed which results in increased lead time.

QUALITYWith the industrial production of the country badly affected by the energy crises, the quality has

been compromised in a way that due to electricity shortage our manufacturing industries are

unable to the efficient production so for that to meet the demand the local industries are going for

the bulk production anyhow with the maximum usage of electricity and are not considering the

quality, on the other hand for the material to be used in production the industries have to import

the material from abroad and thus cannot demand the exact quality material they want as it will

be expensive for them as compare to the materials produced locally so they are giving up on

quality.

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OUTSOURCINGManufacturing industries have started outsourcing their part of the businesses due to various

reasons; one of them is the energy crisis. It is very difficult for a manufacturing industry to

maintain its every department in such a country where there are energy crisis and shortage of

resources that it had become a headache for the industries to manage its manufacturing area.

Industries are outsourcing its functions due to many reasons that are uncountable but specifically

if we talk about the manufacturing side industries outsource due to the increase in the material

costs of the raw material as well as the finished goods that ultimately increase the prices of the

products or its unit cost and services as well. Industries will suffer badly either outsourcing its

functions or managing it by themselves.

EXPLOITATION OF LABORWhen the technology was applied in the industries to make the production efficient, cost

effective and to achieve economies of scale, large number of labors were cut off from their job as

machines were doing all the work but now because of electricity crises the machineries are

becoming useless and with the increased cost of electricity the industries in order to minimize

their cost and losses are going for the manual work, but as human take more time than machinery

for production so the employers are pressurizing the labors and even using child labor to meet

the demand of production.

GLOBALIZATION OF THE BUSINESSOwners of manufacturing industries who are competent enough to take their businesses abroad

and globally are completely shutting their firms from Pakistan, and gaining foothold in

international market for further production, and then export their products to other countries.

Globalization had make it difficult to survive in the market for other remaining industries in

Pakistan

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DECLINE INVESTMENT Energy crises have also affected the flow of investment for the industrial sector. The investors

are not interested to invest in Pakistan as those who were doing business here and were running

their factories are shutting it down because they are unable to produce thus bearing losses, so the

investment rate is declined for the manufacturing industry.

THREAT OF EMERGING MARKETS (GLOBALLY)A major threat to Pakistan’s manufacturing industries from the emerging markets globally like

china, India, Malaysia and Bangladesh as well. These industries have sufficient energy resources

to produce goods and services, they also demand from other countries the energy resource to

store and use for further production. Shutdowns had already made Pakistan’s manufacturing

industry sector small, and now new markets have also come up with the energy demand making

energy prices so high that it becomes completely impossible for the Pakistan’s industries to buy

energy externally for production reasons. Rise in energy prices causes higher production costs

and manufacturers are forced to lower the labor costs.

EXPORT AND IMPORTThe major affect of energy crisis on manufacturing industries that directly hits the economy is

exporting of the products that contribute in the economy. There is a constant decline in the graph

of exporting products by the manufacturing industries, though decrease in the balance of

payments that helps us to import those products from outside the country that usually a country

cannot manufacture or provide service of. Importing ratio is increasing day by day due to the

shutdown of the industries. The manufacturing sector is affected by the increase in dollar value

that ultimately makes the raw material importing costly, hence making it difficult for the

manufacturing firms to carry out their businesses for long time. It leads to more shutdowns or

slow growth in the industrial sector.

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SHUTDOWNDuring last five years the shutdown count has reached up to 1579 manufacturing industries due

to energy crisis and high cost of running businesses, and this count is likely to increase in

upcoming years. Electricity shortage and gas shortfall leads industries to shutdown their

departments, as continuous loss in their business and high prices are unaffordable currently. The

numbers of industries that are closed in the provinces are Punjab 160 units, sindh 800, Khyber

pakhtunkhwa 700, and Baluchistan 40. The gas shutdown hits the industries like steel, cement,

medicine and many other that basically are dependent on the gas for its manufacturing products.

Shutdown of manufacturing industries causes another problem that is the second largest problem

of Pakistan is unemployment.

UNEMPLOYEMENTManufacturing industries are the second largest sector that contributes in the economy and hence

provides employment to all class ranked people. Unemployment in the industries is caused due

to large number of shutdowns. The industrial sector at the current era is working backwardly,

because of which less employees are hired to work. Due to gas and electricity shortfall the

existing industries are weakening that result in the current unemployment ratio. Less numbers of

industries leads to less number of production, followed by the increase in prices of the products,

causes decrease in the demand of products, creates lack of interest in production of goods, that is

reason why manufacturing industries ratio of unemployment is much higher than the services

sector. Workers are hardly able to work half day in the firms due to energy crisis the industries

are facing who are working currently in the market.

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CONCLUSION

The industrial sector plays an important part in the economic growth of a country. With the

energy crises in Pakistan every sector has been affected particularly the adverse effects can be

seen on the industrial sector. Almost every industry has become a victim of energy crisis and

because of this; shutdowns and unemployment have become the major threat with which the

economy has to deal. The problem is getting severe day by day, and if the situation remains the

same the country would completely be dependent on other countries for production and supply of

goods and basic necessities of life. So in order to handle this curb Pakistan has to focus on its

energy utilization’s plan to face the current situation, before it’s too late to handle. The upcoming

impact will be more drastic as it leads to high prices of products, increased taxes, no export, low

standard of livings and etc.

Government should come up with effective power policy. There are alternate resources of

energy to produce power such as solar energy, wind energy, biogas technology, biomass,

geothermal power and proper usage of coal, government should utilize them in the most

effective way possible as the problem is not the lack of resources but the utilization of the

resources.

Other than that, as for the short term solution in order to reduce the impact of energy

crisis on industrial sector, proper management is necessary. Load shedding hours should

be reduced with a proper schedule notice issued to the industries mentioning their time

slot so that they can utilize that time in other ways.

Tax rate should be reduced from leather and textile industries which are the largest

contributing factor to GDP from their exports until the energy crises issue gets resolved.

Gas supply must be reallocated and should be provided to the production sector rather

than transportation sector.

If these issues are not seriously taken in concern by government, it will end up crunching the

economy.

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impact of pakistan's energy crisis on the manufacturing industry

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