GVS: I want to start by saying congratulations on your excellent results that came out a couple of weeks ago. We have been in a Corona pandemic for the past year and are currently in the midst of Corona wave four. You have a large workforce; How did you manage it?
Jahangir Piracha: Unfortunately, it was something which you can never plan for. Maybe we would start doing that sort of planning in the future, but initially, I think it was a bit of a shock; we went into a lockdown.
The entire industry was shut down in Karachi, but when the permission came through with the SOPs, we were one of the first to open up with a very high level of compliance. Also, luckily for us, we had an ongoing project at our site where we had almost 400 Chinese contractors.
They were great role models for our workforce because China, which was amongst the first one to be hit with COVID-19, was already dealing with this issue. Hence, a high level of awareness was there – they started following the SOPs, and then our Pakistani workforce followed, making it easier for us.
We were executing an extensive project, so normally, if we have 1200 people at our factory with the project, it was double, so it was challenging to change their behavior. No one initially believed this was such a severe issue, but enforcement and advocation helped.
Another problem was getting some of the experts, as you need them to come into the country. Fortunately, we got a window in December 2020. Some Japanese experts flew in right before the lockdown, but they were then stuck in Pakistan for about four months.
Alhamdulillah, we were able to complete the project and run our other operations during all that time, and we were then able to commit to commissioning our new Plant in March this year.
GVS: Despite Corona, we are currently in the midst of a construction boom, which must be benefiting your industry. Tell me, because many people don’t know, how is PVC used in the construction sector?
Jahangir Piracha: This is an excellent question because people generally correlate construction with cement and steel, since these materials are the first ones to go into the foundations of a building.
When you look at any building, some PVC is used as the grey structure is coming up and a lot when the finishing elements of building itself are being done. Let me explain what PVC is used for in a construction project. You start with the pipes which go into the sewers, all made of PVC; all your drainage is of PVC pipes.
Your cold water pipes are all PVC. The green ones you see are for the hot water; those are not PVC but another material, PPRC. Then the entire electrical cabling you have in your house; when you look at the cable, you don’t see or touch the metal, the copper; the material you’re feeling is the PVC.
All your cable insulation is PVC. All big cable manufacturers in Pakistan buy PVC from us, which they use as an insulator on their cables. Some of the modern houses that are coming up are replacing wood with PVC windows which look nice and beautiful. As we advance, I see doors also being made of PVC.
GVS: Is that because, unlike wood, these doors don’t expand and contract with the weather?
Jahangir Piracha: Absolutely, all sorts of issues come with wooden windows; maintenance, construction, and even the sustainability part; you cut down forests for wood.
A very recent product that is taking off are kitchen units that are being made with PVC because kitchens typically have a lot of water being used, where again you see the problem of expansion, with the marine board or chipboard .
This new material is plastic, although it looks like and feels like wood, but it does not expand by water and has much higher heat resistance. 70 percent of our production goes into construction at all levels of products.
GVS: With the Naya Pakistan housing scheme that the government has launched and the construction package they gave last year. Have you seen an increase in demand for PVC?
Jahangir Piracha: Absolutely, as buildings or houses get built, our materials go in as well. However, there is normally a lag; the cement and the steel usually go in first when the foundation is being built.
There will be a lag of around six months to eight months when PVC products start being used. Now that the lag has passed, we are seeing that benefit substantially reflected in our sales as our customers are using more of the products. The use of electrical cables is also expanding in this zone, which is another boost.
GVS: Do you think this is why your last half yearly results were exceptionally high because we have come through this lag effect?
Jahangir Piracha: We started seeing the increase from March onwards because winters generally in Pakistan have little construction, especially in northern Pakistan, where it gets very cold.
Then you have the monsoon season, which also has minor construction, but the rest of the year is pretty ok, and I see the momentum now building up. Everyone in Pakistan has now realized that this is one area where the government should support.
If you see the US, UK, Japan, Australia, mortgage rates were dropped and this was followed by a construction boom when that happened. The sector is easy to open, and unlike the retail sector, where there is more open access of people, it is controlled.
You can construct and control the SOPs and simultaneously get your economy running. It creates jobs across many industries, around 40 or so ancillary industries. One downside now is that with the international construction boom, like other commodities, the prices of steel, cement, and PVC prices have gone up across the world.
GVS: I came across a number that showed that when you looked at PVC, GDP per capita usage was significantly lower in Pakistan compared to its neighboring countries. Why is that? Although, you pointed out many advantages to consumers to using PVC?
Jahangir Piracha: It is not just PVC; it is plastics in general. We use 7 to 8 kgs per capita, while it is 12 kgs in India, 50% more than Pakistan. Because Pakistan, unfortunately, never
developed an indigenous petrochemical industry, we do not have any petrochemicals.
We are one of the few companies working in plastics, so there is very little investment in the sector overall. It has been observed that plastics per capita only increase when you have local production, making the supply chain easy for your downstream converters. Plastics have many uses, but Pakistan does not have a plastic base.
For example, when you buy an air conditioner, you buy plastic; when you buy a car, you buy plastic. Plastic is used in many products, so the point is that if we do not make such products in our country, there is less demand for it. People do not buy plastic by the kilo; its value will be there as different products, and that is what I have been telling the government.
When Korea exports plastics, it is in the form of an AC or a mobile phone; nobody is selling you plastic resin. It is sold as part of a product, and it has to be a high-value product, and because we do not have as much value addition, we are at a very basic level; selling plastic as basic pipes, cables, and maybe doors but were not making many high-value products.
GVS: What do you need to make these high-value products. Is the government not boosting the right sectors or giving the right policies, or are the producers making enough profit from low-value products that they don’t need to move higher yet? What is the reason that’s keeping us at the low end?
Jahangir Piracha: I think the government is doing its bit. Two policies have come in recently; one was the automotive policy where lots of new cars have entered the market, and lots of plastic parts will be used in them; hence that will contribute to an increase in plastic consumption per capita.
Similarly, a mobile phone policy has also come, and they also have parts that are made with plastic. But what we are doing is just by bits and pieces; we do not have the scale. We do not make a million cars, or we do not make a million air conditioners, so if we start scaling up our industry, which is happening, there has to be a market for it, and Pakistan has an economy that’s still in a very low GDP.
GVS: When you say there has to be a market for it, what are you as a company doing to increase awareness of these products for the end consumer?
Jahangir Piracha: We have taken a start in this direction. We have opened up a retail shop for our customers where we are now highlighting the possibilities/products which can be made with PVC. We are specifically focusing on PVC, but it can be for other plastics also.
We have opened the first outlet in Defense, Karachi, and the idea is to open one in Islamabad and then in Lahore. We are not looking for a footfall that will come in byproducts but ideally, builders, architects, and general consumers get to see all the possibilities.
It is a big shop with four stories; on the first, we start with the basics (products you need when you start building) where we encourage you to start building and lay your pipes and electrical cables.
As you go up in that building, the displays change to garden chairs, garden hoses and so on. Going further up, you see kitchens, windows, doors, and those are the kind of products with which people are generally stunned, learning of all the possibilities with PVC.
The best bit is that it aligns with the government’s policy of preserving natural resources because using wood products requires cutting down forests, and we are presenting an alternative. If you go to the Western World, PVC is used extensively to save forests; in England, everything is PVC.
GVS: What is PVC like on the pocket of the average consumer?
Jahangir Piracha: If you compare the overall value with wood, it’s a good replacement. There are four possible types of windows you can make. Straight forward Iron windows that do not look very nice, aluminum, and then on the higher end is wood.
It is not the cheapest product, but I would place PVC below wood in terms of cost, but with fabulous aesthetics that you can never get with iron or aluminum, and without the added maintenance.
GVS: You mentioned sustainability, which is something very close to the Prime Minister’s heart and increasingly the consumer’s hearts, along with innovation. How has that changed the nature of your business?
Jahangir Piracha: For sustainability, we have crafted a three-pronged strategy. First of all, we all know of climate change, and some things you do will have a global impact. As a country we are contributing to it, so our primary endeavor is to reduce our own carbon footprint, which can be achieved with all sorts of efficient products to bring it down.
You cannot reduce your carbon footprint numbers beyond a certain point, which is when offset projects are used. To offset our footprint totally, we would need to plant around 15,000 acres of forest.
We are in the process of signing an agreement with WWF and a Ministry of Climate Change; a tripartite MOU would get signed where we are looking at planting around 5,000 acres of mangroves in the coastal areas of Karachi. They provide many valuable functions other than carbon sequencing; they safeguard the coastal belt and help in fish production.
The second part will be 10,000 acres in the mountains of Pakistan, which could be Gilgit Baltistan, Azad Jammu, and Kashmir or Khyber Pakhtunkhwa. When one of these provincial governments permits us, we will plant these trees. Once we achieve that, we will be carbon neutral as a company.
Another important aspect for us is doing our bit to help to reduce water scarcity, which we will do by reducing the water we are taking in as an industry. We compete with 20 million people living in Karachi when it comes to water consumption, and water is also costly.
The idea is to release the excess water and bring in efficiency, and recycling projects, to reduce our water dependence. The last initiative is that of plastic. Recycling has a significant problem, especially since Pakistan does not have an extensive recycling endeavor.
There is some effort by a few multinational companies, such as Nestle and others, in the name of an organization called ‘Core Alliance.’ We have become a part of this organization, and the idea is to create a very high-quality plastic recycling plant in Pakistan.
We are right now importing lots of waste from the world. Would you believe that when you bring in waste, people pay you for it? A city like New York will pay someone to take its waste away, and a lot of this waste is coming to Pakistan; somebody is paying to dump it here.
We are not necessarily saying to stop it since many livelihoods are connected to it. Our objective is to recycle the waste that is being shipped from all over and make it productive. Rather than importing, let our recyclers use this waste. Nobody has yet tried to organize this, and recycling has to be the game in focus.
GVS: How would you succeed when New York city has not managed it?
Jahangir Piracha: We are looking at three cities in Pakistan where we will do the pilots. Not the big metros; we will start with three small places where recycling can be done and how we can create them into viable places. Because otherwise, if plastic usage keeps going up and we do not recycle, and you keep creating virgin resin, you will keep adding to the issue.
Fortunately for us, single-use plastic is only 7 percent of our product, usually wrappers and other stuff. Most of it is not single-use as it goes into pipes and cables which are in buildings for almost 30-40 years, and even when you demolish, there is a value as you can still recycle them. Our initial aim is to attack and reduce single-use plastics. In the short term, recycle at least 7 percent, and when the industry develops, this can also be further increased.
GVS: Regarding the industry development, Engro Polymer & Chemicals has been undergoing an expansion plan itself. Where is it at this stage?
Jahangir Piracha: In March, one part of that expansion came online, commercial operations started, and the second part of that expansion just finished in June. For now, our expansion
has been entirely done and dusted, and almost 300,000 tons can now be produced in Pakistan.
However, our goal is about 400,000 tons. Economies of scale kick in when you have 400,000 tons; you need that to be competitive and provide the right price. It is true for anything we make in Pakistan.
If somebody is making 2 million smartphones and you are making 100,000, you can never have economies of scale. In India, the typical factory produces 2 million cars while we produce maybe 50,000 cars, so the economies of scale never kick in for us. In petrochemicals industry, another 100,000 tons and we have the economies of scale with which we could compete with anybody in the world.
GVS: Why didn’t you go for the 400,000 ton plant straight away?
Jahangir Piracha: Ideally, you need to have the market, which right now is about 250,000. Generally, what you do is you do not design the entire plant to have too much excess capacity. Local demand is about 250,000 and 90-93 percent of the market share is with us now.
We keep ourselves very competitive, and our primary competition is from imports. Nobody is stopping anybody from importing, and if its cheaper from outside, that’s what the consumer will do, so we have to keep our pricing accordingly So we will start with exporting some part of it, and luckily we are in Karachi, making it is easy.
We have already started exporting; we did about $11.5 million worth of export in the first half, and I see us finishing the year at $25 million. So our next project could go to 100,000 tons.
GVS: The IFC recently gave you $15 million; where does that fit into this whole scheme of things? What are you going to do with that money?
Jahangir Piracha: IFC has been a partner with Engro Polymer and Engro Corporation for lots of our projects. We have sustained a 30-40-year-old relationship. They have always been very interested in anything we do. They are always the first ones to come in and talk and show an interest.
We are putting up a Plant to produce hydrogen peroxide, which is utilized by lots of industries. It is widely used in textile processing industry., the food industry uses it in Tetra packs for milk packaging, and so on.
We produce hydrogen as a side product and then burn it in our boilers and furnaces, which is not the best use. Ideally, you want to create it into a value-added product, so that is the value addition that we will use the Plant to bring to the hydrogen. It is about a $37 million project, and the $15 million is coming as debt from the IFC.
GVS: You mentioned the role of import substitution earlier; if we look at the petrochemicals sector generally across the world, it plays quite an important role in developed countries for sure what do you think on how it needs to be developed in Pakistan? What role can you play to develop it in Pakistan maybe and help us with our exports? Where do you see yourself going in the future considering the PM’s vision of 2025?
Jahangir Piracha: We are now importing almost $3 billion worth of petrochemicals, so a considerable amount. Primarily I feel that we, as Engro Polymers, are currently providing an import substitution of around $160 million; that is a lot of money you are saving as a country, and this is after we have to import some of our raw material, the overall net saving is $160 million.
For people to start investing, they need a long view of how the government will deal with this sector. The automotive and mobile industries both have a solid policy, and currently, it is in the news that they are working on the refinery policy, but Pakistan does not yet have a petrochemical policy.
If the sector had to develop without a policy, it would have developed by now, but since it has not, government policy intervention is clearly needed. We are currently in talks with some of the other prominent people interested in this sector, trying to pitch this idea to the government. The time has arrived for Pakistan, and they have to be quick about it.
A typical petrochemical project is a billion-dollar project, and the developmental time from the idea to actual production could be 6-7 years long. Designing takes two years; construction takes four years, so you need to start today for something that will come six years later.
The same is true for the refineries; they take 6-8 years, and a policy needs to come in since people need to believe that this will not be changed. Now the track record of the Pakistan all these years has been super good on consistency of policies.
We can be very sure that anything that has come as part of policies, they have followed through even if the governments have changed. We talk about many bad things about our government, but people do not realize one good thing is policy consistency.
So that gives investors confidence with these megaprojects; if the policy is in place, no changes will come as what is promised today would stay for the next 6,7,8 years.
GVS: What is the policy you want? Is there one or two key features that you can share with us?
Jahangir Piracha: Generally, what we looked at is what levers of policy other countries had. People used to compare Pakistan and South Korea, and I do not want to make that comparison; it is now a different Korea. Ideal places to compare now are places like Vietnam, which is probably the best comparison.
Egypt is an excellent example because it is under the IMF program and what they have achieved being under it. Typically government assurances of water, gas, availability of land in the right places are the first sort of levers you ask for.
The second could be ease of doing business; certain policies make it very clear such as bringing in an investment like CPEC. Financial incentives could be given, like Turkey giving salary support for the petrochemical industry; however, I do not expect that will happen in Pakistan because it will become very controversial.
They could give income tax exemptions like we are offering in the refinery industry, which is on future earning since they do not start for quite some time. Overall, external benchmarks should be preferred over internal, I think something similar to these mentioned countries should be offered because we will be competing directly with them.
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GVS: Looking specifically at your company, where do you see it going?
Jahangir Piracha: Our key focus is to be at a scale where we can be competitive; our mantra or key thing with the government is that we should expand to 400,000 tons; that is the next thing that makes us globally competitive.
You can’t run on the crutches of duty protection; I do not want to operate in that world but let me get to that size. Much support is available, and we do not need anything from the government; it is for us now to take the initiative and make it happen.
The government has done its bit; it has supported us till now through duty protections and is getting us to a level where we are about to become globally competitive in size. Then comes competing with the market for different products in other areas. The PVC could go into the value-added products and be used in Pakistan.
We are already increasing consumer awareness through our retail outlets, social media, and connecting PVC with sustainability. I firmly believe that we should not be cutting our forests for basic uses, especially if we can find an alternative. We need to focus our struggle on the bigger agenda; our children. We need to make the world a little better for them.