The Kingdom thus remains one of the largest players in the Middle East-Gulf region's steel industry both in terms of steel manufacturing capacities and consumption. It is in this context that industry leaders see extreme volatility in steel prices.

Steel is a key metal used extensively in the region's core sectors, which has seen extreme volatility in recent months," Muhammad Alghamdi, a member of the Jeddah Chamber of Commerce and Industry, told Arab News. This is fueled by fluctuations in demand and supply, sentiment, freight rates and rising costs of raw materials.

Crude steel production capacities in the Arab region are growing at over nine percent and are expected to reach 32 million tons in 2010.

"The high volatility witnessed in steel prices is unusual. Its severity is evident in shorter price cycles, which have reduced from 5-7 years in the 70s and 80s to 2-3 years in the 90s, further shrinking to a mere 4-5 months in recent months," a senior executive of a major steel entity said.

Taking into consideration the number of construction projects in Saudi Arabia lined up for this year and next, John Short, executive director, Steel and Base Metals, Dubai Multi Commodities Center, told Arab News in an online interview that although there is no shortage of rebar steel, the Kingdom is still not making all it requires, instead imported billet and new rolling capacity will meet the existing demand.

"Pricing trends seems to be lull during the summer period, but there is no dominant seasonal pattern as such. Rebar steel prices in the Kingdom are set by Saudi Basic Industries CorporationSaudi Basic Industries Corporation, which reflects international pricing and also uses Dubai as a key benchmark. Like all international commodity prices, the volatility in steel prices is also reasoned by fundamentals and sentiments," he added.

No one can hedge prices yet as there is no exchange on which to do so anywhere. Ninety percent of international trader's activity is either going long (buy first/sell later, because prices are anticipated to rise) or going short (sell now, buy later, because prices are anticipated to fall). Most local buyers tend to buy first and then conduct sales, but they often get it wrong (sales prices decline while costs have been fixed). It is in this context that the Dubai Gold & Commodities Exchange (DGCX)Dubai Gold & Commodities Exchange (DGCX) Steel Rebar Futures Contract being launched next month assumes importance. It aims to provide a vehicle for producers, traders, processors and contractors to manage risks associated with extreme volatility.

Prices for steel rebar rose from $600 a ton in March CFR landed price at Dubai's Jebel Ali to $655 a ton in May. Prices fell since then, touching $575-585 a ton in the last week of July, before climbing back to $620-625 a ton in early August. Prices of correlated steel -- billet, wire, rod, have suffered similar, if not such extreme movements, he added. Rebar finds significant usage in real estate, construction and other key industries in the Kingdom and the rest of the region. Rebar constitutes 80 percent of all steel used in the Gulf, especially in the UAE, Short said.

Around 80-85 percent of the rebar is made from scrap and the rest from iron ore and coke. In most of the Gulf countries almost two-thirds of the steel used is rebar. The rise in steel prices also reflect the steep increases in the cost of its inputs -- coke, iron ore, and to an extent, scrap, not to mention energy as well. The price of rebar correlates to the price of scrap. The CFR landed price of rebar has climbed higher despite conversion cost remaining the same.

Reason being it factors in the build up of freight cost, as scrap is moved from its source to the point of conversion, and from then on to Dubai.

Other factors pushing up steel prices include a weak dollar against foreign currencies, especially the euro and yen, rising cost of ocean freight, higher natural gas prices and requirements in Iraq and Afghanistan.

DGCXDGCX Chairman Colin Griffith said: "Steel rebar is a fundamental commodity for the economy of Dubai and the UAE, and its price is highly volatile. This futures contract will provide a vehicle for producers, traders, processors and contractors to manage the risks associated with this volatility. At the same time it will be an important investment tool for those who follow the prices of basic raw materials that are driven by economic activity in Dubai." At the time of the launch DGCXDGCX will list three delivery months, initially from December to February. Additional delivery months and a weekly delivery cycle will be added as market liquidity grows.

The exchange has also listed the initial batch of approved producers for the contract. This first wave of approvals included Al-Tuwairqi GroupAl-Tuwairqi Group (Al Ittefaq Steel ProductsAl Ittefaq Steel Products) and Sabic Steel (HadeedHadeed) from Saudi Arabia, and Qatar SteelQatar Steel from Qatar.

In addition, several others are expected to be approved before the launch next month, prime among these being Turkish producers. The reason for listing approved producers and approved physical product is that buyers and sellers know with certainty what steel can be delivered, and that all users of the exchange know with similar certainty exactly what specification or brands of steel they are pricing.

Griffith said "the interest shown by steel producers reflects how important a steel derivative is to the physical steel market in the region and beyond.

The much-anticipated Steel Rebar Futures contract is an offering that will enable investors to hedge against the cascading effect of volatile steel prices."

With the introduction of futures in steel, the physical steel supply chain is expected to be in a better position to fight price volatilities, which were estimated to be in excess of 15-20 percent.

© Arab News 2007

 

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