On September 29, the authorities outlined the investment package, part of broader plan to expand the manufacturing sector that it will eventually account for 15 per cent of GDP by 2020. The export-orientation of the steel production programme fits well with the Sultanate's broader industrial programme. The government has classified most steel products (including tubes and bars) as "medium value", the second of its four export categories. This indicates that the sector is "likely to grow rapidly", and has been targeted for potential support initiatives.

Steel billet production (that is, manufacture of semi-finished cast products such as coils and ingots) is currently in the third category. This means that exports currently earn the country less than RO5mn annually, but that the segment has been earmarked for development and making a larger contribution to earnings in the future. The rationale behind developing the steel sector further is clear enough. Global demand is strong, hence the export focus, but the domestic market is also growing quickly, with the Sultanate expected to consume upwards of one million tonnes by 2010.

Strategic advantages
Furthermore, Oman has several competitive advantages on which it aims to capitalise. Not least amongst these are a very favourable business climate and a growing pool of skilled labour (both national and, thanks to the country's openness, expatriate). Also important is the abundance of energy resources. "Steel production is an energy-intensive industry, so the availability of relatively cheap gas in Oman contributes to the location's attractiveness," says Suresh K Goswami, CEO of Sohar Steel.

Given the fact that other Gulf countries also have huge energy reserves and strongly pro-business economic policies, location is perhaps Oman's trump card. With its major ports outside the crowded Strait of Hormuz and troublesome Bab al Mandib, the Sultanate has unrestricted access to the Indian Ocean and the huge steel markets of South and South East Asia, as well as the smaller but fast-growing economies of Africa. The Sultanate is also building up a transport infrastructure to complement its geographic position and long-term ambitions.

The extension of the Port of Salalah's current capacity of around 2.5mn twenty foot equivalent units (TEU) to 9mn TEU, the proposed extension of a railway line from Sohar to the industrial centre of Al Duqm, and a motorway from Barka through Sohar to the border with the UAE are three other key projects facilitating transport to and from steel plants and other industrial centres and beyond to external markets. Oman's growing number of trade deals also makes the country an attractive location for the export-oriented steel sector. Indeed, Rizwan Sajan, Chairman of Danube Building Materials, cited, "The Sultanate's excellent relations with potential importing countries" as a key reason for his firm's $13.6mn investment in a new steel plant near Mabella, which was announced the same day as the government's package for the sector. Dubai-based Danube will import raw materials from a wide range of countries, including China, Turkey, Taiwan and South Korea, to its 4750sqm mill.

Sajan is bullish about the domestic steel market, which he sees as the ideal launch pad for Danube. He said in a statement: "We consider Oman as a key market for our high quality building materials, and with more construction and real estate projects emerging within the Sultanate, this is truly the perfect time to invest significantly in expanding our operations there."

The Mabella mill is one of a range of steel projects in the Sultanate. Another is Sohar Steel's new plant near the Port of Sohar. This made headlines earlier in May when it was commissioned to produce 200,000 tonnes per year of continuous cast mild steel billets for Sharq Sohar Steel Rolling Mill, the country's largest steel rebar producer. Its capacity is scalable to 500,000 tonnes per year, giving Sohar ample scope to meet future demand.

Another project that is central to putting Oman on the world metallurgy map is Shadeed Iron and Steel, the Sultanate's first fully integrated iron and steel plant. Located at Sohar Industrial Port, this should be producing 1.5mn tonnes of steel after the completion of its first stage later this year, and 2.6mn tonnes once the second phase has been brought on stream. 

Nose diving prices
The outlook for the steel sector remains positive, even after a sharp recent drop in the steel price from around $1630 a tonne in July to $950 in late September (for Turkish steel in the UAE, a fair measure for the region). The fall caused producers across the Gulf, including Sharq Sohar, to scale back production to lower operating costs as well as to reduce inventories and tighten the supply side to bolster the price.

There are several reasons for the fall in steel, including concerns about a slowdown in the global construction industry as projects come on stream and as lending conditions tighten due to the credit crunch. In the Gulf specifically, fears have been raised that a real estate bubble has been created that may soon burst - though the reality seems to be that oversupply may be occurring in some parts of the market while there is strong demand in others (particularly at the lower end - Saudi Arabia and the UAE in particular have substantial affordable housing deficits). There is also considerable evidence that the price fall is in large part attributable to speculators who had pumped up commodities such as steel and then dumped them - demand has certainly not dropped by 40 per cent. The knocking of speculative wind from steel is, in the long run, good news for producers and it should put the industry on course for steadier, more realistic growth rather than a boom-bust cycle. Analysts suggest that regional demand will start to climb steadily again. Imports of rebars are expected to hit 8 million tonnes next year, up from 6.75 million in 2008, indicating that there is plenty of room for Gulf-based producers to expand.

With India's economy expected to grow by 6 per cent this year and Africa's by 6 per cent, according to IMF forecasts, markets overseas also look robust in the medium term at least. Finally, it should be noted that $5bn, while a significant sum, hardly represents Oman hurling all its resources into one industry. Overproduction from a large number of plants seems unlikely, even if demand was to slow down unexpectedly. The Sultanate is not going to flood the market against its own interests. Overall the announced $5bn looks to be a substantial but sound and strategic investment in a sector in which Oman has several key advantages - and private sector players have voted with their feet to support it.

The author is Regional Editor, Oxford Business Group

By Oliver Cornock

© Oman Economic Review 2008

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