Global headlines have been screaming steel-first, skyrocketing prices, then the landmark Mittal-Arcelor deal. What does it all mean for the Middle East? A closer look.
Steel has made global headlines lately. London-based Lakshmi Mittal's $ 32.5 billion dollar deal to acquire European steelmaker Arcelor, after a bitter fight, has combined two biggest steel companies in the world, ushering in an era of consolidation. And China, which has drunk in steel over the past few years in a frenzied construction putsch, also promises to put the brakes on its consumption, especially following the Olympics in 2008. Developments, developments... What do they mean for the steel industry-and prices-in the Middle East?
Worldwide demand
This year alone, worldwide demand for steel is expected to grow by 7 per cent, fuelled mainly by a burgeoning economy in China, despite efforts from its government to rein in rapid construction growth.
Although it produces around a quarter of the world's steel, China still imports one-third of its requirement, and demand from the country's construction market is expected to reach 13 per cent of total world production this year, compared to 4 per cent in Europe. According to estimates from the International Iron and Steel Institute (IISI), global demand for finished steel products will be between 1.040 billion and 1.053 billion tonne in 2006, compared to 972 million tonne in 2004.
The Gulf outlook
First, let's examine the outlook for the steel industry in the region. In its forecast for 2006, the IISI predicted that the use of steel will increase owing to global economic growth and rapid development in countries with high growth rates, such as India and China. It is estimated that demand for finished steel products in the Middle East grew from 34.7 million metric tonne in 2005 to 37.6 million metric tonne in 2006.
This is expected to escalate to 40.7 million metric tonne in 2007. And 3.4 per cent of the world's total steel production was used across the region last year. IISI also warned, though, that the cost of raw materials and energy will continue to represent a major challenge for the world steel industry.
"Steel is a strategic industry in any young country's economic development," Vikram Bhatia of Alam Steel, told Gulf News. And steel has been vital to countries like the UAE, where construction is such a key constituent of the GDP. And according to Harjit Singh Gouri of Alloy Steel Trading, "The steel market will keep growing over the next decade as steel is the critical raw material for all infrastructure development and construction activity, which is on the rise in the UAE."
The state of the art buildings springing up on a daily basis across the UAE are indeed unimaginable without the use of structural steel. "The high amount of load created by these structures can be withstood only with the support of structural steel in the form of large-sized beams and columns," Siddharth Balachandran, Managing Director, BUMGA Group, told media. "Steel is an optimal material owing to its strength and ability to adapt."
Pricing power
In recent times, the world has witnessed record global prices spurred by high demand and the Middle East is no exception. The long list of ongoing projects in the region should continue to drive demand and, consequently, prices. Meanwhile, analysts are of the opinion that the Mittal-Arcelor deal will usher in not just consolidation but an end to cutthroat competition and volatility of prices; a new era of control and stability in the fragmented steel industry.
In the UAE, which is dependent on imported steel, prices have skyrocketed in recent years, bringing cheer to manufacturers and trouble for builders, who have had to re-budget projects and even alter timelines for deliveries because of short supply. The raw material cost of steel is up to about 30 per cent of the total building cost and volatile prices have been having a considerable impact on small and medium-sized companies, which cannot afford to buy large quantities from major suppliers or guarantee prices for more than one week. "Our market is experiencing an unprecedented boom in construction, and steel as a commodity is currently in shortage owing to total current world demand exceeding output," Bob Fletcher, Commercial General Manager, Corus Middle East, told the press.
Production and capacity
This brings us to the question of capacities in the region. According to Metal Bulletin Research, "The Middle East is home to one of the most vibrant and fastest growing steel industries in the world." Indeed, steel production has risen dramatically in the past five years driven by the availability of cheap feedstock, economic growth, huge investments in mega projects and the construction boom. Production of Arab iron and steel products exceeded 19 million tonne in 2005, up 27 per cent on the previous year. And from now until 2010, approximately 40 projects and expansion plans in 12 countries in the region will come on-stream.
While many countries in the region produce steel, major players are Iran, Saudi Arabia, Turkey and Egypt.
There are many small steel manufacturers but major players are Hadeed in Saudi Arabia, Qatar Steel Company (Qasco) in Qatar, NISCO in Iran and Al Ezz Steel in Egypt.
Although the Middle East is a cost-competitive producer of steel, primarily owing to low gas prices, the region is not immune to other variables. Steel producers have to import raw materials to produce the steel, which includes iron ore, direct reduced iron (DRI) and ferrous scrap. Thus, the region cannot be isolated from events in the international market. As prices are driven by worldwide supply and demand, a limited duty protection should offer enough protection for local manufacturers. Higher duties may well kill competitiveness in the long term.
Future watch
Looking to the future, capacity expansion seems to be the order of the day. Qasco and Hadeed, for instance, are taking this route. And the latest addition to Al Ezz Steel is Al Ezz Flat Steel, a hot strip mini-mill (which feeds recycled steel into a furnace to reprocess the material into finished steel) with a 1.2 million tonne per year capacity of hot rolled coils.
Late last year, Abdulla Mohammed Al Roken, Deputy Director, Industrial Development Directorate, Ministry of Finance, Dubai, issued a statement year encouraging more domestic production of steel to reduce the dependence on foreign imports. And people are taking note. Oasis Metal Manufacturing, a subsidiary of Al Shirawi Group, has stepped up its investment in the steel sector. The company recently started manufacturing industrial steel gratings at its factory in Al Quoz and expects production capacity to be sufficient to meet demand in the UAE.
Another company making rapid strides is the Abu Dhabi Pipes and Profiles Company (Adpico). Part of the Safa Group, Adpico, which makes steel tubes and profiles for the construction sector, currently produces 1.5 million tonne of steel piping across eight mill lines, and is in the process of commissioning two more. Adpico is expanding in the US, Canada and Europe and also plans to launch galvanising products and API pipes of up to 24 inches.
Alternate routes
Alliances, JVs and mergers are other routes to offset the shortage. For example, the latest buzz is that India's Essar Group is planning to set up three steel plants in the Middle East by investing $ 1.5 billion as part of its regional expansion plans.
Essar has signed a 50:50 JV with Qasco to set up a 1.5 million tonne a year steel plant, a 1 million tonne steel rolling mill at the Hamriyah Free Zone in Sharjah and a 1.5 million tonne a year steel plant in Iran. "Our philosophy has always been to have (steel) production capacity in markets which are growing and have a captive need," Anshuman Ruia, Director, Essar Group, told The Economic Times. "The Middle East is a very important part of what we are doing because most of our businesses are very energy-centric. We believe we need to have a much bigger presence here." Nobody's complaining.
Also wanted: Cement!
It's not just steel that's in demand in the Middle East. With projects to the tune of about $ 62.9 billion currently under development, cement is another sought after commodity among GCC states.
Just look at the amount of construction going on! Dubai has the biggest proportion of projects in progress with a massive total of $ 42.5 billion, ranging from the offshore island reclamations to a light railway and new airport terminal. In Saudi Arabia, the biggest project is the $ 1.5 billion expansion of King Abdul Aziz Airport.
Meanwhile, Qatar has its Qatar-Pearl offshore island and new airport; Bahrain its causeway to Qatar and real-estate projects; and Kuwait two big island development projects. Even Oman has its waterfront project, The Wave.
All diverse entities with one common need: cement. Tonnes and tonnes of it, literally. Where will it all come from?
Well, regional producers are set to increase capacity by 24.6 million tonne per annum over the next 24 to 30 months, with more than 90 per cent of new capacity being built in the UAE and Saudi Arabia, and $3 billion of investment. Analysts expect total capacity to rise from 36 million to 60 million tonne per annum by 2007.
There is a problem though-there is a long lead time in installing capacity, which takes 24 to 30 months to come on stream. Investments are also enormous, and there is a fear that by the time the cement becomes available, demand may decline.
In its analysis of the situation, HSBC Bank maps out several scenarios which examine when supply might outstrip demand. Over the past three years, regional consumption of cement has grown by 13 per cent per annum, and at a 12 per cent growth in demand HSBC sees supply and demand in equilibrium by 2007. On the other hand, if growth slows to 8 per cent, an oversupply situation emerges in early 2006.
But in view of the fact that new construction projects are being kicked off each day this hardly seems a likely prospect. The HSBC report also highlights the advantages of consolidating the widely fragmented cement industry in the GCC states to reduce costs and open up the sector to foreign ownership. Let's wait and watch what happens.
© Construction World 2006
