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Gulf
Construction
When supply meets demand The soaring price of steel spells trouble for the regional construction industry. By Guy Brown DUBAI |
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It’s as simple as the law of supply and
demand. The current construction boom in the Gulf has led to greatly increased
demand for materials – especially steel and cement – and that, in turn,
has caused prices to skyrocket. Between November 2003 and April 2004, for
instance, UAE steel prices doubled to nearly $540 per ton; during the same
period, prices for cement rose by 50 percent.
That’s obviously good news for
producers, at least for the immediate future, but rising prices could spell
disaster for regional construction firms. The steel industry, in particular,
must now strike a fine balance between short-term profitability and long-term
sustainability.
Global and regional demand has risen to
such an extent that steel shortages are now delaying construction projects.
According to MEPS, a consultancy operating in the steel sector worldwide, a
severe steel shortage has compelled Middle East manufacturers and marine
construction companies to reschedule
The squeeze on steel supplies is likely to
be maintained for some years, given major pipeline construction activity
throughout the world. According to MEPS, proposed pipeline projects alone may
consume up to half of available steel worldwide. The oil pipeline that runs
from the Caspian Sea to the oil port of Novorossiisk in northern Russia is
made with 1.6-meter diameter steel pipe and runs for
1,500 kilometers. That project alone will have a marked impact on prices.
Regional growth. “The Middle East is
home to one of the most vibrant and fastest growing steel industries in the
world,” according to Metal Bulletin Research. At 12.9 million tons in 2003,
steel production in the Middle East is modest for an emerging market, but
enjoying healthy growth. The region’s steel output is up 10.5 percent for
the year to date, and production of 14.5 million tons is forecast to year-end.
While many countries in the region produce
steel, the major players are Iran, Saudi Arabia, Turkey and Egypt. “Iran and
Saudi Arabia are particularly large, each producing both long and flat
products,” says Brian Levich, senior steel analyst at Metal Bulletin
Research.
There are many small steel manufacturers
in the region, but the main players are Hadeed in Saudi Arabia, Qasco in
Qatar, NISCO in Iran and Al Ezz Steel in Egypt. Qasco and Hadeed are among the
producers planning to expand. Levich says the region has some good steel
mills, including Al Ezz Steel. He credits the company’s relationship with
its customers and the caliber of its clients.
The latest addition to Al Ezz Steel is Al
Ezz Flat Steel, a state-of-the-art hot strip mini-mill with a 1.2 million ton
per year capacity of hot rolled coils. A mini-mill is a steel production
facility that feeds recycled steel into an electric arc furnace to reprocess
the material into finished steel for new applications. Hot rolled coils are
particularly sought after in automotive applications. Italian steel technology
supplier Danieli built the plant, and retains a stake in the business.
This is a rare example, however; foreign
investment in the region’s steel industry is minimal. Any foreign investment
in Middle East steel is usually on a joint-venture basis. “Some steel
shareholdings are still with the government, so the notion of majority foreign
investor remains politically awkward,” says Levich. One notable exception is
Ispat Algeria, which is a foreign-owned steel mill. Karel Costenoble of
MEsteel.com, a regional B2B steel portal, adds that in Turkey, major players
like Arcelor are investing in joint ventures, but in the Gulf there are no
foreign investors in the steel makers.
Small world. The Middle East region is a
cost-competitive producer of steel. Levich attributes this primarily to low
gas prices. However, 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. DRI is processed iron
ore that is iron-rich enough to be used as a scrap substitute in electric
furnace steelmaking. “The Middle East industry is not completely isolated
from events in the international market,” says Levich, who points out that
raw material costs have increased due to strong demand.
There is room for performance gains,
though. “There should be more investment in some companies; some do not
produce as much steel as they should,” says Levich. However, this investment
should come from the private sector, he says.
Quantity and cost are not the only issues.
Steel is not a single commodity: there are currently more than 3,500 different
grades of steel with many different properties – physical, chemical and
environmental. According to the International Iron and Steel Institute, 75
percent of these have only been developed in the last 20 years.
“The driver of quality increases is the
consumer, who is happy to have average steel, as most goes to the construction
market,” says Levich. In the medium to long term, however, it is risky to
rely on basic steel products for construction alone. The demand climate at the
moment provides the region’s producers with a generous window during which
they can improve quality and develop more valued-added products.
Added value. Karel Costenoble of
MEsteel.com says steel mills in the region already produce a good variety of
products, and are investing where needed, in value-added products. But he says
that there is a limit to the possibilities with highly specialized steel
products because local consumption is insufficient to support regional
players.
Not surprisingly, there is a high degree
of state involvement in the region’s steel industry. For instance, most of
Iran’s industry is in government hands; Hadeed is part of Sabic, again
government-related; and part of the Egyptian and Pakistani steel industry is
state-owned, says Costenoble.
“Prices are driven by worldwide supply
and demand,” he says. “A limited duty protection – for example, five
percent in the Gulf – should offer enough protection. Higher duties will
overprotect the local industry and kill competitiveness in the long term.”
Industry alliances could enable players to benefit from synergies, he adds.
For regional construction firms, mergers
may also soon prove necessary. Small firms in smaller Gulf markets – such as
Oman – are already facing a serious cash crunch and may have to choose
between selling out or going bust. Today, any slowdown in government spending
on new projects will drive these companies right out of business. For the
regional steel industry, that could prove disastrous: construction would slow,
competitiveness decrease, and both demand and prices drop. It’s a delicate
balance, and one that may not hold for long.
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