Steel is the world’s largest metals market. More than 1.2 billion tonnes will be produced in 2009 and it is worth more than half a trillion dollars. Almost 50 per cent is produced in China.
Practically all of it is directly traded. Negligible amounts of the growing volume of steel moving across borders are exchange-traded. This is convenient for an industry still driven by giant smelting corporations that dominate the iron ore market and determine the downstream balance between demand and supply.
The experiences of the past two years could change that. World steel demand is projected to be at least 12 per cent lower in 2009 than it was in 2008. This is one of the largest declines in consumption ever recorded. And after reaching a record high in the summer of 2008, steel has suffered its sharpest absolute price fall. By the start of 2009, it was selling at less than $400 a tonne in some markets.
The unprecedented volatility reflects profound structural change. North America and Europe, once the masters of the industry, are now comparatively minor players. Ore and steel production is becoming increasingly concentrated. More than 80 per cent of the world’s ore comes from five countries: China, Australia, Brazil, India and Russia. India’s ArcelorMittal, the world’s largest producer which was created through mergers and acquisitions over the past two decades, delivered more than 100 million tonnes in 2008. The struggle for market share among the iron and steel behemoths is setting the scene for more big price swings in the future.
This is stimulating interest in steel futures trading. Earlier in 2009, the Shanghai Futures Exchange launched futures contracts in rebar and wire rod. They account for about 30 per cent of Chinese production. It is a sign Chinese smelters are finally prepared to relinquish their grip on prices and rely on the market.
The turmoil has had consequences for producers in the Middle East region, the world’s largest buyer of imported steel. It has been compounded by the collapse of the Dubai projects market. Final UAE consumption is estimated to have fallen as a result, by about 50 per cent in 2009 to little more than 3 million tonnes. Despite accelerating a public capital spending programme in Abu Dhabi, there is little prospect that demand will rise in 2010.
Sharply lower prices, meanwhile, are raising questions about plans to increase Middle East crude steel capacity. Further expansion at the Saudi Iron & Steel Company (Hadeed), the GCC’s biggest producer with capacity of just under 5 million tonnes, is now being reconsidered. Saudi industrial planners are rationing future supplies because of severe gas limitations. The steel industry is not a priority.
It is, therefore, even more remarkable that Abu Dhabi has chosen this moment to embark on the most ambitious steel development programme in Middle East history. This summer, Emirates Steel Industries (ESI), a division of the government-owned Abu Dhabi Basic Industries Corporation (Adbic), unveiled plans to have crude steel production capacity of about 6 million tonnes in 2014. The company’s initial DRI plant, the first in the UAE with capacity of 1.6 million tonnes, opened in February. Construction of a second unit to raise capacity to 3 million tonnes is ahead of schedule and should start production in early 2011. Two more DRI plants are planned to double capacity again to the announced target.
It is also understood that ESI is buying two downstream producers: Shadeed Iron & Steel, an integrated producer owned by Abu Dhabi investors that is based in Sohar, and Union Steel, a rebar maker in Mussafah industrial estate close to the first two ESI plants.
ESI is expanding its range of downstream products and backing metal city, a planned industrial estate in Taweelah. ESI is also considering investing in a pelletising plant in Abu Dhabi.
The steel programme constitutes a new industrial revolution for Abu Dhabi and the UAE. With huge volumes of competitive steel being produced in Abu Dhabi, it is likely that downstream production will shift into the emirate. And in not much more than five years, the UAE could be the GCC’s largest steelmaker.
Sceptics wonder how Abu Dhabi steel will fare as the battle of the global steel titans intensifies. Its sponsors are confident. Abu Dhabi’s strategic advantages include its expanding gas resources, financial strength, willingness to buy the best technology and management talent and location at the heart of a region forecast to need more than 80 million tonnes of steel in 2013. By global standards, it is a small player. But in the conflict with Goliath, David won.