Saudi Arabia’s Al-Rajhi Steel is planning to fast-track the development of a $3bn steel complex because of a deadline on its gas allocation.

The project, to be developed at the King Abdullah Economic City (Kaec), has around 12 months to get financed or its gas allocation risks being revoked.

“Al-Rajhi has only got a finite amount of time, maybe just over a year, to get everything in place for this project,” says a source familiar the project. “Otherwise they could lose the gas allocation, as well as a large bond they have put up to the Ministry of Petroleum and Natural Resources. So the clock is ticking.”

Middle East steel demand*
Country Percentage
Iran 39
Saudi Arabia 22
UAE 15
Other GCC 8
Syria 6
Iraq 4
Others 6
*=2010. Source: MBR

In order to meet this timeline, the company is planning to start the prequalification process for the equipment procurement and engineering, procurement and construction (EPC) contracts in either October or November.

Several contracting sources confirmed that they were getting ready to participate in the prequalification process and also confirmed that Al-Rajhi was moving quicker than usual for such a large project in the kingdom.

The UK’s HSBC has been appointed as financial adviser on the debt raising for the project and Al-Rajhi Steel is understood to be in advanced talks with an international bank to appoint it to run an initial public offering (IPO) for the project company. The flotation is expected to be a par value IPO, where the company shares are offered at a nominal value rather than priced according to demand. This is fairly typical for projects that are getting cheap gas from the government and is part of Riyadh’s policy of redistributing wealth to the population.

Imposing time constraints on gas allocations is fairly common in Saudi Arabia. Sources in the kingdom say that the risk of having the gas allocation taken away are quite small. If Al-Rajhi can demonstrate significant progress on getting the financing in place for the project it should be granted an extension by the government. “As long as commitments letters are in place from the banks funding the project, the government will normally give some more time to get the financing closed off,” says one banker close to the project.

Planned steel projects
Project Budget
Al Rajhi Steel integrated complex $3bn
Arcelor Mittal/Bin Jarrallah seamless tube mill $670m
Safco/Hadeed Jubail Steel Billets facility $630m
Atoun Steel Industry Yanbu II steel plant $265m
Source: MEED Projects

“It’s not unusual to put conditions like this on the gas allocation, and as long as they can show some significant progress on getting the financing in place it shouldn’t be a problem,” says another banker in Riyadh.

Although the project is now being fast-tracked, it has been on the drawing board for well over a year but with limited progress due to the lack of a gas allocation. “Although they are now fast-tracking this project, it has been planned for a long time, so a lot of work has already been done behind the scenes,” says a source in Riyadh.

Early indications are that Al-Rajhi and the Saudi Arabian government want to have a large proportion of the complex operational by late 2015. This means work would have to start around mid-2012 if a 36-month construction phase is planned. The Al-Rajhi Steel project is expected to include a 1.8 million tonne-a-year (t/y) direct reduced iron (DRI) plant, as well as mills that produce flat and long steel products (MEED 25:3:11).

To meet this aggressive timeline, tenders are expected to be released in early 2012, with responses due in the second quarter and an award by June. However, contractors have yet to be told if they are expected to bid in consortium with equipment suppliers, or if Al-Rajhi will arrange the technology for the plant itself.

The company has a solid track record in steel and is also constructing a $213m plant in Jeddah that will produce about 1 million t/y of reinforcing steel bars and wire mesh that is used in the construction industry. Completion on the plant is expected in early 2012.

The company also has an 850,000 t/y billet plant in Jeddah, as well as two other smaller scale steel factories in Riyadh.