Imports depress GCC steel prices

16 June 2015

Reduced demand in China has steered its cheaper steel exports into the Middle East

The Middle East steel industry is facing challenging times with prices dropping as lower cost products from China and other exporting countries enter the regional market.

At the same time, the fall in crude prices could affect state spending in the GCC and other oil exporters, leading to a slowdown in steel-intensive construction projects.

The biggest trend in the global steel industry in 2014 was the slump in Chinese consumption of finished steel products, the first decrease since 1995. Demand from the Asian powerhouse dropped 3.3 per cent year-on-year.

According to global trade body, the World Steel Association (Worldsteel), the decrease was due to Beijing’s rebalancing efforts that had a major impact on the real estate market.

Chinese demand

Demand in China, which is by far the world’s largest producer and consumer of steel products, is expected to shrink further in 2015 and 2016, falling 0.5 per cent in both years.

Weaker domestic demand in China has led to overcapacity in the market, resulting in increased exports into other regions including the Middle East.

At the same time, global iron ore and coal prices fell sharply in 2014, while scrap prices kept their value for much of the year, leading the Chinese steel industry to become more cost-competitive.

According to London-based Metal Bulletin Research (MBR), large-volume exports of Chinese steel bars and reinforcing bars (rebars) arrived in Lebanon, the UAE and Oman in 2014. The key markets for Chinese wire rod have been Iran, Saudi Arabia and the UAE.

If proper measures are not adopted, many producers in the UAE would be at risk of losing capacity

Saeed Ghumran al-Romaithi, Emirates Steel

It is estimated that 4 million-4.5 million tonnes of steel arrived in the Middle East in 2014 - a significant increase on 2013 levels.

MBR estimates the price of Chinese rebar at $425 a tonne FOB (free on board) in September 2014 compared with $610 a tonne ex-works for UAE rebar. Even with shipping costs and import duties, Chinese steel producers could undercut UAE suppliers by more than $100 a tonne.

Abu Dhabi-based Emirates Steel, the UAE’s biggest steel producer, recently called on the UAE government to restrict imports from China and Turkey. The company’s CEO Saeed Ghumran al-Romaithi warned that cheap steel imports would damage the UAE’s efforts to diversify its industrial base.

The stronger dollar has added to the lower costs of Chinese and Turkish imports making Emirates Steel – along with other major producers in the GCC – less competitive.

“The steel industry plays a crucial role in the UAE’s industrial development plans and… should be protected against unfair trade practices,” said Al-Romaithi in a statement in April.

The CEO said the lack of strong customs protection in the UAE would escalate the problem.

“If proper measures are not adopted, many producers in the UAE would be at risk of losing capacity, putting the country at risk of losing impetus in diversifying its economy away from dependence on oil as a major source of income,” he added.

Al-Romaithi recommended the introduction of anti-dumping duties, along with the introduction of a uniform standard to fend off low-quality Chinese imports and force Chinese exporters of steel into the UAE to comply.

Similar practices, such as the American Standards for Testing of Materials and British Standards, are applied in the US and Europe.

The surge in Chinese exports has led to anti-dumping investigations launched in the US, Turkey, Southeast Asia, Europe and other major steel products markets.

Revising import tariffs

Al-Romaithi highlighted the “urgent need to revise import tariffs or increase duty levels to avoid the threat of cheap imports from China and Turkey”. Other traditional importers have acted to protect market shares, such as the 110 per cent anti-dumping duty by the US on Chinese wire rod imports and Turkey raising its import duties by 34-40 per cent.

According to Emirates Steel estimates, Chinese exports to the UAE and the GCC increased by 63 per cent in 2014, compared with 2013, while Chinese exports to UAE of billets increased by almost 300 per cent and wire rod rose by nearly 112 per cent.

In January 2015, Chinese exports to the UAE were up 186 per cent year-on-year. Turkish exports to the UAE for rebar grew by 28 per cent to 1.33 million tonnes in 2014, compared with 2013. The impact on prices is clear

Average steel prices dropped by 7.1 per cent in February compared with the same month in 2014, according to the Statistics Centre Abu Dhabi. The price for Turkish 10-25mm rebar fell 9.5 per cent in the same period, while 6-8mm rebar dropped by 19.1 per cent.

Spot prices for Chinese steel have halved since the last peak of June 2011 as the country’s pace of economic growth has slowed along with demand for metals.

MBR, in its latest report on the Middle East steel market, advised against the sort of protectionism called for by Emirates Steel.

“By protecting the domestic steel industry even more, the government will only ensure that they pay a higher price for capital investment,” wrote special projects director at MBR Brian Levich in the January report.

“The higher steel costs associated with further steel protectionism will inevitably be passed down to further steel processing and/or end-user customers. They then pay a higher price and will become even less competitive with imports.”

MBR says 2015 will mark the low-price point for global steel products for several years to come in the Middle East region. There are likely to be increases in 2016, but with Chinese steel mills capping price rises with higher exports.

The Middle East enjoyed relatively strong consumption in 2014, with Worldsteel estimating that steel use rose by 3.7 per cent to 51.9 million tonnes.

Slower growth outlook

Although the growth rate is expected to slow to 2.8 per cent this year, it is significantly faster than the rate at which global demand is increasing. Worldwide steel use rose 0.6 per cent in 2014 and is expected to climb just 0.5 per cent in 2015.

“In 2014, the drop in oil prices led to a slower growth outlook for the major steel using GCC countries, such Saudi Arabia and the UAE. Also geopolitical instability is affecting steel demand in such countries as Syria and Iraq,” says a spokesperson from Worldsteel, which represents companies making up 85 per cent of global steel production. “In 2015-16, the main driver in the Middle East will be Iran, showing average growth of 5.5 per cent.”

The fall in oil prices has had a mixed impact on global steel demand and on the oil-exporting Middle East market specifically.

“The GCC countries will be able to cushion the impact of the drop in oil prices in the short term thanks to the accumulated fiscal reserves. However, if the lower oil prices continue, it will lead to a scaling down of investments in the medium and longer term, and subsidies,” says the spokesperson.

“But overall, the Middle East and North African region’s steel demand outlook generally remains positive, supported by the need for infrastructure and housing investments, economic diversification, favourable demographic trend and improved political stability, if not as strong as before.”

Lower oil prices are just one of the factors that could dampen the market for new steel production projects in the Middle East. The shortage of government gas allocations in some of the region’s largest steel-producing countries such as Saudi Arabia and the UAE has led to a drying up of the project pipeline.

Saudi Arabia, the Middle East’s second-largest steel producer after Iran, has struggled to push through schemes in recent years. The kingdom’s flagship steel project, Al-Rajhi Steel’s $3bn steel complex proposed for King Abdullah Economic City was cancelled in 2013.

In the same year, it emerged that chemicals group Saudi Basic Industries Corporation (Sabic) was planning to invest $4.2bn in two new steel projects, but these are now on hold as further feasibility studies are carried out.

Change in strategy

In the UAE, Emirates Steel’s planned phase-three flat steel expansion project appears to be on hold indefinitely awaiting a gas allocation from the Abu Dhabi government.

With no expansion projects on the horizon, local producers are responding to growing international competition by changing strategy.

The two key elements of their new approach is to focus on the development of their existing product range, diversifying their offerings and adding value to services, as well as increasing marketing efforts on the uniqueness and quality of their products.

Local steel producers will be hoping to emerge stronger after riding out the period of low prices.

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