A strong outlook for global steel demand is encouraging Middle East countries to develop a processing industry that they hope will make the region a major hub for the sector in years to come.

Since the fourth quarter of 2011, global steel prices have been on a largely downward trend. By early February, the steel billet price had fallen below $500 a tonne, down from almost $700 a tonne in August 2011. It was also well below the mid-2008 peak of more than $1,000 a tonne, according to figures from the London Metal Exchange.

Steel prices will rise in Europe in the first quarter of 2012 and most markets will follow suit

Senior executive at major Gulf steel firm

The trend is likely to continue in 2012, according to a report published in December by Bank of America Merrill Lynch. The global average for hot-rolled coiled steel futures, an industry standard, is forecast to fall from $749 a tonne in 2011 to $709 a tonne in 2012, according to the report. Although global steel production will grow 4.4 per cent year-on-year in 2012, to a record 1.56 billion tonnes, utilisation is likely to be about 81 per cent, down from 88 per cent in 2006. Iron ore prices are expected to fall to $150 a tonne in 2012 and $145 a tonne in 2013, from close to $170 a tonne in 2011.

Steel price drop

The trend is mirrored in the Gulf region. A slowdown in infrastructure development in Abu Dhabi and cheap Turkish imports led to a decline in the average price of reinforcing steel bars (rebar) in the UAE from $820-870 a tonne in March 2011 to $785-830 a tonne in October, according to UK-based consultancy Davis Langdon. In most of the GCC, the price of structural steel remained flat in the second and third quarters, but in Qatar, it fell from $1,507-2,195 a tonne to $1,192-1,510 a tonne.

Despite the recent downturn, the fundamentals for the iron and steel market remain strong, and analysts are confident that steel demand will rebound in the medium-to-long term.

“The fundamentals of steel demand are looking very positive,” says David Russell, a director of Ernst & Young’s mining and metals team. “It’s only demand in Europe that appears soggy. Demand is strong in Asia, Australia and the Middle East, and in the future southern Africa will also have strong growth.

“BHP Billiton and Rio Tinto have both announced huge programmes to meet growing demand. It’s not a short-term play, it’s a medium-to-long term plan. They see future demand as bullet proof.”

Most of the recent growth in the steel business has been driven by increasing demand from China. Although growth rates have softened recently after years of double-digit economic expansion, analysts expect the country will remain a major driver of iron and steel demand for years to come.

We are seeing signs of recovery of Chinese demand for iron ore … pushing up prices and steel will follow

David Russell, Ernst & Young

“Although there have been signs recently that the pace of China’s economic growth is faltering, they still have a lot of catching up to do, so in the long term, it will continue to be a growth market,” says Donald Douglas of Cambridge Risk in the UK. “Demand for base metals is still huge in China and demand is emerging from India and elsewhere. It’s the countries that need to develop their infrastructure that will always be the key drivers. We’ve seen a lot of projects reaching the bankable feasibility stage.”

According to industry analysts, it will not be long before Chinese demand growth accelerates once more. “We expect steel demand to recover in the second half of 2012,” says Russell. “We are already seeing the signs of recovery of Chinese demand for iron ore, which is pushing up prices and steel will follow.”

The business development manager at one Gulf steel firm is similarly positive, saying, “Steel prices will rise in Europe in the first quarter of 2012 and most markets will follow suit.”

In the Middle East itself, the combination of rebounding oil prices, the gradual recovery of the global economy, government infrastructure programmes and the 2022 football World Cup in Qatar are all likely to ensure that steel demand will be robust in the medium term.

Downstream steel potential

On the supply side, with the exception of Iran, Algeria and Mauritania, the region has little iron ore of its own. But despite a lack of raw materials, other advantages make the region highly promising for the development of a downstream steel industry.

“They have the financial, technical and labour resources, but not raw materials,” says the Gulf executive. “Most raw materials are imported from elsewhere. Where they come from depends on the individual manufacturer and where they are in the processing chain. Some buy iron ore, some buy billets, and some buy HBI [hot briquetted iron]. It varies from company to company.”

The most important natural advantage in the region’s favour is an abundance of energy resources. But the allocation of these resources to industrial development is not a straightforward decision. Many of the Gulf states have struggled in recent years to meet the combined demand for gas from fast-growing electricity consumption and industrial development.

A lack of non-associated gas in every Gulf country but Qatar means that every time global demand for oil weakens, it has an impact on gas production. Rising commodity costs in 2008 and the global economic downturn that followed also caused delays in downstream infrastructure development.

The outlook, though, is more positive. Gulf income is on an upturn due to a recovering global oil market. Analysts expect crude prices to average more than $100 a barrel in 2012. The recent outage of Libyan production enabled Gulf countries to increase oil output, while the reduction in output from Syria and concerns over Iran mean that demand for Gulf oil is expected to continue to be strong in 2012. Although a deepening recession in Europe remains a downside risk in the medium term, the recovery of the global economy in the longer term means that the outlook for oil demand remains strong.

Strategic location

The location of the Gulf region between major consumers in Asia and the major iron ore producing areas of Australia, Brazil and Africa, give it another natural advantage when it comes to steel processing and trans-shipment.

The region also benefits from a steel industry trend in which one iron ore, magnetite, is increasingly favoured over another, hematite, which makes up what is known as direct shipping ore.

Hematite-bearing deposits have a greater iron content than magnetite, making them more cost-efficient to transport. But they are also less abundant and contain other components that make processing more difficult, such as phosphorus, water and aluminium.

“A gradual transition from hematite to magnetite is under way in the long term as the currently preferred haematite ores are gradually supplanted by processed magnetite,” says Russell. “Several Chinese steel smelters already prefer the more consistent parameters of processed magnetite concentrates and pelletised products in order to provide consistent feed to steel plants.”

The Gulf countries remain committed to diversifying their national income away from the sale of hydrocarbons, which currently makes up the bulk of government revenues. Investment in the downstream iron and steel sector is one way they plan to do this.

“Access to energy in the Middle East makes it extremely interesting for the steel industry, and a lot of countries [in the region] are trying to diversify away from oil and gas,” says Russell. “They already have a track record of using gas for aluminium smelting and it’s easy to see how they might move into the steel industry.”

At the moment, the projects market is still in a recovery phase. According to regional projects tracker MEED Projects, the total value of steel projects in the region is $58.2bn, but of that only $23.9bn-worth of projects, or 41 per cent, have progressed to construction. Of the total, $13.7bn-worth of projects, or 24 per cent, are either on hold or have been cancelled, while $19.6bn, or 35 per cent, are still in the study or design stage.

“How quickly projects are developed depends on the approval of contracts and budgets by each government,” says the Gulf executive. “Some markets have slowed down their industrial development, so there may be some delays in project delivery, but there are still many projects under way and there is still an upward trend of steel schemes in the region.”

Steel projects in the Gulf

Although there has certainly been a slowdown in project delivery in recent years, there are signs that the GCC governments are keen to push ahead with their steel programmes.

Saudi Arabia was due to issue tender documents by early February for the construction phase of a $3bn steel complex at the King Abdullah Economic City near Jeddah. The tender follows the award of the construction contract for a 500,000-tonnes-a-year (t/y) rebar mill at Jizan in late 2011.

Qatar Steel Company has shortlisted contractors for a $500m expansion of its Mesaieed steel complex, after Austria’s Siemens Steel won the contract to build a new 1.1 million t/y steel plant in March 2011. In the UAE, Emirates Steel is seeking a contractor to build a 1.4m t/y flat steel plant as part of the $800m third phase of its Mussafah plant expansion. The second phase, worth $650m, was commissioned at the end of 2011. Meanwhile, Bahrain is due to complete the construction of a new steel plant in September.

If all goes well, the commissioning of these new plants will coincide with a recovery in steel demand both globally and within the region. And as Gulf governments become more confident of their own economic recovery and that of steel-hungry markets around the world, investment in the downstream steel business is likely to continue to gather pace.