New vision needed for GCC steel

13 October 2010

The GCC imports more steel than it produces, but there is more to building a steel industry than increasing production

The GCC is one of the world’s most buoyant markets for steel. It produces about 10 million tonnes a year, but consumes almost 25 million over the same period.

The region’s steelmakers plan to close the gap. The MEED Middle East Steel 2010 conference last week heard from the Gulf United Steel Company (Foulath), the Bahrain-based metal industry holding company, about its vision for an integrated, cross-border iron and steel behemoth.

GCC steel demand is not expected to grow in 2011

The expansion of the capacity of its subsidiary Gulf Industrial Investment Company’s (GIIC’s) iron ore pelletising plant to 11 million tonnes a year (t/y) was completed at the start of 2010. Foulath owns 51 per cent of the United Steel Company (Sulb), which is building a 1.8 million-t/y direct-reduced iron (DRI) plant, a melt shop and rolling mill next to GIIC. The Sulb project is due to be completed in early 2013.

Foulath’s upstream plans call for investment in iron ore mines in Brazil and ore pelletising plants in Egypt and Oman. It also will soon complete the purchase of a rolling mill in Saudi Arabia.

Foulath is aiming for the sky, but Gulf steel’s confidence generally has been shaken by the events of the past two years. After hitting a record high of more than $1,000 a tonne in the summer of 2008, steel prices tumbled with unprecedented rapidity to little more than one third of this figure in less than nine months. Demand crashed by 20 per cent in 2009.

Steel has rebounded and global production this year will probably recover to about 1,300 million tonnes. GCC steel demand is not expected to grow in 2011, but consumption is forecast to grow steadily as Gulf project investment accelerates. Steel prices could average $700 a tonne next year.

The region’s big steel makers have massive long-term plans. Emirates Steel Industries (ESI) has announced it is aiming to lift annual DRI capacity to 6 million tonnes from 2 million at present. Saudi Arabia’s Hadeed, the largest producer in the GCC, has declared its long-term vision is to expand capacity by 200 per cent to 15 million tonnes. Qatar Steel, which is now operating at almost 100 per cent of its 2 million t/y capacity, also has expansion ambitions.

But questions are being asked about the GCC steel drive.

The first is about regional coordination. If the big three GCC steelmakers press ahead with their investments, the region could have a steel surplus in 10 years. The GCC needs to avoid unnecessary duplication because investing in steel for export is an expensive way of giving away Gulf gas, which has become a critical GCC policy constraint, particularly in Saudi Arabia. The kingdom has allocated practically all its available proven gas reserves. Strict criteria are being applied to projects seeking additional supplies. Finance is a further headache. GCC expansion plans depend upon securing bank finance. But the banks, stung by the shock of 2008 and facing new capital rules under Basle III, are charging more for smaller loans with shorter tenors. Steel projects will need more equity finance from now on.

Then there is the downstream industry, where there are some serious challenges. The UAE has the biggest problems with rebar production capacity that is now estimated to be more than twice demand.

Gulf steel, therefore, cannot simply depend upon forecast demand trends to validate capacity expansions. The industry needs to explain why making steel locally makes more sense than buying it from foreign suppliers who stand ready to supply everything the region needs.

The MEED conference was told about the 400-metre-tall Capital Market Authority (CMA) tower in Riyadh, which will use steel to an extent that is unprecedented in the Middle East. About 15,000 tonnes of steel will be consumed by the project, but all of it will come from China – this is because Chinese steel is cheap and high quality.

Some allege there’s been dumping in the GCC, but calls for punitive action against foreign steel makers selling in the region at below cost have been rejected. Dumping is difficult to prove and hard to beat. But defending local producers makes sense if you’re serious about steel long-term.

The original justification for GCC steel was that it used associated gas that was previously flared. This argument no longer stands.

The idea that displacing imports was a good way to promote economic development has been discredited for more than two decades. The steel industry can produce good long-term returns on investment, but there are attractive alternatives in the GCC, particularly in infrastructure.

And steel employs few people. Job creation is only significant when steel-intensive manufacturing, such as the car industry, is established. At present, most jobs in GCC steel are taken by foreigners.

To dispel doubts, the GCC steel industry needs a compelling vision that will win over Gulf governments and other stakeholders.

Most Gulf steel is used in buildings as reinforcement. But there are more imaginative ways of using the metal that will deliver higher returns to the GCC economy as the CMA tower demonstrates.

The challenge for GCC steel is, therefore, about more than building capacity. It requires demonstrating how steel can play a more complete role in helping the region achieve its long-term economic and social goals.

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