The first internationally traded steel futures contract will be launched on the Dubai Gold & Commodities Exchange (DGCX) early next year. A 10-tonne steel reinforcement bar (rebar) contract will be launched, followed by a steel billets contract. The listings are of great interest to traders the futures contracts should provide a means of hedging against fluctuating prices in other commodities. But the listing will also be watched closely by Gulf-based contractors, who are in the grips of a region-wide construction boom in which any fluctuation in steel prices can have a serious impact on local economies. There is some relief in sight. After the strong price growth of the past two years, rebar prices have stabilised in recent months. 'Up until the middle of this year steel prices were very strong,' says Matthew Watkins, senior steel consultant at the Commodities Research Unit (CRU). Regional demand partly accounts for the soaring prices of 2005, but global market factors are also at work. Prices rose by 30 per cent in the first half of this year, with strong demand driven mainly by the North American and Chinese markets. 'Also, the supply side was constrained by unplanned outages, including accidents at steel plants in North America and Brazil,' says Watkins. The growing cost of raw materials has also fed through to higher steel prices. In 2005, the price of iron ore grew by 19 per cent and a further 10 per cent increase is expected this year. Middle East steel producers depend almost entirely on imported iron ore from China, India and Turkey. Other raw materials and intermediate steel products such as scrap metal, steel billets and direct reduction iron (DRI) are also imported.

Iron pellets

'There is no shortage of raw materials, but there is a price issue,' says Omar Ramzi, corporate treasurer of Egypt's El-Ezz Industries. While scrap prices have grown significantly due to high demand for rebar and flat steel, the price of iron pellets has remained much more stable over the past decade. El-Ezz Steel Rebars Company uses scrap metal, while another subsidiary El-Ezz el-Dakahliya for Steel starts with iron pellets. 'Using iron pellets gives us much better margins,' says Ramzi.

More recently, however, slower growth in demand and the resolution of supply problems have stabilised prices. In one of the most significant changes to the global steel market, China has gone from being a net importer to a net exporter of steel. It now exports 4 million tonnes a month of steel, up by 60 per cent on the previous year. China's rise to the position of largest steel exporting country in the world has exerted downward pressure on global prices.

China's share of the Middle East rebar market is also expanding. 'Local manufacturers are not able to fill demand,' says Karel Costenoble, chief executive of ME Steel. 'China could take a larger chunk of the market in the long term.'

According to statistics from the International Iron & Steel Institute, worldwide crude steel production reached 105.9 million tonnes in October 2006, up by 7.4 per cent on the same period the previous year. Of that, the Middle East produced 1.2 million tonnes. Local production is led by Saudi Iron & Steel Company (Hadeed), Qatar Steel Company (Qasco) and El-Ezz Industries, which dominates the sector, with a 70 per cent share of its local rebar market and 57 per cent of the flat steel market.

Unlike Egypt, the UAE is a major importer of rebar, bringing in 3 million tonnes a year (t/y) to fuel its booming construction industry. 'Steel is going to be in short supply for many, many years,' says Raman Madhok, chief executive officer (CEO) of Tradeline. 'Projects are taking three to four years to complete, but new projects are still being announced.'

Several steel projects have been launched in an effort to satisfy growing demand. In the UAE, new facilities are expected to produce 4 million t/y of steel, most of it rebar, long products and sections. One exception is the Al-Ghurair Iron & Steel project to build a AED 300 million ($82 million) cold rolling mill and galvanising complex in Mussafah, which will produce flat steel. Part of the steel will go to the local market. 'We are also positioning ourselves to sell abroad, mainly to the US and Europe,' says Madhok. Flat steel produced in the region has traditionally been earmarked for export. Egypt, for example, requires 800,000 t/y, but produces more than 2 million tonnes. The surplus is sold abroad. 'Flat steel is used mainly in the industrial sector,' says Yasser Ibrahim, senior steel analyst at Cairo-based HC Securities & Investment. 'Industrial bases are not very demanding in Egypt and the Gulf.' There is some concern that increasing investment in steel production may exacerbate the problem of global overcapacity. But it would appear that for the time being, the Gulf does not need to worry about this. 'In the Middle East, there are still more imports than exports and even then existing mills are producing at full capacity,' says Costenoble.