According to the Dubai Gold & Commodities Exchange, average steel prices in the Gulf hit an all-time high in early December 2007. Topping $680 a tonne, they rose $100 in just six weeks of trading from 20 October. Driven by strong regional demand growth and increasing production costs, prices are continuing to rise. Despite some market volatility in the past 18 months, this growth looks set to persist.

The prolific pace of infrastructure, real estate and industrial development projects in the region, coupled with local and international demand growth, is fuelling the dramatic upward rise in the price of steel. “Demand in this region will continue to rise exponentially,” says Bill Attenborough, managing director of steel trading company Stemcor’s Middle East and South Asia operations. “The value of projects under construction in the region is $220bn in the UAE alone, and in excess of $800bn in the GCC as a whole. A significant amount of that value will be for steel.”

The Gulf region now has one of the highest per capita consumption levels of steel products in the world. At about 440 kilograms, it is far higher than the world’s average of 182kg.

The current construction boom relies on securing sufficient quantities of long products - a term that encompasses reinforced steel bars (rebar), rails and wire rods - particularly rebar. In August, the Gulf Organisation for Industrial Consulting (GOIC) estimated that the UAE would use 44-66 million tonnes of rebar products over the next 15 years. Together, the UAE and Saudi Arabia are the main centres of regional demand growth. Ali Hassan al-Muraikhi, manager of the commercial division at Qatar Steel Company (Qasco), estimates they account for 78 per cent of the GCC’s total budget for active civil development projects.

In terms of infrastructure, railway construction alone is set to have a significant impact on long product demand. To construct proposed rail network projects across the GCC, Saudi Arabian steelmaker Al-Tuwairqi Group estimates that 2.2 million tonnes of steel will be needed over the next three years.

“I am bullish on steel prices,” says Vikram Bhatia, director of Dubai-based Alam Steel. “I do not see demand going down in the next five years.”

Cost concerns

With no expected let-up in the region’s need for steel, external factors will largely define price trends in 2008.

There are three major issues at work. Feedstock prices are set to rise, with high scrap and iron ore prices already having an impact. A hike in freight rates is also expected, making the cost of importing feedstock and exporting finished products a growing concern. Global credit ratings agency Fitch estimates that increasing feedstock and freight costs could add as much as $60-70 a tonne to the cost of blast furnace steel.

Finally, the impact of developments in the Chinese steel industry will be key. The world’s biggest steel consumer is proving its power in the market. “Massive purchases by China have played a major role in the overall bull run that we have been experiencing in recent years,” says Attenborough.

In addition, Chinese exports of steel products are restricted by export taxes that look set to rise again. Its tax policy on steel exports has changed dramatically in recent years. “There has been a 20 per cent swing from 10 per cent subsidies on exports to a 10 per cent tax,” says Bhatia. “This has greatly reduced the amount of steel coming out of China, and there are rumours in the market of a further 5 per cent increase.”

Iron ore prices and securing reliable feedstock supplies will also be a critical barometer of future trends. Here too, China will play a key role. The results of Chinese negotiations with the world’s biggest iron ore producers, Brazil’s CVRD and Australia’s Rio Tinto, to fix 2008 prices will be significant. These discussions will largely determine the global price of iron ore for all buyers in 2008. It is likely to be 40-50 per cent higher than in 2007.

Gulf producers are looking to Mauritania to secure feedstock. Qatar Steel holds a 49.9 per cent stake in the Guelb el-Aouj direct iron project in the north to ensure regular supplies of direct reduction-grade pellets for its steelmaking plant at Mesaieed.

Rising prices

The cost of rebar production in many areas will remain exposed to the rising price of scrap. This is especially true in Turkey, the predominant supplier of rebar to the Gulf. “In early December, scrap prices in Turkey jumped,” says Bhatia. “Rising energy prices are also having an impact on the cost of rebar production.”

With Turkey accounting for as much as 70 per cent of Gulf rebar supplies, the growing expense of production in the country is likely to be carried by GCC consumers.

GCC consumers will also be shouldering the burden of freight shipping costs. “These have gone through the roof,” says Bhatia. “The breakbulk rate for exporting steel products is very high.”

To mitigate the impact of further increases on local production and ensure some stability in freight costs, Qatar Steel has signed a long-term contract of affreightment with US agricultural and industrial giant Cargill International. Running from 2008 to 2017, the agreement covers the shipping of iron ore pellets from Brazilian and Swedish ports to Mesaieed.

Local steelmakers are increasing production to help meet demand in the region. In November, Saudi Iron & Steel Company (Hadeed) commissioned the world’s largest direct red-uction plant at Al-Jubail. The complex has production capacity of 1.7 million tonnes a year (t/y). A $2.6bn steel complex is also planned in the kingdom’s Jizan Economic City. The facility, known as the South Steel Factory, is being developed by the Pan Kingdom Investment Company. Its initial capacity will be 1 million t/y.

Expanding capacity in Iran will contribute significantly to regional output. By 2012, the country expects total steel production to reach 40.5 million t/y. Among the projects being developed is Iran Alloy Steel Company’s (Iasco) 650,000-t/y steel plant in Yazd. It will use feedstock from the direct-reduction and pellet manufacturing facility under construction at nearby Ardakan.

In Egypt, prequalified companies are bidding for four licences to build steel facilities in the country. Expanding capacity in the region will help to alleviate the pressure of rising prices. But there are concerns that this will not be enough.

“Over the next three years, capacity expansion investments on finished steel will not meet the excess demand,” says Cetin Kaya, general manager of Turkish steelmaker Ekinciler. “Crude steel capacity investments will mainly focus on billet production to meet the billet requirement in the region.”

In the past five years, steel prices have risen by 50 per cent globally. Rising demand in the Gulf accompanies that of China, India, Brazil and Russia. Fitch estimates prices will rise by 7-8 per cent in 2008.

Volatile market

Yet predicting prices remains difficult. “No one knows where the market is going,” says John Short, executive director of the Dubai Multi Commodities Centre’s steel and base metals department. “We have had a volatile time over the past 18 months, and particularly over the past year.”

The recently launched Dubai Gold & Commodity Exchange (DGCX) rebar futures contract reflects this volatility. “The price of rebar started the year at $490 a tonne,” says Short. “Then it rose to $651, fell to $571, rose again to $620 and fell to $585. It now stands at about $685, and that is an all-time high.”

With demand continuing to soar, 2008 may be a record-breaking year for steel prices.

TABLE: GCC steel consumption rate

Source: Metal Bulletin Research

TABLE: GCC rebar suppliers

Source: Qatar Steel