Demand For Steel Still Robust In GCC

Demand for steel will remain strong in the GCC region despite the financial turmoil affecting world economic growth, according to the Kuwait-based think-tank Global Investment House. An estimated $850 billion will be spent by GCC countries in the next three-five years on infrastructure, petrochemical industry, tourism and other projects. These huge projects will create an estimated incremental demand of 17m tpa over the next three-five years.

"GCC countries are diversifying their revenue sources to reduce their reliance on oil income. Setting up of steel and aluminium industries is part of the plan. We are likely to see a jump in inter-GCC trade with Oman and Bahrain supplying iron pellets to regional countries such as Saudi Arabia, Qatar and UAE while importing finished steel products from these countries."

The new capacities which are coming online are unlikely to pull down prices significantly as additional output will be absorbed by strong steel demand. However, we believe that international steel prices are likely to come down on the back of falling crude oil and raw material prices and lower world economic growth. Steel consumption throughout the GCC has increased significantly underpinned by demand from the construction sector. The liberalisation of the real-estate sector and diversion of oil revenue towards construction and infrastructure development has led to a high demand for rebar, a steel bar commonly used in reinforced concrete.

An estimated 13m tonnes per annum (tpa) of rebar is consumed by the GCC countries. While 40 per cent of the total steel demand is met locally, the rest is imported mainly from Turkey, North Africa and the CIS countries. The demand for long products, which are mainly used in building and construction, form 60 per cent of the overall demand. The cost of steel bars account for an estimated 10-15 per cent of the construction cost.

GCC steel production is fairly fragmented, says Global. There are 18 steel companies in the GCC region engaged in the production of raw steel and finished steel products. Saudi Arabia is the largest producer in the region. On the consuming front, the UAE tops the list with a per-capita consumption of 2,348 kg, followed by Qatar with 985 kg.

The GCC as a whole has a per-capita average consumption of 645 kg which is higher than the world average of around 240 kg. With low populations and massive investment in infrastructure and tourism related projects the per-capita consumption in GCC is likely to stay higher than the world average. As an energy intensive industry, the steel industry benefits from the easy availability of natural gas in the GCC.

Producers in the GCC enjoy a comparative advantage in steel production due to low energy costs of $0.8-1.5 mmbtu compared to $4.0-6.0 per mmbtu worldwide giving them leverage to withstand any downturn in the steel industry. Direct Reduction Iron (DRI) is the preferred method of iron production in the GCC as it is energy intensive and scale economies is not a major factor determining profitability. Steel imports have grown at a 2003-2007 CAGR of 18.8 per cent to 15.5m tonnes in 2007.

This growth coincided with the rise in oil prices and the consequent flush of liquidity. The oil boom triggered massive construction activities across the Gulf. "We believe the imports will come down once new planned capacities come online," says Global. However, a prolonged world economic slowdown and reduction in oil prices can lead to cancellations and postponements of projects which will have a detrimental effect on the industry as a whole, the think-tank warns.

Source - © Oman Daily Observer [09 November 2008]