Rolling out a test of steel: hardening to the task

The GCC is a prominent and strategically important trade bloc for the global economy. The combined gross domestic product (GDP) of its constituent states exceeded $1 trillion (Dh3.67 trillion) last year (source: Samba).

The bloc's economy is marked by a high degree of construction and real estate activities, apart from huge oil and gas exports. The economic strength in the region has led to the growth of all kinds of infrastructure development, on a scale among the largest in the world.

After the setback of the global economic slowdown, the GCC countries demonstrated notable recovery last year. In fact, $148 billion worth of contracts for infrastructure development in the GCC were signed during 2010, according to Venture Middle East, up by around 4 per cent from the previous year.

With such rapid development, the Gulf states are evidently in a transition phase of diversifying their economies in order to remain less dependent on oil and gas in future. Facilitated by stable oil prices, the governments of these countries have been able to continue with ambitious plans to upgrade public infrastructure in the domains of health, education, transport, water and waste.

The real estate sector too has obviously witnessed considerable investment, of which the residential segment has occupied a good share. The drive to build a sufficient supply of affordable housing is now near to meeting the requirements of a growing population.

The demand for products from key sectors including steel and cement has consequently boomed. It is a trend that is assumed to continue during the coming years, especially in Saudi Arabia and the UAE.

The current value of all construction projects in the GCC countries is more than $2.5 trillion (source: Construction and Projects Forum). Stability is returning to the sector, and there are signs of recovery from 2011 and onwards.

Infrastructure projects will continue to accelerate the region's economic development during the next decade, with GCC governments using surplus funds to finance them. (Qatar has budgeted to spend more than $50 billion on the 2022 Fifa World Cup alone.)

Promoted by all these factors, demand for steel in the region has not only increased rapidly during the past decade but the region has also become one of the most favoured of business destinations for the global steel giants.

While for steel and other metal commodities the Gulf remains a vital market, the demand for steel in the GCC still surpasses domestic supply by several-fold and is a prominent feature in these countries. Production is 10 million tonnes per year, whereas consumption is around 25 million tonnes.

Current scenario

Amid scarcity of ore resources in the region, domestic producers face a severe shortage, and so import steel from other countries. In the current scenario the shortage of ferrous metals exposes producers to the price fluctuations of raw materials. This creates problems for them at another level again, with imported steel turning out to be cheaper than the domestic product in some cases.

The only option to cover the shortfall is from the likes of China, India, South Korea and Turkey. An estimated $11.2 billion worth of steel was imported by the GCC in 2009, according to the World Steel Association.

To counter the gap, the region is continuously pledging new capacity, which is expected to increase by nearly 150 per cent during 2008-2011. Gulf producers have made continuous efforts in the past to increase capacity but have not been able to catch up, although import volumes are expected to decrease once those new capacities take hold.

The unbalanced demand and supply scenario could have serious implications for the domestic industry as well as the economies concerned. Although they are protected by stable oil exports to the rest of the world, the development of other key sectors will be crucial during the next two decades. Infrastructure will be very important in the longer term, when crude oil will be a relatively less important means of energy production with the advent globally of renewable sources.

Steel producers in these regions will be required to function more cooperatively in order to bring about stability in the regional markets and thus ensure success. Indeed, the industry will face several challenges.

In the next few years the main challenge will be control over prices. Owing to higher raw material prices, steelmaking costs have been on the rise. Regional producers have to be more innovative to face the competition, especially taking into consideration shrinking profit margins.

Steelmakers need to adopt new technologies that will allow them to pare production costs, and use a variety of sources to beat the changes in raw materials prices. Dependence on imported raw materials, overcapacity and the requirement to recruit and retain skilled manpower will all require cooperation between producers.

UAE's paradigm

In the UAE's steel industry there have been some notable developments in the past decade, and the government's focus on economic diversification has brought paradigm shifts in the demand for steel in the country.

The construction surge throughout the region, an expanding manufacturing base and the flourishing service sector are helping multi-sectoral growth. Booming civil infrastructure developments by the government and a housing shortage in the country, coupled with high public-private investments, have boosted allied sectors.

Although, the steel sector experienced a dent in market sentiment in 2009 amid the recession, the market bounced back last year. During 2010 the UAE awarded $39 billion in contracts for the development of the energy sector, infrastructure and buildings (source: Venture Middle East), which proved decisive for steel demand dynamics.

The UAE has been a significant contributor to the overall development of the GCC's steel trade. It ranks second on both steel production and consumption, while in top slot in terms of steel imports in the GCC.

The UAE has the highest per capita apparent steel consumption among the member states. The industry mirrors the country's strong growth in the economic and industrial sectors. But, in line with the regional experience, producers in the country have not been able to keep up with the pace of steel demand, and this gap has increased in the past four to five years.

To meet the growing demand, market players are leaving no stones unturned: trying to keep costs as low as possible but increase production capacities at the same time.

For instance, Emirate Steel Industry, the biggest integrated steel producer in the UAE, has targeted to up its production capacity to 6.5 million tonnes of rebar steel annually by 2015.

Product specialisation

Also, major players are trying to achieve product specialisations, making a strong case for the industry's health when considering, for instance, the problem faced by China. China is currently the second-largest exporter of steel, but still features in fourth position among the largest importers, owing to its lack of expertise in producing certain types of steel products.

The UAE has in fact steered the growth of GCC steel imports during the past few years, as evidenced by its import of $4.7 billion worth of steel in 2009. South Korea accounted for around 18.7 per cent of the UAE's steel imports, followed by China and India.

The UAE's steel sector is crucial for its own economic development and long-term growth. Cost differentials and product specialisations hold tremendous opportunities for local producers to grow organically both inside and outside the country.

The huge expansion programmes that are under way should impact positively in containing steel imports, while overall supply has responded as well to the arrival of regional players.

Yet, in the current scenario, only those steelmakers who can supply quality steel upon demand at economical prices will survive.

Beyond survival, to ensure continuous growth, the UAE steel industry will have to overcome further hurdles, like the under-utilisation of steel mills and the industry's cyclical nature.

The writer is Chief Executive, RNCOS.