Market strength

The Middle East steel industry has been undergoing rapid expansion over the last few years to meet the needs of a fast-expanding construction sector. But what challenges has this rapid growth presented to regional producers? Younis Haidar, Regional Director for the Arab Iron and Steel Union, explains.

“The price of steel billets recently fell from US$1200 per tonne down to US$ 270 per tonne”

What is interesting about the development of the Middle East steel industry during the last few years is the speed at which it has grown: over the last eight years, the growth rate of this industry in the Middle East was second only to China in world terms. This acceleration is evident in the number of new projects that have been set up: between the expansion of existing mills and the start up of new facilities, over one hundred new projects have been initiated, which has increased the production volume and made it much easier for producers to respond to the needs of the domestic markets – in particular, in the field of long products production, the growth of which has been driven in large part by the construction sector.

In recent years, this rapid growth has imposed certain challenges on producers – for one thing, they need to consolidate their position as producers and improve their ability to compete and continually develop. There is also the external challenge posed by the nature of a market such as the Middle East, which is considered one of the most open and attractive world markets for a number of big international players. Perhaps the biggest challenge for local producers has been the number of companies trying to enter the market at a time when weak demand means the field has become too narrow to accommodate a large number of competitors, each of whom is trying to gain market share.

Economic conditions
Without doubt, the economic conditions that have hit the construction sector have been a big shock for steel producers, who have gone from experiencing strong demand for their products to a downturn in a matter of months. However, what makes the markets of the Middle East better able to get out of this shock in a shorter time is the fact that steel is a key need for most countries of the Middle East, and considered a necessity rather than a luxury. This reality reflects the growing demand for popular, middle-income housing developments, while the demand for luxurious or welfare housing has declined. The biggest proportion of steel products go to satisfy growing demand in the housing and infrastructure sectors, which are sectors supported by the governments and directly connected with the social and living situation of people.

The development of the steel industry in the region has been connected with the recent surge in economic prosperity. For instance, much of the revenues resulting from high oil prices in recent years have been directed towards investing in and setting up steel projects. Improvements in the price of steel have also encouraged investment in this sector. In addition, the industry has had a guaranteed return, and its export capabilities – as well as its ability to satisfy the increasing needs of domestic markets – mean it has been a very attractive investment.

Nevertheless, the steel industry in the region is relatively nascent, and therefore more vulnerable to crises. Many of the new players who entered the industry in the last few years are not accustomed to or familiar with the cycles of this industry, and the upwards and downwards conditions through which it usually passes over certain periods of time – intervals that have become increasingly short in recent years. Perhaps the clearest indication of the impact of this crisis on the region’s steel industry is the slowing down of the implementation of certain projects, the postponement of some and the cancelling of others. Projects in the public sector were less affected than those in the private sector.

Generally, it may be said that the steel industry is, in spite of the negative impacts of the crisis on its growth, still in good shape – especially compared with the automotive industry or some other industries. No bankruptcies of steel companies have been announced, and most companies still maintain a strong financial position that enables them to survive and maintain limited growth despite the declining profits and shrinking prices.

What may be seen at the world level, however, is a trend to cut down costs and production. This will result in creating the required supply-demand balance for most world markets. Most companies have been forced to cut down their production, but this is better than having overcapacity, which may result in more price reductions and will in turn cause loss of confidence in the industry – which constitutes a danger to the stability of markets and prospects for recovery.

This is also applicable to the steel markets in the Middle East, as most companies resorted to cutting down their production as a result of the declining demand. But with signs of the recovery of the market, they have resumed increasing their production so that they can maintain their position in the market.

Regional outlook
With the continued recession facing the steel markets as a result of declining demand in most markets, and available cash liquidity decreasing, forecasting what the state of this industry will be over the next few months is very difficult and is one of the great challenges facing the steel markets – not only at the level of the Middle East, but also at the world level.

The rapid changes taking place during the last few months have certainly had a destabilising effect on the steel markets, and by extension on other industries too; the price of one tonne of aluminium dropped from US$3500 down to US$1530 inside two months, while the price of steel billets fell from US$1200 per tonne down to US$270 per tonne. This is also applicable to the scrap prices and the prices of some other finished products.

Such a situation does not help with forecasting what the outlook might be over the next few months. However, signs of an improvement in the steel industry have begun to appear in a number of markets. Steel consumption in one of the biggest Arab markets, Egypt, has seen strong growth during the first quarter of this year, achieving an increase of 21 percent during 2008 compared with 2007. Consumption of long steel products reached five million tons in 2008 against 4.1 million tons in 2007. Also, the steel imports in the markets of the region have been elevated during the first quarter of this year compared with the same period in 2008. The level of imports from Turkey in March 2009 was one million tons. The markets of the Middle East are the largest steel products importers, with a figure exceeding 30 million tons throughout the whole of 2008, according to international statistics.

Based on this reality and not on prediction or forecasts, it may be said that the steel markets in the Middle East have great potential reinforced by the available need and the fact that most steel markets are still unsaturated. The average per capita consumption of steel products is still less than the world consumption average, with some limited exceptions in some countries of the Middle East region. This potential is also reinforced by the fact that the economic growth rate ¬– despite being affected by the global economic crisis with levels expected to be the lowest for many years – is still in the positive side, on contrast to many economies of developed countries where growth is expected to be negative.

An insight into the coming period can be glimpsed seen in the intention of many companies to go ahead with the implementation of their projects in spite of the crisis conditions. Some companies also see this crisis as a good opportunity to acquire other projects or to carry out some merger operations with similar companies.