Steel firms brace against price hikes

Demand for steel continues to flourish in the Middle East. But with steel requirements across the world expected to increase rapidly, what effect will this have on projects in the Gulf?Angela Giuffrida speaks to a cross section of those affected to see how they are coping.

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By  Angela Giuffrida Published  June 10, 2006

|~|125prod200.gif|~|Steel rebar has increased to $515 per tonne from $480 in April. Lawyers in the UAE are now urging contractors to draw up price protection clauses to mitigate against the crippling price hikes happening all across the materials sector.|~|Fluctuating prices, supply shortages and extended delivery times are just some of the challenges facing the steel industry in the Middle East at the moment. While the regional construction explosion is keeping steel companies on their toes, rising global demand is placing immense pressure on stock. This year alone, worldwide demand for steel is expected to grow by 7%, fuelled mainly by a burgeoning economy in China, despite efforts from its government to rein in rapid construction growth. Although it produces around one quarter of the world’s steel, China still imports one third of its requirement, and demand from the country’s construction market is expected to reach 13% of total world production this year, compared to 4% in Europe. According to estimates from the International Iron and Steel Institute, global demand for finished steel products will be between 1.040 billion and 1.053 billion tonnes in 2006, compared with 972 million tonnes in 2004. Meanwhile, the demand for steel in the Middle East continues to flourish — 3.4% of the world’s total steel production was used across the region last year, equating to 18.6 million metric tonnes. And around 22% of steel products were brought into the region, making it the fifth largest importer. Out of this, 4.6% went in the direction of the UAE. But while the markets are strong, steel shortages are having a big impact on those operating in the region — as well as on the timely completion of major projects. “Our market is experiencing an unprecedented boom in construction, and steel as a commodity is currently in shortage due to total current world demand exceeding output,” says Bob Fletcher, commercial general manager, Corus Middle East. “Stock levels are relatively low due to stockists being reluctant to buy in case prices fall and therefore inventory levels are lower than normal. This will adversely affect the fast track projects that need steel ex-stock. “When mills are busy and raw materials scarce, deliveries become extended, and a three to four month arrival after an order is placed is common.” Volatile steel prices have been having an even bigger impact on small- to medium-sized companies, which cannot afford to buy large quantities from major suppliers or guarantee prices for more than one week. According to MEPS International, the raw material cost of steel is up to 30% of the total building cost. In the UAE, steel now trades on average at around US $599-626 per tonne, compared to $435.70 a few years ago, and can cost as much as $762.44 for the most expensive grades. In the last month alone rebar has moved from around $505 to $515 per tonne, compared with $480 in April, according to mesteel, a portal that links steel buyers and sellers in the Middle East. And 316-grade stainless steel — which is often used on desalination and petro-chemical projects, as well as in exterior cladding and cooling towers because of its high resistance to corrosion, is currently pegged at $4900 per tonne, compared to $2020 last year. The price hikes mean that many contractors have suffered major losses on projects because they have been unable to source essential material at the price stipulated in their original tenders. Fletcher adds that companies need to adopt finely-tuned strategies to avoid the pinch of sudden price fluctuations. “Rising steel prices affect everyone, particularly in terms of cash flow,” he admits. “But we are in the fortunate position of having strong relationships, not only with our own mills but also other major manufacturers throughout the world, which allows us to continue to service our customer base. “This diversity remains one of our key strengths in meeting demand. There isn’t an answer to the price challenge. If demand outstrips supply prices will continue to rise and mills are taking opportunities to maximise price by adopting spot business strategies.” Rising prices are even more of a dilemma for the UAE, which despite having to cater for increasingly high demands from the construction market, relies heavily on imports due to minimal steel production in the region — domestic demand is believed to outweigh supply by two to one, with firms needing three million tonnes of steel a year. Some companies in the region have been making inroads to try and overcome the burden of price fluctuations and product shortages. And deputy director of the Dubai Ministry of Finance’s industrial development directorate, Abdulla Mohammed Al Roken, even issued a statement late last year encouraging more domestic production of steel to reduce the dependence on foreign imports. Oasis Metal Manufacturing, a subsidiary of Al Shirawi Group, has stepped up its investment in the steel sector in order to exploit the rapid growth in industrialisation and construction. The company recently started manufacturing industrial steel gratings at its factory in Al Quoz and, according to executive director Ali Abdulla Al Shirawi, production capacity will be enough to meet demand in the UAE. “The investment of the Al Shirawi Group in steel and other related sectors has exceeded $20 million. The steel gratings will fulfil the requirements of the market, which is growing at fast pace in line with progressive development of various economic sectors,” he says. “The annual capacity of the factory will be enough for the UAE and region. About 70% of the product will be sold locally and the remaining 30% will be exported to various countries.” Oasis Metal Manufacturing makes a wide range of products, including galvanised and plain steel gratings, which can be used in airport, water treatment and power generation projects. “The company is planning to penetrate neighbouring markets as the region is witnessing substantial growth which will increase the demand for steel gratings in the coming years,” he adds. “The factory is equipped with advanced technology that can manufacture products at a high speed and quality to meet all international standards and cope up with the demand of steel products, which is increasing year on year.” Another company making massive strides in the industry is the Abu Dhabi Pipes and Profiles Company (Adpico). Part of the Safa Group, Adpico is ranked among the region’s largest producers of steel tubes and profiles for the construction sector. It currently produces 1.5 million tonnes of steel piping across eight mill lines, and is in the process of commissioning two more. Its products are used throughout the Middle East and GCC. And with growing demand for construction material supplies worldwide, Adpico is expanding in the US, Canada and Europe. The company also plans to launch galvanising products over the next few months, as well API pipes of up to 24 inches for the oil and gas and construction industries. “Adpico’s manufacturing processes adhere to stringent standards, and as long as there is an appetite for large-scale projects within the region, there will be a demand for our pipes for scaffolding projects,” says Feisal Hammude, director of international sales and marketing, Adpico. He adds that the company’s ability to procure enormous quantities has meant it hasn’t been too badly affected by volatile steel prices. “We have been hit by increased steel prices but the effect has not been as much as the smaller mills. Our ability to procure enormous quantities, along with our group’s buying power directly from the source gives us added advantage. This keeps us a step ahead by allowing us to maintain large stocks while keeping our mills running and our clients happy by passing savings on to them.” “But I am sure the prices will stabilise. Like any commodity of its kind there are fluctuations according to supply and demand. This happens to all commodities, whatever they may be. “The difficulty that consumers face is when to buy, should they buy and if so, how much. There’s a lot of speculation in the industry, but people need to have steel because every development in construction, from real estate to industrial and commercial projects, uses it.”||**||

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