Exclusive Interview: Hassan Sha'sha'a

Abu Dhabi steel giant Emirates Steel Industries is pressing on with an aggressive expansion plan covering inward investment and acquisitions. Is this a means of bringing stability to the multi-billion-dollar domestic steel market – or of monopolising it? Construction Week talks to strategy and development vice president Hassan Sha’sha’a.

Following the G20 meeting held in London on April 2, an official communiqué was issued by the countries involved. Among its themes was the rejection of protectionism, defined as the safeguarding of domestic trade by imposing rules to limit international competition. This pledge was intended to promote global trade and investment, and aid the fight back from the global financial crisis.

“World trade growth has underpinned rising prosperity for half a century,” the statement said. “But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures. We will not repeat the historic mistakes of protectionism of previous eras.”

Following the communiqué, any protectionist policy was scrutinised globally, which is why some have seen fit to question last month’s decision to reimpose the 5% customs duty on steel and cement imports into the UAE.

For decision makers it is tough to balance the need to protect local industry with the good international PR that comes from maintaining freedom of trade.

According to Emirates Steel Industries (ESI) strategy and development vice president Hassan Sha’sha’a, however, the giant government-owned steel producer is more than capable of competing on a level playing field.

“We believe in the free world system,” he says. “That means that if we cannot compete in a business then we shouldn’t be in it. We are building this company so that we will be able to compete on the international market.”

In fact, Sha’sha’a says that the import tax has had little effect on the business of ESI. “The 5% tax that is imposed on rebar imports does not apply to the cut-and-bend facilities,” he explains.

“In reality, the 5% tax does not apply to most of the steel imports that come into the UAE, so when the import duty was removed and then restored it had a limited impact on us.”

Expansion
ESI has embarked on an aggressive expansion policy, which it does not hide from view. Last week, international media, some of which were flown in for the occasion, were taken on a tour of the firm’s new facilities.

The first phase of its expansion, completed last month, cost US $815 million (AED3 billion) and boosted its production capacity from 800,000 tonnes per year in 2008 to two million tonnes per year this year.

Phase two will boost capacity to three million tonnes by 2011 at a cost of $1.63 billion. ESI is aiming for a vast total production capacity of 6.5 million tonnes by 2014. Already its energy consumption, with phase one of its expansion fully operational, accounts for 15% of the total power requirement of Abu Dhabi island.

The steel company controls a 45% share of the UAE market for rebar and wire rod. Through a combination of investment and acquisitions, its plans will see its output by volume increase by a huge 325%.

The fact that the company is wholly owned by the government of Abu Dhabi may present the wrong impression of ESI. Sha’sha’a maintains that part of the firm’s mandate from the government of Abu Dhabi is to bring long-term stability back to a steel market that shot from $760 per tonne of rebar to $1540, before slumping back to $440 over a ten-month period last year.

Hence the huge market share that is being targeted.“Part of our mandate is to bring stabilisation to the price,” Sha’sha’a says, “because the way that the prices peaked and troughed last year made for a very difficult investment climate.”

The firm is actively eyeing the competition, and says it will be making acquisitions in due course. “We believe that the present market conditions are conducive to consolidation in the steel industry,” Sha’sha’a says.

“We will try to acquire companies that are of interest to us, that make sense, that can be integrated into our business plan, and that meet the local demand,” he adds. “Those are the companies that we are eyeing, that are being reviewed seriously, and in due time our management will make a decision on such acquisitions.”

ESI chairman HE Hussain Al Nowais makes no bones about such plans for expansion, and agrees that the time is right for consolidation. “We can benefit from economics of scale,” he explains, “provided that our acquisitions fulfil our strategy and have an economic value. We want to be market leaders.”

Demand
Some have expressed fears regarding the uncertainty of steel demand in the wake of the construction slowdown in some parts of the country. Among them is Gulf Organization for Industrial Consulting industrial promotion unit head Ismail Elshafei.

“It is too early to say whether it is wise for steel facilities to expand, he warned. “I would not want to risk a prediction.”

However, ESI dismisses such fears and remains bullish about the coming 12 months and beyond. “It is not an issue of being optimistic, but an issue of doing your homework,” Sha’sha’a says.

“We know what projects have been issued and each one of these will require a set amount of steel. There is going to be a continuous healthy demand for steel, at least in the short- to medium-term.”

This belief is partly fuelled by ESI’s confidence in the local Abu Dhabi market. Of the total steel produced by the plant today, around 95% is for domestic consumption, with around 60% of this being sold within the Emirate of Abu Dhabi.

“We know what projects have been issued,” Sha’Sha’a says, “for example, we have the two big museums on Saadiyat Island, the Khalifa Stadium, the new airport, Masdar City, and roads like Al Salam Street.

“Masdar City will require 1.5 million tonnes, while Al Salam Street will require 300,000 tonnes. When we add up all these projects we see that there will be a continuous healthy demand for steel at least in the short- to medium-term.”

With such ambitious expansion plans, the obvious question is one of funding. Just where does the cash come from to finance a $2.45 billion expansion whilst economies the world over contract?

ESI chief financial officer Stephen Pope reveals how. “Though we are owned by the government we operate purely commercially,” he says. “Phase one is financed by a consortium of seven regional and international banks.

“Phase two will be financed through a similar arrangement. We are working with our banking group to consolidate our debt into long-term project finance.”

Market share
Along with the physical investment ESI will be looking to recruit UAE nationals at all levels of the business. It currently employs 133 nationals, up from just 33 in 2006. All things considered, the expansion of the firm is going to see the UAE profit from its own developmental aspirations.

“Our market share is growing at the expense of imports,” Sha’sha’a says. “We are contributing to improve the balance of trade by producing local steel to meet local requirements.”

This is no bad thing for the UAE. The status of ESI as a government-owned firm, openly expressing its desire to buy up the competition while tripling its output, may project it as a company that has an unfair advantage. Abu Dhabi has taken the decision to fuel its own developmental furnace over the coming years, but not necessarily at the expense of free trade.

It is reinvesting its accumulated petrochemical dollars in a robust, internationally competitive steel industry that will create jobs and bring with it security of supply for the long-term future. Protectionist – maybe. Others would simply call it sound business sense.