Hard knocks

The construction industry is steeling itself for more pain as dwindling steel supplies drive up prices.

ANALYSIS, Materials

The construction industry is steeling itself for even more pain as dwindling steel supplies in the Middle East drive up prices. Jamie Stewart reports.

It seems that barely a day goes by in the region without a new major project being tendered, a new multi-million dollar contract being awarded, or a new development blasting out of the sand.

It is this remarkable construction boom, fuelled by healthy oil revenues and rampant demand for commercial and residential property, that has led to the rapid expansion of the steel industry across the GCC, as suppliers battle to meet today's sky high demand.

According to a report published by the International Iron and Steel Institute, an organisation representing 19 of the world's 20 largest steel companies, the global growth in crude steel output saw a small decrease in 2007 to 7.5%.

Despite this global slowdown, the Middle East was able to buck the trend, with growth in production during the second half of 2007, despite well publicised global economic problems.

According to figures from Mesteel, steel production in the region is indeed on the rise. The rate of growth is predicted to continue, with high demand presenting a huge challenge to suppliers eager to satisfy the hunger within the market.

Despite this growth, however, regional consumption continues to outstrip supply on an alarming scale. There are over US $1 trillion (AED3.7 trillion) of construction projects currently underway in the GCC, according to Dubai-based research firm Proleads.

Estimates put predicted steel consumption for 2008 at 19.7 million tonnes. All of which is reflected in the cost of steel which, like the projects spread across the GCC, continues to spiral upwards.

Customs duties on steel were lifted in March of this year, along with those on cement, to bring some relief to struggling contractors who had no option but to pay the market rate.

At the time of the move, Dubai customs said it was "to allow all contractors and real estate developers to import these two materials with no restrictions."

Prices have continued to rise, however. According to Mesteel, since the beginning of 2008, the price of steel billets and blooms has risen from $730 to $1,000 per tonne, while the price of reinforcing bars has risen from $750 to $1,150.

Over the past five years, the price of steel has risen consistently, according to Dubai Chamber of Commerce and Industry.

The situation has been reflected around the world. Internationally, steel prices rose considerably during 2007, a trend which has continued into 2008.

GCC countries have reacted to the gulf between demand and supply, though as is the case in any market, when an explosion occurs the likes of which has been seen in the construction industry, any reaction takes time to bear fruit.

Spencer Felix, exhibition manager of the Middle East Manufacturing Exhibition (Memex), said in a statement last week that GCC countries are to invest $18 billion to build 46 new steel plants.

Thirty-three of these will be based in the UAE and Saudi Arabia. Along with this huge investment, there are companies which are prepared to inject the cash required to pursue the extremely high level of demand by increasing supply.
 

For those prepared to put up the capital, the rewards could be there for the taking.

One such company is Danube Building Materials. Danube is one of the largest building suppliers in the UAE, and has invested $26.8 million in the UAE steel industry in 2008.

The move will transform the outlook of the company, pushing steel to become one of the largest segments of its business.

Half of this investment will go towards a new logistics facility in Ajman, UAE. Large-scale construction operations are expected to commence in three months time.

The new facility is expected to supply construction materials to a variety of high profile projects in the emirate, including Emirates Commercial City, Ajman Eye City, Al Helio Downtown, and Ajman International Airport, as well as other projects across the UAE.

The new logistics facility will cover 11,000 m2 in Ajman's Al Jarf area. It will add to Danube's established factories in China, Bahrain, and its existing facility in Jebel Ali, Dubai.

Rizwan Sajan is chairman of Danube Building Materials. He said: "Due to the rise in steel prices, the [$26.8 million] which we initially invested has quickly become [$53.6 million].

This, and the opening of our facility, is testament to the rapid growth pace at which we are moving at to leverage the booming construction market.

"We import a lot of steel and we distribute this steel into the market place. There is so much happening not only in the UAE, but all over the Middle East."

Sajan is confident that the trend is here to stay. When asked if he believes such a high rate of growth can continue, he says simply: "Oh yes, for sure. There is no doubt about it."

Another company with a healthy spread of interest in the region's steel industry is Stemcor Dubai, which concentrates its business on the marketing, financial, logistics and advisory fields.

On a global level, Stemcor has an annual turnover of some $8 billion, trading around ten million tones of steel raw materials annually, and employs a workforce of around a thousand.

Bill Attenborough is managing director of Stemcor Dubai, the regional hub for the Middle East and southern Asia markets. Attenborough puts the explosion in the GCC construction sector down to a number of issues:

"Growth in industry, and the expansion in various regional economies," he says. "Whereas previously industry was catering to a host of well established European markets, these either fell static, or went on the decline.

Now, however, [along with the GCC] we are seeing an explosion in the markets of Brazil, Russia, India and China."

As for the near future of the steel industry, unlike Sajan, Attenborough sees challenges ahead: "I certainly see growth continuing though not without one or two blips on the horizon.
 

For example, a boat load of rebar that previously cost around $16.5 million; that same boat load may cost you $30-40 million today. What with the credit squeeze, you can no longer go to the bank and say please."

Attenborough also identifies oil as an uncertain factor: "We could face problems with how far the oil price is going up. There are rumours that markets today are planning to impose export taxes, which could pose a problem for some."

Though some have expressed cynicism as to whether the region will be able to fill the countless square metres of office and commercial space currently under construction, there is no sign of the pace dropping off as yet, though whether Attenborough's warnings will lead to a slowdown over the next few years, only time will tell.

Though there may be problems underfoot, many in the industry have expressed a belief that the GCC is in a healthy position to weather the global financial storm. It is clear that much is being done to even out the supply and demand of the market.

The attendant problem, however, is that the supply side must attempt to settle with the demand side on an even keel, for the market to balance itself out. A process that, though suppliers are scrambling to plug the gap, inevitably takes time.

And so to the question that contractors have been asking across the region for some time now. Will we start to see the price of steel fall to more affordable levels in the near future? And if so, when?

The answer that contractors do not want to hear, is that nobody can be sure. The complexity and span of the market make accurate predictions impossible.

Torben Krebs is general manager of Arminox Gulf FZCO, suppliers of stainless steel.

The company, which originated in Denmark, also chose to expand its operations into the GCC to take advantage of the boom.

Says Torben: "For the first five or six years we were trying to persuade governments and clients to use stainless steel to avoid corrosion of structures, especially developments by the sea.

Over the past three or four years our business in the region has expanded. Contractors have started to use our materials in bridges and waterside developments."

And as per the rules of supply and demand, as Arminox's capacity to supply has increased, so its prices have fallen
accordingly.

As Torben explains: "We opened our factory in Dubai four years ago, which is the largest of its kind in the world.

"Now that we are receiving more orders, the prices have become more affordable."

As a long list of contractors battle to source the materials needed to deliver an even longer list of construction projects to deadline, one thing is for sure.

With the one-sided climate of supply and demand the industry currently finds itself in, it takes nerves of steel to get the job done on time, and on budget.

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