Steel yourselves

Despite the private sector scrambling to keep up with demand, steel prices have continued to surge.

Stemcor UK Ltd., ANALYSIS, Materials

Despite the private sector scrambling to keep up with demand, steel prices have continued to shoot though the roof. Jamie Stewart asks if relief is in sight.

Some time ago, Dubai set out on a mission, driven by the vision of a select group of people. Today the city is in the midst of pursuing the vision of a bustling metropolis, at the centre of GCC commerce, trade and industry.

But in order to build such a place from the desert sands, capable of supporting millions of people, where billions of dollars worth of business can be conducted on a daily basis, the materials must be sourced on an unprecedented scale. The materials used to construct this vision are coming under the most pressure.

What with the credit squeeze, you can no longer go to the bank and say please.

The problem of steel shortages is by no means one that is restricted to the UAE's second city. Across the GCC, the sheer amount of construction work, fuelled by healthy oil revenues, is placing unprecedented pressure on the supply chain.

But it is in Dubai, at the centre of the boom, in which the market forces are at their most prevalent, pushing the price of steel through the roof.

The city's faultless marketing on the world stage continues to inspire demand for office, residential and hotel space. As the towers continue to blast from the desert sands unabated, no one can sure of where it will all end, just how long demand can continue to outstrip supply and, most worryingly, just how high prices of materials can be pushed.

The price of steel in the region has been increasing for some time now. This despite a report published by the International Iron and Steel Institute, an organisation representing 19 of the world's 20 largest steel companies, which showed the global growth in crude steel output actually dropped in 2007 to 7.5%.

As expected however, the Middle East was able to buck the trend, with increased growth in production during the second half of 2007.

Despite this growth, regional consumption continues to outstrip supply. A recent report by Al Mal Capital for Arabtec Holding stated that "there are currently over $2 trillion of projects planned or underway in the GCC which is more than double the GDP of the six GCC economies combined.

The construction sector, which includes air and sea ports, real estate, civil engineering, railways and roads, accounts for 60% of the total and is valued at $1.17 trillion."

All this equates to a lot of steel. Customs duties on steel were lifted in March of this year, along with those on cement, to bring some relief to struggling contractors. But despite this move on the part of the UAE government, prices have continued to rise.

According to Mesteel, the portal for steel buyers and sellers across the Middle East, since the beginning of 2008, the price of steel billets and blooms has risen from $730 to $1250 per tonne, while the price of reinforcing bars has risen from $750 to $1380.

And now for the figure that should make every contractor enjoying an iced water during the mid-day work break, choke on his cool, refreshing beverage. This equates to a rise of 85.6% and 92% respectively in just six months.

For contractors working to a fixed price contract that fails to allow for material price hikes during the course of construction, such a drastic increase in costs may be enough to force them to bid elsewhere.

Though this rise is steep, it is merely an acute magnification of an ongoing trend. The price of steel has risen consistently, according to Dubai Chamber of Commerce and Industry, for the past five years.

Firms have sprung up across the GCC as market forces have swung into action to try and plug the yawning gap between supply and demand. Though the gap is such, reflected by a price increase not far off 100%, that it will take some time until the results begin to show, and prices can finally be clawed back to more affordable levels.

Our business has expanded as contractors have started to use our materials.

Spencer Felix, exhibition manager of the Middle East Manufacturing Exhibition (Memex), said in a statement earlier this year that GCC countries are investing $18 billion to build 46 new steel plants, 33 of which will be in the UAE and KSA. As requited, that amounts to a lot of steel.

As the UAE and KSA continue to construct a more diverse economy from concrete and steel, lessening dependence on oil exports, both are in need of all the materials they can get.

Along with this huge investment, there are companies which are prepared to inject the cash required to pursue the extremely high level of demand. For those prepared to put up the capital, the potential rewards are waiting to be enjoyed.

Stemcor Dubai concentrates its business on the marketing, financial, logistics and advisory fields, and so maintains a healthy spread of interest around the region.

Stemcor is also a major player on the global field, with 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.

Despite the boom, managing director Bill 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 boatload 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."

Along with the steel suppliers themselves, related businesses have been making moves as they see necessary to take advantage of the boom. One such firm is crane provider Demag Cranes, which deals with customers from small workshops all the way up to major international firms.

"Due to the booming construction industry we have developed our solutions for the specific needs of certain industries like pre-cast factories, pre-engineered building fabricators, rebar traders and manufacturers and glass manufacturers," says sales and marketing manager Joerg Heber.

Two months ago Danube Building Materials chairman Rizwan Sajan told Construction Week that in his opinion there is "no doubt" that the construction boom is going to continue for some time.

These were very confident words from Sajan. Jittery talk of the bubble bursting, particularly in Dubai, is never too far away. Be it critical supply shortages, staff retention problems, or demand stemming only from investors seeking to make a quick buck, as opposed to residents seeking to find somewhere to live. Though to date, year on year, growth within the sector has continued, which has surprised some, and reassured others.

The situation is compounded by continued talk of recession in the West, and fears of job losses, some of which have already proven true. Just ask some of the 350,000 construction workers who, according to reports, have lost their jobs in the US since August 2006.

The construction sector is valued at $1.17 trillion.

So what does all of this add up to? The Gulf nations will be hoping that it leads to a healthy position for the GCC to inhabit in order to weather the global financial storm. Which will mean more building. Which means more steel.

Much is being done to even out the supply and demand of the market. So will we start to see the price of steel fall to more affordable levels in the near future? And if so, when?

The answer is that nobody can be sure. The boom that is currently being witnessed will have to calm to a more sustainable level before prices can recover. As to when this will happen, the unpredictable nature of the region makes it very hard to say.

The complexity and span of the market make accurate predictions impossible, and who would want to make promises that they cannot guarantee, when there are, quite literally, trillions of dollars involved?

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

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

The company says its product is suitable for water-side developments and bridges. Something that the gulf countries are currently building, and will no doubt continue to build, considering the amount of land reclamation work that is going on.

"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," says Krebs. "Over the past three or four years our business in the region has expanded. Contractors have started to use our materials."

Good news for Krebs, and though this represents a tiny piece of a very large and very complex jigsaw, good news for the Gulf too.

As a long list of contractors battle to source the materials needed to deliver an even longer list of construction projects to deadline, the more help that steels into the GCC, the better.

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