Steel surges

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

Steel surges
Steel surges

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

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

But in order to build such a place in the desert that is capable of supporting millions of people and where billions of dollars' worth of business can be conducted on a daily basis, the materials must be sourced on an unprecedented scale.

And the materials being used to construct this vision are coming under intense pressure.

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 is placing huge pressure on the supply chain.

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

The city's worldwide marketing campaign continues to inspire demand for office, residential and hotel space. As the towers continue to blast from the desert sands seemingly unabated, no one can be sure of just how long the demand for steel can continue to outstrip supply and, most worryingly, just how high the prices of materials can be pushed.

Cost concerns

The price of steel in the region has been increasing for some time now. This is despite a report published by the International Iron and Steel Institute - an organisation that represents 19 of the world's 20 largest steel companies - that 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: "There are currently over US $2 trillion (AED7.35 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 of this equates to the need for a lot of steel. Customs duties on steel were lifted in March 2008 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 start 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. This equates to rises of 85.6% and 92% respectively in just six months.

For contractors that are working to a fixed price contract that fails to allow for materials 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 for the past five years according to Dubai Chamber of Commerce and Industry.

Market response

Several 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 that it will take some time until the results begin to show and prices can finally be clawed back to more affordable levels. This is reflected by a price increase of not far off 100%.

Spencer Felix, exhibition manager of the Middle East Manufacturing Exhibition (Memex), has reported that GCC countries are investing $18 billion to build 46 new steel plants, 33 of which will be in the UAE and Kingdom of Saudi Arabia.

As requited, that amounts to a lot of steel. But as the UAE and Saudi Arabia continue to construct a more diverse economy from concrete and steel, lessening dependence on oil exports, both are in need of all the materials that they can get.

Along with this huge investment, there are firms that 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 in the marketing, financial, logistics and advisory fields, so it maintains a healthy spread of interest around the region.

Stemcor is also a major player in the global field, with an annual turnover of some $8 billion, trading around ten million tonnes of steel raw materials annually and employing 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 boatload of rebar that previously cost around $16.5 million...may cost you $30-40 million today. What with the credit squeeze, you can no longer go to the bank and say please," he adds. 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," he warns.

Positive changes

Along with the steel suppliers themselves, related businesses have been making moves as they see necessary to take advantage of the boom in demand. 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 glass manufacturers," reports sales and marketing manager Joerg Heber.

Two months ago Danube Building Materials chair Rizwan Sajan stated 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. 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 weather the global financial storm. This 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 stainless steel supplier Arminox Gulf. The Danish-based firm has expanded its operations into the GCC to take advantage of the boom. The company says that its product is suitable for water-side developments and bridges.

"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.

Jamie Stewart is assistant editor on MEP Middle East's sister magazine Construction Week.

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