One step ahead of steel hikes
One of the region's largest offshore contractors recently celebrated 20 years in the Jebel Ali Free Zone. Rupert Cornford talks to Hafez K. Aghili, president, J Ray McDermott Middle East to see how the company is coping in a climate of rising steel prices and skills shortages.
Congratulations on your 20 years in Jebel Ali. Can I ask you what your future plans are for the yard and the company?
We are very much committed to our operations in the Middle East and Dubai. The Middle East operation is one of our most significant worldwide; we are committed to Dubai and we are going to be here for many years to come.
What are the biggest challenges facing oil and gas contractors in the market of rising steel prices, for example?
On many of the projects that we work on we have to provide a lump sum turnkey bid, where we are responsible for procuring all of the materials. We try and do this as best as we can by examining the industry publications and talking to steel suppliers to try and get an indication of where the market is going.
We do have a steel group within the company whose only responsibility is to monitor and forecast the price of all the ferrous and non-ferrous materials that we use in our operations.
We enjoyed probably 10 years of zero growth in steel prices until about three or four years ago, when we saw an increase. And since we have put the steel group in place, the contingency plans we have in bids now are actually stronger than they used to be because of the unpredictability of the market.
A good example is the ship that recently ran aground off the UK coast. It was carrying 1,000 tonnes of nickel, which actually represents about 25% of the world's stocks. So as a result, the price of nickel has shot up by US $10,000 a tonne, just over that one incident. We are isolated from that because of the commitments we have got in place, but it just goes to show how small things can very seriously impact the price of steel.
Interestingly enough, in today's environment, being able to find qualified individuals in a market, which is very buoyant and very much a global market, is one of the biggest challenges that not only us, but all companies in the industry face. It is difficult to find all the required engineers, project managers and planners, for example.
Why is it such a challenge to find such people?
I think that the whole industry is very active and probably over the last 10-15 years we have gone through cycles. And as a result of ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“down cycles', some people have left the industry, so the supply of qualified individuals is relatively limited and as the market is expanding, there is competition for those limited resources.
What has your steel group found in terms of predictions for steel price fluctuations in 2007?
I think it varies depending on the categories of steel. We use relatively high-grade marine quality steel for most of our operations. There is a general consensus that prices of lower grade steels are going to slow down, but the higher-grade steels are going to continue to rise in 2007. There is a lot of construction work underway, and there is a huge ramp-up in the CAPEX [capital expenditure] spending, particularly by oil and gas companies and the ship building industry, and that has consumed a lot of high-grade marine steel. I think the expectation is that the price will stay fairly strong for the rest of 2007 whereas the lower grade steel will soften.
Have you suffered from poor quality steel entering the market and not passing your tests?
That's a very interesting question, particularly for the UAE market. The high-grade steels are not being supplied to this market, they are being consumed by Korea, China and Europe, and a lot of the steel mills that produce high-grade steels are not committing tonnage to stockists in this market.
There has been an emergence of Brazilian, South African and Ukrainian steel, all coming into the local market. And that does not typically meet our higher-grade specifications, so we cannot buy it. We have to buy from the mills direct or stockists in other parts of the world that actually hold our grade material.
So is that actually costing you more money?
Well, quite honestly, yes you pay more for shipping but because there is more available the prices are a little cheaper. In the market here, the stockist's supply pays for the shipping, so he can charge whatever he wants for the steel, so personally I don't think buying foreign hurts us in any way.
How does a contractor mitigate against price fluctuations? Do you factor price escalation clauses into your contracts?
On some contracts we get price escalation protection, but it isn't the norm. It isn't something customers would tolerate. We factor our own escalation expectations in and we have typically done slightly better than our predictions, as the market hasn't been as strong as we expected it to be. But that's a swings and roundabouts situation, you win on some, you lose on others.