Steel demand forces producers to raise game

Increasing competition in the global steel production market has placed new levels of expectation at the doors of factories in the region. Angela Giuffrida reports on the need to keep customers onside.

With a shortage of raw materials brought on by increasing global demand and the emergence of China as a massive consumer - and producer - of steel, local manufacturers are placing more emphasis on their relationships with suppliers, enhancing service quality and responding quicker to project changes, to ensure they keep up with demand as well as higher consumer expectations.

The GCC alone accounted for one-third of the Middle East's total [rebar] consumption [in 2006] and 5.8% of global consumption.

Last year, worldwide demand for steel grew by around 7%, according to figures from the Organisation for Economic Cooperation and Development (OECD). An upsurge in steel manufacturing was also seen in the European Union, the CIS countries (led by Russia), and in North and South America.

Meanwhile, the procurement of steel in the Middle East continues to flourish - in the GCC alone, steel demand stood at 15 million tonnes in 2006, of which 14.3 million tonnes were imported. This figure is expected to reach around 19.7 million tonnes in 2008, mainly because of a surge in industrial and infrastructure projects.

Another trend placing even more pressure on production and demand is the consolidation of major steel players, as highlighted by Mittal Steel acquiring Arcelor last year and the more recent takeover of Corus by Tata Steel.

According to Alexander Burdiak, assistant to the general manager of Austrian steel producer Unger Steel, with such challenges facing the industry, strengthening relationships with suppliers has become even more crucial.

"Tight cooperation with suppliers, which has been Unger's philosophy for many years, has become more and more essential," he says. "And this includes architects, developers and clients."

Another way of overcoming industry challenges has been the maintenance of high quality standards in the company's design department as well as in production.

"We are constantly updating employees' qualifications and the software in the in-house design department," adds Burdiak.

"We also use a direct electronic interface between the in-house design department and fabrication, in order to adjust quickly to required changes, and employ highly qualified project managers."

Unger Steel opened its US $23 million (AED85 million) structural steel factory in Sharjah's Hamriyah Free Zone in April. The factory currently has the capacity to produce 50,000 tonnes a year to service the UAE. Production at the plant, which is spread over 100,000m2, is carried out with three bays using the latest machinery. All shot blasting machines, cutting and drilling lines, coping robots and pipe cutting are computer-controlled. One of the company's first orders was for the supply of structural steel for a labour accommodation complex at Hamriyah.

"The new facility for structural steel in the Hamriyah Free Zone contains three independent production lines, which are very flexible to customer demands within a short timeframe," says Burdiak.

Among the trends expected to drive the industry over the next year is clients' expectations in terms of the quality of service provided as well as the increasing importance of responding quickly to project changes, according to Burdiak.

"The completion of the client's orders on schedule will become more and more crucial since the delayed handing over of projects to the investor represents a considerable loss in the return on investment. Therefore, Unger is constantly focusing on completion of projects in or before time with all our orders."

With the price of cement continuing to rise, Burdiak says that this could prompt a move towards more high-rise buildings in the region being constructed with steel.

"The advantages of using steel in this context means a shorter construction period; less weight, leading to considerable savings in the foundation costs; smaller columns and wider spans, therefore more available spaces to let; and it's earthquake-proof."

As with most building materials, escalating prices continue to affect steel as a result of burgeoning global demand. But buyers will now be able to better protect themselves against rebar price rises with the launch of a steel rebar futures contract on the Dubai Gold & Commodities Exchange (DGCX) on 27 June. Rebar is the first of four futures contracts aimed at the steel supply chain.

The Middle East is the only region outside China whose production and consumption of rebar increased by over 5% in the last year. According to DGCX, the Middle East consumed 20% of the global rebar production in 2006.

The GCC alone accounted for one-third of the Middle East's total consumption and 5.8% of global rebar consumption, while price volatility can range between 15 and 20%. Contractors can trade on the exchange either by signing up as a member or by using an existing broker member and paying them commission. Trade membership has been set at $10,000 (AED36,717), while transaction fees have been wavered for the first 12 months of the contract.

"The reality is, the steel industry has created price volatility all by itself," said John Short, executive director - Steel & Base Metals, DGCX.

"It's not future exchanges, it's not hedge funds, it's not government action, it's the steel industry. It's the supplier-demand dynamics. So in terms of the construction industry, if you want to construct buildings you just have to take whatever the steel price is at the time - what we're offering is a tool whereby if you see an attractive price, or you need to lock in a fixed price, then you can do so using these tools.

"You still continue to get your physical steel from the market, you just manage price on the exchange," he adds.

GCC demand for rebar is expected to increase by 9% a year until 2010.

"I'm not entirely sure if the futures contract will work for rebar, as it's difficult to predict the price in two weeks time, let alone three to six months time," said Sameh Hassan, CEO of building materials trader, Madar Holding.

"But we'll register ourselves and maybe we'll be able to add value. If we're able to secure supply for three to six months at a sustainable price, then that would give us a lot of peace of mind, which at the moment is absent."

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