Infrastructure development and housing will drive the demand for steel in the UAE and the region in 2009, experts. Even as they warned that 2009 will not be the same as previous years.
Shyam Bhatia, Chairman of Alam Steel, said one of the major driving forces in 2009 will be the exit of non-steel traders. "As the demand for steel increased last year, there was a flurry of activity with non-steel traders entering the market, resulting in a glut in the UAE market. Today we have stocks available that far exceed the local requirement," said Bhatia.
"Once the non-steel traders exit the market, regular traders will be able to sell as before depending on the requirement of ongoing projects," he added.
According to some analysts, by the end of the second quarter, the industry will get a clear picture on how the construction industry will fare during the rest of the year.
"With a slowdown in construction of several ongoing projects and the unclear status of new projects, it would take a while for the industry to make any forecasts. By end-April, we are hoping that a clear picture will emerge," said one analyst.
Meanwhile, rebar prices continue to remain stable at around Dh1,850 to Dh1,900 per tonne for eighth week in a row. Last year, prices had hit a low of Dh1,500 in November following an oversupply and a slump in global demand. This has resulted in an increase in orders being placed.
"The orders had significantly reduced when the prices were fluctuating during the last three months of 2008. Following a relative stability, the number of orders should also increase," said one trader.
Riad Bsaibes, Chief Operating Officer – Corporate at Amana Contracting and Steel Buildings, told Emirates Business that demand will get an impetus from the various fiscal packages (well over $1.5 trillion or Dh5.5trn at this point) being announced by governments across the world.
"A very large amount of this spending will go into infrastructure. This will consume a good amount of the global steel inventory. The pace of this consumption coupled with the reduced production rates will determine the supply-demand dynamics of the industry and the resulting price points," said Bsaibes.
According to him, since oil and gas and transportation constitute a considerable cost in the production of steel, continued lower oil prices will result in lower steel prices as well.
The other main drivers for the steel industry in 2009 will be current high inventories, the cost of iron ore and oil, and the effect of the various fiscal stimulus packages being announced across the world.
"Because of the dramatic change in the supply-demand dynamics in the industry over the past six months, huge amounts of steel inventory exist in the supply chain across the world. This has naturally resulted in depressed prices. The ability to absorb this inventory will depend on the industry's co-ordinated reduction of supply coupled with the ability to consume the current inventories," he said.
According to him, the steel industry underwent a boom-bust cycle in 2008. "At the beginning of the year, worldwide supply constraints coupled with increasing global demand resulted in a continuously increasing price curve for steel. This phenomena was further enhanced by speculative financial investors who saw commodities as an inflation-safe asset class," said Bsaibes.
Another cause for the increased price of steel was the continuously rising price of oil, he said.
"Since energy is a major component in the cost of producing steel, increased price of oil resulted in increased cost of producing steel. However, with the dramatic unfolding of the financial crisis in the developing world over the last four months, the ensued dampening of future global economic growth as well as the dramatic drop in the price of oil resulted in a commensurate drop in the price of steel," he said.
He said the increased inventory levels (due to the aggressive supply factors of the first half of 2008) resulted in further dampening steel prices worldwide.
The state of the steel industry in the UAE mirrored the global state, he said. But with the addition of another factor – the tight supply chain.
"The fact that the local demand for steel far outstripped the local supply and inventories resulted in price shocks of steel in the UAE and the region. This resulted in steel prices increasing in the middle of 2008 much more aggressively in the UAE than the rest of the world."
Experts welcomed government intervention in stabilising the prices of materials.
According to Bhatia, the major cause of price fluctuation was the international financial crisis which has affected all industries from oil to steel.
"The government cannot intervene because it is not in their hands. Fluctuation in steel price is subject to demand and availability in the international market," he said.
Bsaibas, however, said government-related projects constitute a good portion (if not the majority) of the current construction in the UAE.
"The fact that many mega-projects were launched at the same time resulted in an immediate demand for steel, which the supply chain in the country was unable to accommodate easily. As a result, we witnessed the extreme price shocks witnessed during the first three quarters of 2008," said Bsaibas.
While steel, which was priced Dh3,200 per tonne during the first quarter of 2008, increased to Dh4,000 during the second quarter and further increased to Dh5,500 during the third before dropping to Dh2,400 in the fourth quarter.
"Since it is a fact that construction and real estate are the major components of the country's GDP, I believe that the government should intervene in times of crisis to maintain price stability and availability. If this is not done we will witness dramatic increases in construction costs as we saw in 2007 and 2008. Such increases do not help anyone, not the contractor, nor the developer, not the end user," said Bsaibas.
In 2007, the government lifted the five per cent customs duty that was being levied on the import of steel and cement into the UAE market.
According to Bsaibas, the reintroduction of the customs duty on steel imports will simply result in an equivalent increase in the supply price.
"This will translate into higher construction costs. At the same time, this customs duty would be an incentive for increasing the production of locally-produced steel. Therefore the decision to reintroduce this customs duty will depend on the government's balance of three things: government revenues from the duty, increased construction costs, and incentive to encourage the local steel production industry."
According to Bhatia, re-introduction of customs duty will always help the local manufacturers. "At present, almost 75 per cent of the demand is met by production from the GCC countries. In the long run, it will be beneficial to the local steel industry," he said.
Experts said that most contractors probably have enough work in hand.
"I am sure there are many contractors, though, whose projects have been put on hold or cancelled. These contractors are certainly not in an enviable situation. Consider that six months ago the industry had extreme shortages of resources, especially human resources. As a result, all contractors were scrambling to recruit and develop enough resources to cope with their backlog of projects," said Basibas.
"With that as a backdrop, when projects get delayed or cancelled, it creates a shock in the system. This is why the worry of most contractors will be to cope with 2009 and 2010. We face a dilemma in this regard. On one hand, the global downturn logically dictates that contractors reduce their resources in anticipation of a slowdown. However, given that it takes years to develop these resources and capabilities, if you do scale down in 2009, what do you do if the activities pick up in 2010 or 2011?" he said.