There is no shortage of steel and no black market in the metal even though prices have soared in the UAE, says the head of a leading building materials company.
“There is still no shortage in the steel market but you have to pay the high prices,” Rizwan Sajan, chairman of UAE-based Danube Building Materials, told Emirates Business yesterday.
“There is also no black market because availability is plentiful. Whatever quantity you want is available, it’s just that the price has become inflated. But in the case of the cement sector, even if you want to pay the price, supplies are not available. So then the black market comes into the picture.”
Sajan said the price of steel has shot up since the beginning of 2008 from Dh3,000 per tonne to Dh4,000. The current price is a 60 per cent increase on last year’s average price of Dh2,500.
Figures from Dubai Chamber of Commerce and Industry (DCCI) show that the price of steel has increased almost 14 times in five years.
“Steel suppliers have taken big losses because a lot of us agreed contracts at Dh3,000 and now it is trading at Dh 4,000,” added Sajan. “But whatever I have lost on a particular contract I can make up in others contracts. Prices usually remain valid for three to six months.”
But some industry figures say those purchasing steel are facing problems. One trader said: “Many suppliers won’t sell if you are asking for less than 300 tonnes and some have a much higher minimum for orders. So if you are a small contractor you are facing a major problem.” And another source who asked to remain anonymous said there was a worldwide shortage. He added: “The steel industry must now strike a fine balance between short-term profitability and long-term sustainability. Global and regional demand have risen to such an extent that the steel shortage is now delaying construction projects.”
According to MEPS, a consultancy operating in the worldwide steel sector, prices were driven up by rising costs and limited supplies. It forecast that global steel prices were set for double-digit percentage increases this year.
“Steel mill transaction prices continue their positive trend,” MEPS said in a recent report. “They are being driven by escalating input costs and higher energy and transport charges. The upward price movement is being propelled by limited supply and higher production costs.”
The report said the current steel situation had compelled some Middle East companies to reschedule the delivery of projects. But Sajan said contractors had no option but to pay.
“They can delay a project but if I am a contractor and I have 1,000 workers to feed I cannot put my project on hold for very long. I have to negotiate the price with my developer, explain the situation to them and go on.”
The squeeze is felt not only by contractors but by steel producers themselves as they have to import raw materials including iron ore, direct reduced iron (DRI) and ferrous scrap – and the cost of these commodities is rising. DRI is processed iron ore that is iron-rich enough to be used as a scrap substitute in electric furnace steelmaking.
Mohammed Al Zamil, Chairman of Zamil Group, said: “The spiralling price of several inputs such as steel, copper and aluminum have definitely affected us.
“We are sometimes even faced with a contrasting situation where input prices have gone up but the prices of corresponding output products have seen a downward trend. This affects our competitiveness and therefore profitability. As our operations come under pressure from both suppliers and customers our operating cycle takes a beating and cash management becomes crucial,” said Al Zamil.
Sajan added: “Our profitability will surely be affected by the increasing prices. If the price inflates again and we have contracted at a lower price then we have to take the loss.”
The soaring price of steel spells trouble for the regional construction industry. As early as 2006 a severe cash crunch was forecast which may lead to forced mergers of contractors.
Demand for steel in the UAE was 3.5 million tonnes in 2006, according to a report from the Gulf Organisation for Industrial Consulting. It said demand for iron and steel products in the region, where infrastructure projects worth Dh3.67 trillion are in the pipeline, would climb by 31 per cent to 19.7 million tonnes by 2008. To alleviate the pain caused by rocketing prices customs duties on cement and steel were last month lifted across the UAE.
The efforts of the GCC nations to diversify their economies away from oil and natural gas and the availability of considerable monetary surpluses have led to a boom in investment in a range of sectors.
Major investments are taking place in petrochemical complexes. According to the Gulf Organisation for Industrial Consulting (GOIC), the natural advantage of comparatively low energy costs is being leveraged in setting up metallurgical units for the production of aluminium and steel, which have high energy usage.
The bullish economic outlook for the GCC thanks to high oil prices has resulted in a huge spurt in construction activities in the region and as a consequence there has been a sharp rise in steel consumption in the region.
Local producers of steel have increased production to meet the growing demand. However, despite an impressive growth of steel production in the region, consumption has by far outstripped the domestic production.
The GOIC said the production of steel in the GCC region increased by 21 per cent between between 2001 and 2005. But the consumption of steel during this period, however, saw an increase of 64 per cent. This has led to ever increasing imports of steel in to this region. Imports of finished and semi-finished steel in to the GCC region was more than 13 million tonnes in 2005.
The GOIC estimates that in the next two to three years about 10 million tonnes of new steel capacity will be created in the GCC region.
Gulf states spent $6.5 billion (Dh23.8bn) on enhancing production capacity and an additional $5bn is expected to be invested over the next three years.
Steel demand in the GCC stood at 15 million tonnes in 2006, of which 14.3 million tonnes were imported, and is expected to reach around 19.7 million tonnes in 2008, mainly because of a big rise in industrial and infrastructure projects.
Demand for steel to rise by 31% in UAE