From oil to strategic red earth
One of the television channels in London uses the Dubai skyline as background film during announcements for future programmes. The images of skyscrapers rising from the desert are far more compelling than the programmes being promoted and I’m sure many British viewers assume they are watching computer-generated effects, as it is hard to comprehend the scale of what is happening in Dubai.
The bold vision that has given birth to these buildings is distinctly Dubai’s but their construction ties the city directly into the global economy. It is impossible to build a skyscraper without using steel reinforcing bars (rebar) and, as a result, Dubai’s consumption of the metal is growing as rapidly as its buildings. Insufficient rebar and buildings sag and fall over, which is unfortunate for builders as steel is expensive and concrete is cheap.
Dubai’s steel consumption rose 23 per cent in 2006 alone, compared with a worldwide average of 6.1 per cent. The Burj Dubai, an awe-inspiring building, is expected to use up to 80,000 tonnes of rebar, which at a cost of about $1,000 (Dh3,670) a tonne represents 10 per cent of the project’s cost even before concrete is poured or the steel-and-glass skin added. Steel, the raw ingredient of all growing economies and booming demand – whether from construction in Dubai or industrialisation in China, has made access to iron ore, from which steel is made, of enormous importance.
Surging demand has pushed the cost of iron ore up with estimates of a 50 to 60 per cent increase in prices this year alone, which means that the rebar holding up the Burj Dubai is increasing in value faster than the property itself.
Part of the reason for the rapid price rise is that iron ore supply is tightly controlled with just three companies dominating: Brazil’s Vale, Rio Tinto and BHP Billiton. Together they control 80 per cent of the market, so what happens in the mines owned by these companies dictates iron ore prices, steel prices and the ability of China, Dubai and other rapidly developing economies to construct the necessary infrastructure and machinery to maintain their growth.
The miners have ambitious plans to increase iron ore production, but this will not happen overnight. Rio plans to spend $10 billion doubling production from its mines in the Pilbara region of Western Australia to 320 million tonnes by 2013. BHP will spend $15bn to reach 300 million tonnes by 2015.
Last month I spent some time in the Pilbara, which in January is something of an endurance challenge. The weather at this time of year makes Dubai in July seem quite mild. The scale of the Rio and BHP operations in the Pilbara is vast. The region itself is an expanse of nothingness larger than Iraq and each mine could swallow a town. The iron ore is carried out of the pits by trucks the size of houses. Each vehicle can carry more than 240 tonnes of rock and their tyres are 12 feet high and cost $25,000 a piece. The ore is loaded onto trains 2.5km long for a 350km journey to the sea, where it is dumped into a 250,000 tonne ship.
The ore is then taken to smelters all over the world and the steel that emerges is exported to Dubai and ends up enmeshed in concrete. Everything about this process is huge: huge in cost, huge in scale and also hugely risky.
BHP has proposed buying Rio in a deal worth more than $130bn, largely so it can combine the operations in Western Australia and find efficiencies transporting the ore to market. But this would place 80 per cent of the world’s iron ore in the hands of just two companies and China’s decision to take a 12 per cent stake in Rio last Friday has been seen as an attempt to block BHP’s bid.
China’s decision to buy the stake is enormously significant as it may be the first shot in a new economic war for control of the world’s resources. The continued growth of China’s industry, as well as Dubai’s skyscrapers, depends on access to key resources like iron ore and it seems inevitable that we will soon be talking about the strategic importance of these metals in the same way that we talk about oil.
The heart of the global economy is not therefore Wall Street, or the City of London. Neither is it Dubai, Shanghai or Tokyo. It is a vast expanse of red earth in the middle of nowhere – but Dubai’s skyline does make better television.
-- David Robertson is business correspondent for The Times of London.
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