Middle East awaits steel demand recovery

As the region’s governments invest in downstream iron and steel projects, expectations are high that the commissioning of these new plants will coincide with a rebound in prices

A strong outlook for global steel demand is encouraging Middle East countries to develop a processing industry that they hope will make the region a major hub for the sector in years to come.

Since the fourth quarter of 2011, global steel prices have been on a largely downward trend. By early February, the steel billet price had fallen below $500 a tonne, down from almost $700 a tonne in August 2011. It was also well below the mid-2008 peak of more than $1,000 a tonne, according to figures from the London Metal Exchange.

The trend is likely to continue in 2012, according to a report published in December by Bank of America Merrill Lynch. The global average for hot-rolled coiled steel futures, an industry standard, is forecast to fall from $749 a tonne in 2011 to $709 a tonne in 2012, according to the report. Although global steel production will grow 4.4 per cent year-on-year in 2012, to a record 1.56 billion tonnes, utilisation is likely to be about 81 per cent, down from 88 per cent in 2006. Iron ore prices are expected to fall to $150 a tonne in 2012 and $145 a tonne in 2013, from close to $170 a tonne in 2011.

Steel price drop

The trend is mirrored in the Gulf region. A slowdown in infrastructure development in Abu Dhabi and cheap Turkish imports led to a decline in the average price of reinforcing steel bars (rebar) in the UAE from $820-870 a tonne in March 2011 to $785-830 a tonne in October, according to UK-based consultancy Davis Langdon. In most of the GCC, the price of structural steel remained flat in the second and third quarters, but in Qatar, it fell from $1,507-2,195 a tonne to $1,192-1,510 a tonne.

Despite the recent downturn, the fundamentals for the iron and steel market remain strong, and analysts are confident that steel demand will rebound in the medium-to-long term.

“The fundamentals of steel demand are looking very positive,” says David Russell, a director of Ernst & Young’s mining and metals team. “It’s only demand in Europe that appears soggy. Demand is strong in Asia, Australia and the Middle East, and in the future southern Africa will also have strong growth.

“BHP Billiton and Rio Tinto have both announced huge programmes to meet growing demand. It’s not a short-term play, it’s a medium-to-long term plan. They see future demand as bullet proof.”

Most of the recent growth in the steel business has been driven by increasing demand from China. Although growth rates have softened recently after years of double-digit economic expansion, analysts expect the country will remain a major driver of iron and steel demand for years to come.

“Although there have been signs recently that the pace of China’s economic growth is faltering, they still have a lot of catching up to do, so in the long term, it will continue to be a growth market,” says Donald Douglas of Cambridge Risk in the UK.

“Demand for base metals is still huge in China and demand is emerging from India and elsewhere. It’s the countries that need to develop their infrastructure that will always be the key drivers. We’ve seen a lot of projects reaching the bankable feasibility stage.”

According to industry analysts, it will not be long before Chinese demand growth accelerates once more.

“We expect steel demand to recover in the second half of 2012,” says Russell. “We are already seeing the signs of recovery of Chinese demand for iron ore, which is pushing up prices and steel will follow.”

The business development manager at one Gulf steel firm is similarly positive:

“Steel prices will rise in Europe in the first quarter of 2012 and most markets will follow suit.”

In the Middle East itself, the combination of rebounding oil prices, the gradual recovery of the global economy, government infrastructure programmes and the 2022 football World Cup in Qatar are all likely to ensure that steel demand will be robust in the medium term.

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Richard Nield is a freelance journalist, photographer and filmmaker covering the Middle East and Africa. In 10 years covering the region, he has been published and broadcast by clients including the BBC, Reuters, Al Jazeera, The Economist, The Financial Times, The Independent and Foreign Policy magazine. He has reported from throughout the region, including Algeria, Egypt, Libya, Morocco, Tunisia, South Sudan, Jordan, Lebanon, Syria, Kuwait and Saudi Arabia.