Steel’s inflated price caused concern throughout the last two years, but with global economic growth slowing, Petrochemicals Middle East asseses the impact for downstream players.
In the burgeoning Middle East market, being able to source equipment and raw materials at affordable prices and when they are needed have been major concerns. With a host of large-scale projects being undertaken over the past decade, the demand for such materials soared, and with this increased demand the prices also sky-rocketed and the relative availability of the resources plummeted.
One of the biggest issues in recent years for those operating in the Gulf has been that of steel availability. With the material being used for applications ranging from structural support in buildings to pipes for the utilities and oil and gas sector, the pull for the available resources has been several fold.
Consumption in the region has continuously outstripped demand, meaning that sometimes very different industries have found themselves in direct competition for the same resources.
But as the construction industry begins to experience definite signs of a slowdown as the current global economic downturn begins to impact the region, does this really mean that the reduced demand from this sector will result in a drop in prices?
Market movements
The price of some types of steel has already fallen dramatically in recent months, and there are indications in the global market towards further cuts in the future. However, this may be counteracted by a reduced output from the steel manufacturers as they struggle to cope with high raw materials costs and a lower market demand for their product. In addition to the downturn in construction, the flagging car market has meant that the amount of steel required on the world market has dropped by a significant amount over a very short period of time.
In mid-January 2009 the world’s second largest steel producer, Japan-based Nippon Steel, announced plans to cut its output by at least two million tonnes for the period between October 2008 and March 2009 compared to the preceding six month period. “We have said two million tonnes, but it probably won’t stop there,” stated Nippon chair Akio Mimura.
The firm is also reportedly considering the closure of a 2.4 million tonne capacity blast furnace at its Kimitsu plant for maintenance in 2009 – three years before the maintenance work was originally planned.
This news comes almost a year exactly after Nippon’s shares plunged by 7.6% following a 13% fall in its quarterly profits; these effects were blamed on higher fuel and iron ore prices.
The firm attributes the reductions in production to both lower market demand and increasing pressure for price cuts, especially from the car manufacturing industry. In December 2008 the Nikkei reported that Toyota was expected to ask for a 30% price cut, for example. Nippon reasons that lower material availability will prevent a dramatic drop in prices due to a reduced demand caused by the global recession.
Other steel producers have also announced such production cuts, with the largest such firm Arcelor Mittal dropping its output by 30% and POSCO, the world’s fourth largest steel firm planning its first ever output cut.
Price indicators
According to MESteel, the online portal for buyers and sellers of steel in the Middle East, the current market prices are significantly lower than they were a year ago, having fallen in the last few months of 2008 after rising earlier in 2008.
Under its UAE steel price indicator for January 2009, stainless steel HR coils of 316L base now cost US $3500-3600 per tonne, with the material sourced from Western Europe, the Far East, Brazil and South Africa.
In January 2008, MESteel quoted a price of $6400-6500 per tonne for the same product, indicating a reduction of almost 50% since the same month last year. The portal cited steel billets and blooms at a cost of $730-750 per tonne in January 2008, this reducing to $400-450 per tonne in its January 2009 figures. However, a peak of $1180-1250 was reached for the product in July 2008 before the price began to fall again.
It is such wide variations in price over a relatively short time period that has put pressure on firms tendering for work on the region’s projects. With materials potentially rising in price by 80% or more during the tender period, the bid price could see the winning contractor operating at a loss from the beginning of the job should it be a fixed price contract, as many are in the construction sector.
Now the prices have dropped this could work in the favour of some firms. However, as many developers and clients are now asking for tenders to be resubmitted even for jobs that are underway, any potential savings to be made may not reach the contractor level. “The prices are being squeezed from the owners down, it’s from top to bottom,” stresses Sharjah Steel Pipe Manufacturing (SSPM) chief accountant Pram Krishnan.
Variation factors
The recent fall in prices is simply a balancing of the market in line with the world economy reasons Krishnan. “Last year it was all exaggerated prices and the steel manufacturers made money out of this…the figures were high because 2008 was a boom year and the producers took advantage of this situation,” Krishnan states. “This year it will go back to 2006/07 prices,” he predicts. “Steel is very in demand…but the market is almost stagnant and has been for the past month or so. We expect it to bounce back next month (February),” adds Krishnan.
“The price of stainless steel depends on nickel charges fluctuating in the world market. Alloy steel and low temperature grade steel – the prices are still strong and stable,” reports TC Gulf general manager PK Gyaneshwar.
SSPM sources its steel from countries including India, Malaysia and Saudi Arabia, dealing directly with the steel producers. “The demand will remain stable this year because we have to finish projects underway,” states Krishnan.
“Steel demand is based on active projects, and in the petrochemical industry projects are still ongoing,” adds Gyaneshwar. “Most of the purchasing for long-term projects has been done. Petrochemical projects are still happening and those that started one to two years ago will be completed.”
The grade of steel used makes a huge difference to the final quality of a project, and SSPM deals only with high grade steel products in order to meet market demand, reports Krishnan: “If I give [a client] commercial steel they will throw me out,” he states.
“For all government projects API (American Petroleum Institute) standard grade steel is used for line pipe… as this meets the requirements and is used for projects such as district cooling.”
Not everyone is in line for such dramatic price drops however. The different sectors using steel will find widely varying percentage savings depending on the type and grade of steel product needed. “The steel used for buildings I can get this for $300 per tonne, but line pipe may be $600-700 per tonne; we can sometimes get it for $500-600, but this depends on quantity, quality and many other factors,” explains Krishnan.
“The price of rebar dropped three times since mid last year, they were selling at $1400 per tonne and it’s now $350-400 per tonne and there is excess material,” adds Gyaneshwar.
“With the steel used for the petrochemical industry the price won’t go down as [the clients] require the quality [to be maintained], it may be 10% different from last year,” Gyaneshwar adds.
“The price level has not changed much from Q4 of last year among the premium material [steel product used in the petrochemical industry],” confirms Gyaneshwar.
“Last year from Q1 to Q3 the prices rose in three stages and from the beginning of the year to September there was up to a 20-25% rise in price. Since September the price has stabilised,” he reports. “This year we are awaiting premium manufacturers to announce [their prices], but at the moment they will stay the same,” he adds.
One of the primary uses of steel in the petrochemical industry projects is for pipes, with two main types being used: welded and seamless. “There are lots of different grades of steel [needed for the petrochemical industry] – stainless, seamless, welded, carbon, alloy – for different areas and flow lines,” adds Gyaneshwar. “Their use depends on the client specifications given.”
The seamless products are generally the premium products and TC Gulf, dealing solely with premium milled steel products sources these mainly from Europe, the USA and Japan in order to ensure that quality and safety standards can be met.
Non-premium materials are mainly supplied by manufacturers in China, India and the Ukraine. The price of these non-premium products has dropped by 20-30% over the past four months reports Gyaneshwar. “There [has been] a big dropout of price in China, mainly for steel piping. There is also a big drop in [the cost of] welded pipes from Korea,” he states.
In terms of product availability, currently this is not an issue assures Gyaneshwar, with the producers able to meet market demand. TC Gulf is a stockist, distributor and project package supplier for the oil and gas and petrochemical industries. The firm keeps a standard stock at its Jebel Ali facility for ongoing projects.
One relief provided last year in the wake of soaring prices was the removal of import tax and customs duties on steel entering the UAE. However, with the prices now reduced this reprieve may prove temporary. “It was dropped because the price had gone up so much…we are expecting it to be reintroduced this year,” predicts Krishnan. Whether this happens or not, what is sure is that uncertainty in the steel price market is set to remain while the overall global economy seeks renewed stabilisation.
• Premium milled steel is used as standard throughout the petrochemical industry, with safety being the prime consideration.
• The high demand for steel products from industries varying from construction to car manufacturing and the oil and gas sector caused the material price to rise significantly during 2008.
• The cost of non-premium steel products has dropped in recent months, while premium steel has maintained its market value according to industry sources.
• Some worldwide steel producers have announced plans to cut their output following reduced demand from sectors such as construction and car manufacturing.
• MESteel listed steel billets and blooms at a cost of $730-750 per tonne in January 2008; the cost peaked at $1180-1250 in July 2008 before falling to the current list price of $400-450 per tonne, demonstrating the wide variations being experienced in the materials prices over the past year.
